Fed: U.S. economy weakened in first two months of '09

The U.S. economy "deteriorated further" in most industries and in almost all corners of the country over the last two months as consumer spending slumped and manufacturing declined, the Federal Reserve said yesterday in its regional business survey.

Business officials participating in the Fed's Beige Book survey saw more pain ahead, expecting no improvement in economic conditions until at least late this year.

"We're in the throes of the deepest part of the recession now," said Kevin Flanagan, a Purchase, N.Y., fixed-income strategist for Morgan Stanley's individual-investor clients.

In the Philadelphia area, the Fed said, business conditions remained weak in the survey period, from late January through late February, and the outlook over the next six months in the region "is generally not bright."

Area manufacturers reported declines in product shipments and new orders, retailers saw sales remaining below year-ago levels, banks reported a drop in credit quality (that is, riskier borrowers), and home builders were forced to offer more incentives to potential buyers. Moreover, the survey found, more owners of existing homes were choosing to rent rather than accept low purchase offers.

In responding to the survey, one Philadelphia store executive told the Fed, "The consumer is focused on the basics, and sales of big-ticket items are still falling."

The Philadelphia region consists of the eastern two-thirds of Pennsylvania, the southern half of New Jersey, and all of Delaware.

From factories in Cleveland to high-tech firms in Texas and California, the Fed's beige book reported widespread production declines.

"National economic conditions deteriorated further," the Fed's survey concluded. "The deterioration was broad based, with only a few sectors such as basic food production and pharmaceuticals appearing to be exceptions."

Looking ahead, businesspeople rated the prospects "for near-term improvement in economic conditions as poor, with a significant pickup not expected before late 2009 or early 2010."

The survey will figure into discussions among Fed Chairman Ben S. Bernanke and his colleagues when they meet next on March 17 and 18 to decide on monetary policy.

Lending fell across the United States, and credit availability "remained tight," the Fed said.

"Consumer spending remained very weak on balance, albeit with slight firming noted by many districts," the Fed report said.

Highlights from yesterday's Federal Reserve report on the region's economy in late January and February.

Business conditions remained weak or declining. Credit quality is deteriorating.

Manufacturers reported declining shipments, with the weakest sectors in metals and electrical equipment. Capital spending plans are threatened.

Retailers reported steady sales of basic items and clothing. Other categories were weak.

Loan volume increased modestly. But bankers said many people were not seeking loans, possibly thinking they could not get them.

Home sales were slow. One builder said sales were "the lowest we've ever seen."

The service sector appears to be shrinking, leading to layoffs. Colleges are limiting expenditures.EndText