By Steven K. Beckner

(MNI) – The Federal Reserve’s latest survey of conditions around
the country, released Wednesday, confirms statistical evidence of an
economic slowdown, but does not show a dramatic or widespread slump.

The “beige book,” based on what business and banking contacts told
the 12 Federal Reserve Banks through May 27, shows only “modest” wage
and price pressures, but finds some “limited” ability of firms to pass
along higher energy and other costs.

The Fed report points to many of the same special, transitory
forces which Fed Chairman Ben Bernanke cited in a Tuesday speech to
explain slower economic growth.

The survey findings — summarized by the New York Fed — will be
reviewed by Fed policymakers at their June 21-22 Federal Open Market
Committee meeting.

The May employment report and other recent data have created the
impression that the first quarter slowdown in GDP growth to 1.8% has
extended into the second quarter, but while the beige book’s anecdotal
information is not totally at odds with that picture, they do not
suggest a sharp drop-off in economic activity.

“Reports from the twelve Federal Reserve Districts indicated that
economic activity generally continued to expand since the last report,
though a few Districts indicated some deceleration,” the beige book
began.

But only four districts — New York, Philadelphia, Atlanta, and
Chicago — experienced “some slowing in the pace of growth.”

In contrast, the Dallas Fed said growth in its dynamic district was
“accelerating.”

“Other Districts indicated that growth continued at a steady pace,”
the Fed said.

By sector, the report said “manufacturing activity continued to
expand in most parts of the country, though a number of Districts noted
some slowing in the pace of growth.”

The beige book says elsewhere that manufacturing activity continued
to grow in all but two districts, but said “many noted that the pace of
growth had slowed.”

The disruptive impact of Japan’s natural disasters on the auto
industry was given some of the blame. “Supply disruptions related to the
earthquake in Japan led to reduced production of automobiles and auto
parts in several Districts.”

The Japan quake and tsumami also had reverberations elsewhere in
the economy, according to the survey. “Widespread supply disruptions —
primarily related to the disaster in Japan — were reported to have
substantially reduced the flow of new automobiles into dealers’
inventories, which in turn held down sales in some Districts.”

The survey detected “steady” growth in non-financial services. But
consumer spending was “mixed, with most Districts indicating steady to
modestly increasing activity.”

The report said “elevated food and energy prices, as well as
unfavorable weather in some parts of the country, were said to be
weighing on consumers’ propensity to spend.”

“Auto sales were mixed but fairly robust in most of the country,
though some slowing was noted in the Northeastern regions,” it said.

Although the Labor Department reported a sharp slowing of non-farm
payroll growth to just 54,000 last month and a rise in the unemployment
rate to 9.1%, the beige book said only that “labor market conditions
continued to improve gradually across most of the nation, with a number
of Districts noting a short supply of workers with specialized technical
skills.”

“Wage growth generally remained modest, though there were scattered
reports of steeper increases for highly skilled workers in certain
occupations,” it said, adding that “abundant labor availability has
continued to limit the pace of wage growth.”

On the price front, the beige book said “most Districts continued
to report widespread increases in commodity prices; manufacturers are
said to be passing along a portion of the higher costs in the form of
price hikes and fuel surcharges.”

Elaborating, the report said, “While Boston indicated that firms
were able to pass along most input price increases into selling prices,
contacts in Philadelphia, Cleveland, Richmond, Atlanta, Chicago,
Minneapolis, Kansas City, Dallas, and San Francisco noted only a limited
ability to pass through these cost increases to their customers, with
manufacturers generally being more successful than retail or
construction firms.”

“In general, selling prices increased only modestly, except for
food and energy prices, which continued to escalate,” the beige book
continued. “In addition, low inventory levels contributed to price
increases for used cars in the New York, Cleveland, Chicago, and San
Francisco Districts.”

“Plans to implement future increases in selling prices were
reported in the Boston, New York, Chicago, and Dallas Districts,” it
added.

In other findings, residential construction and real estate
continued to show “widespread weakness,” while non-residential real
estate was somewhat firmer. Loan demand was described as “mixed.”

** Market News International **

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