–Oil Spill Could Have ‘Much Greater’ Impact

By Yali N’Diaye

WASHINGTON (MNI) – The Federal Reserve Wednesday reported that its
latest survey of economic conditions around the country — the “Beige
Book” — showed that economic activity “continued to improve,” albeit
mostly at a “modest pace.”

Improvement was reported by all 12 Districts, compared with 11
Districts in the April 14 report, when the St. Louis Federal Reserve
reported “softened” economic conditions. This time, it also reported a
modest increase in activity.

The report noted, however, some concerns about the potential impact
of the European fiscal crisis, as well as the potential for a “much
greater” impact from the Gulf of Mexico oil spill.

The economic improvement was both on the consumer and business
sides, with spending increasing for both categories.

Residential real estate also strengthened, with activity “buoyed by
the April deadline for the homebuyer tax credit.”

The improvement occurred without creating inflation pressures, as
retail prices were “largely stable” and wage pressures remained limited
despite a “slight” improvement in the labor market.

Weak spots remain nonetheless, especially commercial real estate
and slower inventory investment spending.

And despite “a few” reports of a modest rise in lending, financial
activity “was little changed on balance.”

Some districts even reported concerns about the potential impact of
the fiscal crisis in Europe on both financial and business conditions,
“and reported a corresponding increase in uncertainty and financial
market volatility.”

Overall, financial activity dragged by the ongoing weakness in
commercial and industrial lending. “In contrast, real estate lending
increased even though standards on these loans remained tighter than on
other loans, particularly for commercial mortgages.”

Increased lending in residential real estate was consistent with
higher activity in the sector. The latter was buoyed, however, by the
April 30th deadline for homebuyer tax credit, leading to a slowdown in
activity in May compared with April.

On the consumer front, spending improved but remained concentrated
on “necessities,” according to the report, prepared by the Federal
Reserve Bank of Chicago with information collected through May 28.

Vehicle and tourism activity also increased.

“Atlanta also reported, however, that the Gulf oil spill and
Tennessee floods had already resulted in some vacation lodging
cancellations,” the Beige Book said. “The potential exists for a much
greater impact, although contacts are quite uncertain as to the ultimate
effects,” it added.

So far, the oil spill “had little immediate effect on oil
production, although it had damaged fishing operations.”

On the business side, spending also increased, albeit “moderately,”
the report said, “with employment and capital spending edging up but
inventory investment slowing.”

Manufacturing and transportation, as well as nonfinancial services
continued their gradual improvement.

Against this backdrop, labor market conditions improved “slightly,”
the report said, noting “permanent employment levels edging up in most
Districts.” This was accompanied by a continued rise in temporary hires.

The manufacturing sector was cited as the largest source of job
gains.

Still, wage pressures were “limited,” the report said, also noting
that final goods and services prices were also unchanged.

** Market News International Washington Bureau: 202-371-2121 **

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