WASHINGTON (MNI) – The following is an excerpt from the minutes of
the Federal Open Market Committee’s August 10 monetary policy meeting
published Tuesday, regarding the participants’ views on current
conditions and the economy’s outlook. Members said information being
received is indicating a “slowing in the pace of recovery”:

Participants’ Views on Current Conditions and the Economic Outlook

In their discussion of the economic situation and outlook, meeting
participants generally characterized the economic information received
during the intermeeting period as indicating a slowing in the pace of
recovery in output and employment in recent months. Real GDP growth was
noticeably weaker in the second quarter of 2010 than most had
anticipated, and monthly data suggested that the pace of recovery
remained sluggish going into the third quarter. Private payrolls and
consumer spending had risen less than expected. Business spending on
equipment and software had increased strongly but reportedly was
concentrated in replacements and upgrades that had been postponed during
the economic downturn. Investment in nonresidential structures continued
to be weak. Housing starts and sales remained at depressed levels,
falling back after the expiration of the temporary homebuyer tax
credits. The incoming data suggested that economic growth abroad had
been somewhat stronger than anticipated and remained solid, boosting
U.S. exports and supporting a pickup in U.S. manufacturing output and
employment, though a surprising surge in imports in the second quarter
widened the U.S. trade deficit. Conditions in financial markets had
become somewhat more supportive of growth over the intermeeting period,
in part reflecting perceptions of diminished risk of financial
dislocations in Europe: Medium- and longer-term interest rates had
fallen, some risk spreads had narrowed, and the decline in equity prices
that had occurred in the months before the Committee’s June meeting had
been partly reversed. Moreover, participants saw some indications that
credit conditions for households and smaller businesses were beginning
to improve, albeit gradually. Thus, while they saw growth as likely to
be more modest in the near term, participants continued to anticipate
that growth would pick up in 2011.

Revised national income and product account data showed that the
contraction in aggregate output during the recent recession had been
larger than previously reported. In particular, consumer spending had
contracted more over the course of 2008 and the first half of 2009, and
recovered less rapidly, than previously estimated, even as households’
after-tax incomes had increased more than shown by the earlier data. In
combination, these revisions indicated that the personal saving rate had
been higher and had risen somewhat more during the past three years than
previously thought. Participants recognized that the implications of
these new data for the outlook were unclear. On the one hand, the
revised data might indicate that households have made greater progress
in repairing their balance sheets than had been realized, potentially
allowing stronger growth in consumer spending as the recovery proceeds.
On the other hand, the revised data might signify that households are
seeking to raise their net worth more substantially than previously
understood, or to build greater precautionary balances in what they
perceive to be a more uncertain economic environment, with the result
that growth in consumer spending could remain restrained for some time.

Many participants noted that the protracted downturn in house
prices and in residential investment seemed to have ended, although ups
and downs in housing starts and home sales associated with the temporary
tax credit for homebuyers made it difficult to be certain. A few
commented that home sales and prices appeared to be edging up in their
Districts. While recognizing that the housing sector likely had bottomed
out, participants observed that large inventories of vacant and unsold
homes, along with continuing foreclosures that would increase the number
of houses for sale, likely would continue to damp residential
construction, indicating that a sustained upturn from very low levels
was not imminent.

Business investment in equipment and software had grown at a robust
pace, but growth in new orders for nondefense capital goods, though
volatile from month to month, appeared to have stepped down. Many
participants noted that capital investment was heavily concentrated in
replacement investment and upgrades that firms had postponed during the
economic downturn. A number of participants reported that business
contacts again indicated that their uncertainty about the fiscal and
regulatory environment made them reluctant to expand capacity. Other
participants cited business surveys and reports from business contacts
indicating that slow growth in sales and uncertainty about the strength
and durability of the recovery likely were more important factors.
Except in the extractive industries (drilling and mining), investment in
nonresidential structures had continued to decline. The near-term
outlook for commercial real estate investment remained weak despite a
decline in vacancy rates in some markets.

Participants agreed that credit conditions did not appear to be an
important restraint on investment spending by larger firms that have
access to the capital markets. Such firms were able to borrow readily
and at relatively low rates; moreover, many businesses held substantial
cash balances. In addition, survey results suggested that a sizable
fraction of banks had eased loan terms, and a few had eased lending
standards, on C&I loans. Some participants observed that small
businesses continued to find credit hard to obtain. However, several
participants noted recent survey evidence indicating that most small
firms that requested credit were able to borrow, and that relatively few
small firms thought that access to credit was their most important
problem. Standards for commercial real estate loans and residential
mortgages remained very tight, and banks did not appear to be easing
standards on such loans. Some limited easing of lending standards was
noted for consumer loans, but credit availability remained a constraint
and consumer credit continued to contract. However, several participants
noted that with credit quality improving, some bankers were more
actively seeking loan growth, though the same bankers also indicated
that the demand for loans remained weak.

Many participants noted that European countries’ efforts to address
their fiscal imbalances, and the release of the results of the stress
test of European banks along with information about their exposures to
sovereign debt, had reduced investor concern about downside risks in
Europe. These factors appeared to have supported improvements in
financial markets both here and abroad. Moreover, growth in Europe and
Asia apparently remained solid, boosting U.S. exports. Nonetheless, a
continuation of strong foreign growth would require a pickup in private
demand abroad to offset a decline in policy stimulus and a smaller boost
from inventory investment. Several participants noted that the same
shift in the sources of demand would need to take place in the United
States: Waning fiscal stimulus on the part of the federal government and
continuing retrenchment in spending by state and local governments would
weigh on the economic recovery, and recent data raised questions as to
whether private demand would strengthen enough to increase resource
utilization.

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

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