Fed Says Economy Slowed, With Sales `Disappointing' (Update1)

By Steve Matthews


Jan. 16 (Bloomberg) -- The Federal Reserve said economic growth slowed in late November and December, with districts reporting ``disappointing'' holiday sales.

``Economic activity increased modestly during the survey period,'' though ``at a slower pace,'' the central bank said in its regional business survey, known as the Beige Book for the color of its cover. ``Most reports on retail activity indicated subdued holiday spending and further weakness in auto sales.''

The report provided anecdotal evidence the economy is slowing, a day before Fed Chairman Ben S. Bernanke testifies before Congress on the outlook. Bernanke said last week more interest-rate cuts ``may well be necessary'' after 1 percentage point of reductions since September to buttress growth.

``This confirms what we already know: The economy is weakening but has not slipped into recession,'' said Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago.

Seven districts reported a ``slight'' increase in output, while two reported ``mixed'' conditions and three slowed, the report said.

Traders anticipate the Federal Open Market Committee will cut its benchmark rate by half a percentage point, to 3.75 percent, this month, futures show.

U.S. stocks were little changed while Treasuries fell as speculation receded that the Fed will reduce borrowing costs in excess of half a point this month. Yields on benchmark 10-year notes rose to 3.73 percent at 3:37 p.m. from 3.68 percent late yesterday.

`Quite Weak'

``Residential real estate conditions continued to be quite weak in all districts,'' and lenders were cautious in making loans, today's report showed. ``Most districts cited tighter credit standards.''

Economic figures released today highlighted the risks the Fed faces on growth, with inflation concerns receding. Consumer prices rose increased 0.3 percent in December after a 0.8 percent gain in November, while output at U.S. factories was unchanged in December, separate reports showed.

The Beige Book said increases in prices were ``widely reported'' for food and energy, while wage increases were ``moderate.''

The Fed's preferred gauge of consumer prices rose 2.2 percent in November from a year before, the most since March. The three-month annualized rate for the personal consumption expenditures price index, minus food and energy, was 2.6 percent.

Fed officials are next scheduled to meet Jan. 29-30.

Philadelphia Federal Reserve Bank President Charles Plosser said Jan. 11 that the economy had slowed ``considerably'' and the housing slump may hurt consumer spending.

``The combined weakness in wealth -- that is both housing wealth and stock market wealth -- and some softness in employment growth seem to be suggesting that the robustness of consumer spending going forward may not be as healthy as we thought it was just a few months ago,'' Plosser said an interview with PBS television's Nightly Business Report.

The Beige Book's regional anecdotes are gathered through hundreds of telephone calls, news clippings and personal contact by the staff of the 12 Fed banks, whose districts cover all 50 U.S. states. The anecdotes are designed to supplement quantitative forecasts of the Board of Governors staff.

The January Beige Book was prepared by the Atlanta Federal Reserve Bank with information collected before Jan. 7.