Fed: Economy worsened in early spring

updated 5:56 p.m. ET April 16, 2008

WASHINGTON - The country’s economic health deteriorated further in early spring as shoppers buckled under the strains of the housing and credit debacles and a weaker employment climate.

Manufacturers and others businesses, meanwhile, were walloped by zooming prices for energy and other raw materials. However, their ability to jack up retail prices to customers was mixed, with some companies restrained by competitive pressures, according to the Federal Reserve’s new snapshot of nationwide economic conditions released Wednesday.

“Economic conditions have weakened,” the Fed report stated.

Many analysts believe the economy has fallen into a recession, predicting that economic activity contracted in the first three months of this year and is still ebbing. Even Fed Chairman Ben Bernanke recently acknowledged for the first time that a recession was possible. That was a rare utterance of the “r” word for a Fed chief. The government later this month will report on the economy’s first-quarter performance.

Janet Yellen, president of the Federal Reserve Bank of San Francisco, said in a speech Wednesday that the economy “has all but stalled and could even contract over the first half of the year.”

On Wall Street, investors — buoyed by upbeat earnings reports from JPMorgan Chase, Intel Corp. and Coca-Cola Co. — looked past the downbeat economic news. The Dow Jones industrials jumped 256.80 points.

The Fed report underscored the challenges facing Bernanke and his colleagues as they fight to keep the economy from sinking into a deep recession, while at the same time avoiding a flare-up of inflation. The report will figure prominently when the Fed meets April 29-30 to decide its next move on interest rates.

The Fed, which has been cutting rates since September to bolster the economy, turned much more forceful in January, when conditions took another turn for the worse. Many economists believe the Fed will lower rates yet again at the April meeting to help shore things up.

The Fed snapshot “either portrayed a slowdown in already subpar economic growth or a deepening recession,” said Michael Gregory, economist at BMO Capital Markets, who predicted a quarter-point rate reduction.

Even with the rate reductions, though, consumers have turned more cautious, the Fed report suggested. Consumers are major shapers of the economy because their spending accounts for such a big chunk of overall economic activity.

“Consumer spending was characterized as softening across most of the country, with some districts reporting year-over-year declines in retail and or auto sales,” the Fed report said. Merchants — other than auto dealers — reported sales were “sluggish or declining” in 10 of the Fed’s 12 regions, the report said. With inventories of unsold goods starting to pile up, retailers in the Richmond, Va., and San Francisco regions have canceled orders, the report noted.

Lofty energy prices are squeezing businesses’ profits and pinching consumers, leaving them with less money to spend on other things. That is putting a damper on economic growth and adding to inflation pressures.

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