Fed report shows an economy still struggling

And, while businesses welcomed this drop, they told the Fed that prices still remain elevated. “Business contacts in a number of (Fed) districts indicated that they had increased selling prices in response to the high costs” for certain commodities.

Caught between dueling concerns of slow growth and inflation, the Fed is expected to leave a key interest rate alone at 2 percent when it meets next on Sept. 16 and probably through the rest of this year. The Fed at its last two meetings didn’t budge the rate out of concerns about inflation. Before that, though, the Fed had aggressively cut rates to shore up the economy.

“Given all the conflicting pressures, it does serve the Fed to just keep things steady on rates for now,” said Brian Bethune, economist at Global Insight.

With the Fed on hold, Democratic presidential nominee Obama has called for a second round of government stimulus, while his GOP rival McCain has favored free-trade and other business measures to spur the economy.

Workers’ wage gains — characterized as “modest” — aren’t raising inflation worries. Wary employers have cut jobs every month so far this year and aren’t inclined to be overly generous in their compensation to workers amid “a general pullback in hiring,” the Fed said.

The nation’s unemployment rate jumped in July to a four-year high of 5.7 percent. Many economists predict the jobless rate will climb to 5.8 percent when the government releases the August employment figures Friday. More job losses also are expected.

The Fed’s report also said that manufacturing activity was “weak or declining” in most Fed regions. Demand for housing-related goods and construction materials continued to wane. Although some manufacturers said exports were helping bolster their activity, they also noted “some recent slowing in growth from this source,” the Fed said.

Export growth accounted for most of the pickup in second quarter economic activity. The economy clocked in at a 3.3 percent pace, the government reported last week. The rebound isn’t expected to last, however.

Economic slowdowns overseas could make exports tail off just as Americans are hunkering down after the bracing impact of rebate checks wanes, plunging the country into another rut later this year.

In a separate report, the Commerce Department said orders placed with U.S. factories rose 1.3 percent in July as demand for commercial aircraft, heavy machinery and iron and steel all posted gains.

Factories have been helped by the drooping value of the dollar, which makes U.S.-made goods cheaper and more attractive to foreign buyers. That also has helped to boost overall export growth.

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