Americans spending more on cars and housing helped the economy maintain a “modest to moderate” pace of expansion from early July through late August, even as borrowing costs increased, the Federal Reserve said today.
Manufacturing expanded “modestly” and consumers spent more on travel and tourism, the Fed said today in its Beige Book business survey, which is based on anecdotal reports from its 12 districts. Hiring “held steady or increased modestly.”
The Federal Open Market Committee is debating whether growth is sufficient to fuel steady improvement in the job market and warrant tapering the Fed’s $85 billion in monthly bond buying. Speculation the FOMC will dial down purchases at its Sept. 17-18 meeting has roiled financial markets, pushing up U.S. bond yields and contributing to the worst rout in the currencies of developing nations in five years.
“Growth isn’t accelerating and there’s no escape velocity that some members would like to see” before tapering, said Yelena Shulyatyeva, a New York-based economist at BNP Paribas SA, a primary dealer that trades government securities directly with the Fed. “Slow progress continues to be the reality for the domestic economy and has been for quite some time.”
The Fed said eight districts described growth as moderate. Among the remaining four, Boston, Atlanta and San Francisco reported a modest expansion, while Chicago saw an improvement. The previous Beige Book, released on July 17, also said the economy expanded at a “modest to moderate pace” overall.
“Consumer spending rose in most districts, reflecting, in part, strong demand for automobiles and housing-related goods,” the Fed said. “Residential real estate activity increased moderately in most districts, and demand for nonresidential real estate gained overall.”
U.S. stocks and Treasury yields maintained gains after release of the report. The Standard & Poor’s 500 Index (SPX) advanced 0.8 percent to 1,652.37 at 3:35 p.m. in New York trading, while the yield on the benchmark 10-year Treasury note increased 0.04 percentage point to 2.9 percent.
Today’s Beige Book showed an impact from higher interest rates, with conditions in housing and bank lending slowing from the previous report.
“Lending activity weakened a bit, and several districts reported less-favorable conditions than in the preceding reporting period,” the report said. The Atlanta, Chicago, St. Louis and San Francisco districts reported that lending slowed, while Kansas City said lending declined. The Chicago district reported that “recent interest-rate increases likely were depressing commercial investment.”
Today’s report indicated that residential real estate “increased moderately” compared with the previous report, which cited a “moderate to strong pace” of expansion. Sales and prices continued to increase, and many districts said that “limited inventories of desirable properties contributed to upward price pressures.”
Many districts saw “strong demand for home furnishing and home improvement items,” and a few reported that consumer spending got a boost from back-to-school sales. The Boston reserve bank reported an increase in consumer confidence.
The world’s largest economy has weathered the impact from federal budget cuts and higher taxes, with gross domestic product growth accelerating to a 2.5 percent annualized rate in the second quarter from 1.1 percent during the first three months of the year.
Employers probably added more workers last month, and the jobless rate held at a more than four-year low of 7.4 percent, economists said before a report Sept. 6 report on employment. Payrolls rose by 180,000 following a 162,000 gain the prior month, according to the median forecast of 71 economists surveyed by Bloomberg before release of Labor Department data.
Faster hiring and income gains would underpin consumer spending, which accounts for about 70 percent of the economy.
Fed Chairman Ben S. Bernanke and his colleagues have pledged for almost a year to press on with asset purchases until the labor market shows substantial improvement. Their buying of Treasuries and mortgage-backed securities have expanded the Fed balance sheet to $3.64 trillion.
While payroll growth in July decreased to 162,000, the average over the past six months was 200,000. Boston Fed president Eric Rosengren and Chicago’s Charles Evans, both voting members of the FOMC this year who have consistently supported increased stimulus, have cited job growth of 200,000 as a benchmark for labor-market improvement.
The FOMC this month will probably begin to reduce its bond buying, according to 65 percent of economists surveyed by Bloomberg. Its first step may be small, with monthly purchases tapered by $10 billion to a $75 billion pace, according to the median estimate in a survey of 48 economists conducted Aug. 9-13. The Fed will probably end buying by mid-2014, they said.
Speculation the Fed will pare its bond purchases has pushed up borrowing costs to two-year highs. The average rate on a 30-year, fixed-rate mortgage has increased to 4.51 percent from a record-low 3.31 percent in November, according to Freddie Mac. The 10-year Treasury yield hit a two-year high of 2.93 percent Aug. 22.
The 20 most-traded emerging-market currencies have weakened almost 8 percent this year as the Fed’s potential paring of stimulus lures away capital.
San Francisco Fed President John Williams, who has backed record stimulus, said today he favors a slowing in bond buying later this year as the economy shows signs of picking up.
Bernanke “laid out a timetable for our securities purchases, which includes reducing them later this year and ending them around the middle of next year, assuming our forecasts for the economy hold true,” Williams, who doesn’t vote on policy this year, said in Portland, Oregon. “I view Chairman Bernanke’s timetable to still be the best course forward.”
The FOMC began its third round of quantitative easing in September 2012 with monthly purchases of $40 billion in mortgage-backed securities. It added $45 billion in Treasury purchases in December.
Policy makers were “broadly comfortable” with Bernanke’s plan to start tapering purchases this year if the economy improves, minutes of their July 30-31 gathering showed.
Federal budget reductions have posed a limited drag on growth and labor market gains. About $85 billion in automatic spending cuts, known as sequestration, started taking effect in March. In addition, the payroll tax reverted to its 2010 rate of 6.2 percent in January after holding at 4.2 percent for two years, resulting in lower take-home pay for American consumers.
Construction spending increased in July to the highest level since June 2009, with outlays climbing 0.6 percent to a $900.8 billion annual rate after little change in June, the Commerce Department said yesterday.
A measure of U.S. manufacturing, the Institute for Supply Management’s index, rose last month to 55.7, the strongest since June 2011, from 55.4 a month earlier, the Tempe, Arizona-based group’s report showed yesterday.
The auto industry is at the forefront of the manufacturing rebound. General Motors Co. (GM:US), Toyota Motor Corp. and Ford Motor Co. reported U.S. sales gains for August that exceeded estimates as analysts projected the best month for industry demand in six years.
Sales of cars and light trucks rose 15 percent for GM, 23 percent for Toyota and 12 percent for Ford, according to company statements. The results compared with average estimates for gains of 11 percent by GM, 15 percent for Toyota and 10 percent for Ford in a survey by Bloomberg News.
Ford, the second-largest U.S. automaker, is expanding payrolls and output of its Fusion sedan at its factory in Flat Rock, Michigan, according to the Dearborn, Michigan-based company.
“Adding 1,400 new jobs, all new employees, to this plant creates that job growth,” Joe Hinrichs, Ford’s president of the Americas, said in an Aug. 29 interview with Matt Miller on Bloomberg Television. “In addition, adding the capacity here brings the supply base and brings other component manufacturers to the area.”
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