US economy contracts further, remains weak: Fed

Published by rudy Date posted on April 17, 2009

WASHINGTON (AFP) — The US recession has deepened, the Federal Reserve said Wednesday, as fresh data showed industrial output slumped to a decade low in March and annual inflation fell for the first time in 54 years.

“Overall economic activity contracted further or remained weak,” the Federal Reserve said in its Beige Book report, a survey of economic activity culled from the central bank’s 12 districts.

The report, based on information gathered from early March until April 6, said five of the 12 districts surveyed noted a “moderation in the pace of decline” while several districts also “saw signs that activity in some sectors was stabilizing at a low level.”

The report did not provide figures on any additional economic contraction.

The latest government figures showed the economy contracted by 6.3 percent in the last quarter of 2008, following a home-mortgage meltdown that triggered financial turmoil and slammed the brakes on economic growth.

The United States plunged into recession in December 2007.

The government will announce its initial estimate of first-quarter gross domestic product (GDP) on April 29. According to a survey of 53 economists released by the Wall Street Journal last week, GDP could contract in the first and second quarters of this year by 5.0 percent and 1.8 percent, respectively.

A modest return to growth is not expected until the third quarter.

The Beige Book report, based on phone calls to businesses across the country, is used by the Federal Open Market Committee, the central bank’s policy-making body, in decision making. Its next meeting is on April 28-29.

Policymakers in March voted to unanimously hold the Fed’s base interest rate at a historically low range of zero to 0.25 percent, where it has been since mid-December, and have suggested the rate would be kept there for quite some time.

Underscoring the depth of the US recession, government data showed Wednesday that consumer prices in March posted their first annual drop in 54 years and industrial production fell to a decade low.

The Labor Department said the consumer price index (CPI) fell 0.1 percent in March on a seasonally adjusted basis from a month ago and declined 0.4 percent from a year ago, the first annual drop since August 1955.

Most analysts had expected a 0.1 percent month-on-month rise in March for the CPI, which tracks the average price of consumer goods and services purchased by households. It had risen 0.4 percent in February.

Core CPI, which excludes food and energy prices, increased 0.2 percent for the third month in a row in March. The core rate was up 1.8 percent from March 2008.

The annual inflation figure could continue to decline in the months ahead and “become significantly negative,” said Marie-Pierre Ripert, an economist with Natixis bank, adding that “the risk of deflation will not disappear rapidly.”

It could hit a negative 2.3 percent in July, as a result of a “large base effect” from oil prices that had reached record peaks above 147 dollars last year, she said.

Deflation is a price decline on a sustained basis that encourages consumers to delay purchases because they expect prices to continue falling.

The Federal Reserve said in a separate report Wednesday that industrial production fell in March for the fifth consecutive month, by 1.5 percent, to the lowest level in a decade.

The seasonally adjusted monthly decline matched the 1.5 percent drop in February and was much steeper than the 0.9 percent decline expected by most analysts.

Output in March dropped to its lowest level since December 1998 and was a hefty 12.8 percent below its year-earlier level.

“The huge declines in industrial production in the past two quarters reflect very aggressive cuts in inventories by businesses,” said Nariman Behravesh, chief economist at IHS Global Insight.

“The potentially good news is that businesses are now close to getting their inventories under control.”

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