Fed survey: Economy deteriorated in Jan., Feb.

March 4, 2009 12:46:48 PM PST
After a dismal start to 2009, business people see more pain ahead, expecting no improvement in economic conditions till late this year at the earliest. [SIGN UP: Get headlines and breaking news sent to you]

Their pessimism was evident in the Federal Reserve's latest snapshot of business activity nationwide. It showed sharp cutbacks affecting both blue-collar jobs that once churned out construction equipment and white-collar professionals like business consultants and accountants.

From factories in Cleveland to high-tech firms in Texas and California, the Fed's beige book reported widespread production declines.

"National economic conditions deteriorated further," the Fed's survey concluded. "The deterioration was broadbased, with only a few sectors such as basic food production and pharmaceuticals appearing to be exceptions."

Looking ahead, business people rated the prospects "for near-term improvement in economic conditions as poor, with a significant pickup not expected before late 2009 or early 2010."

The survey summarizes information from businesses and others supplied to the Fed's 12 regional banks. The information -- most of it anecdotal -- was collected on or before Feb. 23. It's used by the Fed to get a better idea of what's occurring at the ground level of the economy and will figure into discussions among Fed Chairman Ben Bernanke and his colleagues when they meet next on March 17-18.

The Fed is widely expected to hold its key interest rate at a record low at that meeting as well as through the rest of this year to help revive the economy, which has been stuck in a recession since December 2007. The Fed also has said it will consider expanding existing relief programs or come up with new ones to extinguish the worst financial crisis since the 1930s.

Still, most economists believe the recession will drag on for most of this year even after the enactment of President Barack Obama's $787 billion stimulus package of boosted federal spending and tax cuts designed to revive limp consumer spending and boost factory production. Bernanke told Congress Tuesday that the impact of the stimulus package is subject to "considerable uncertainty" given the current economic climate.

The nation's unemployment rate in January jumped to 7.6 percent, the highest in more than 16 years, and the number of newly laid-off people signing up for unemployment benefits has been climbing in recent weeks. The government will release February jobs data on Friday and many economists expect the unemployment rate rose to 7.9 percent while employers cut nearly 650,000 jobs.

The economy also has been battered by a collapse in the housing market and a lockup in lending that has made it difficult, and more expensive, for people to secure financing for homes, cars and household appliances.

The Fed survey said there were "steep declines" in manufacturing activity in some sectors, and "pronounced declines overall."

Hardest hit were factories that make goods related to the housing industry. Construction-related equipment and materials, such as primary metals, wood products and electrical equipment, saw especially steep drops in production. So did makers of furniture and cars, the report said.

Factories are getting hit by slower demand at home as well as overseas, where foreign customers are coping with their own economic troubles.

In the Cleveland region, overall factory production dropped about 25 percent compared with a year earlier.

Makers of computers, semiconductors and other information technology products saw further declines in production and orders in the Dallas and San Francisco regions.

A few bright spots: makers of pharmaceuticals and biotechnology products saw production gains. The Boston region reported sales growing at a double-digit pace for biopharmaceutical firms. The Chicago region reported strong demand for pharmaceuticals and the Richmond region noted temporary hiring at pharmaceutical companies.

Food processors and makers of certain chemicals also saw pickups in the San Francisco and Philadelphia regions. And airplane makers in the St. Louis region are planning to expand existing production, according to the Fed survey.

White-collar businesses felt the recession, too.

Demand continued to fall for professional services, such as business consultants, accountants and legal services. The Boston region reported "dismal" business for temporary staffing firms. A New York company noted that activity by a major employment agency "virtually ground to a halt."

And even health care services -- one of the few parts of the economy that has been adding jobs during the recession -- felt fallout from the downturn in the Richmond, Minneapolis and San Francisco regions. Providers of health care services reported falling patient volumes, which were partly attributed to a drop in elective procedures, those regions reported.

Against that backdrop, consumer spending remained "very weak," the Fed survey said.

That's not news to Mark Steinke, the owner of Revival, a 6-year-old antiques and home decor store in Chicago. Sales are down about 20 percent this year in his store as shoppers gravitate more toward cheaper purchases, or items that are unique and hard to replicate. And as sales fall, so does Steinke's steady paycheck. "I think in today's environment, the consistency is just not there, which is the most unsettling part," he said. "The first thing out of people's mouth is 'How are you doing, are you going to survive?' Everyone is waiting for another shoe to drop, which is not good."

Sales of luxury goods, including jewelry, electronic equipment and other big-ticket items were especially slow in the Philadelphia, Richmond and Chicago regions. Demand for furniture, appliances and other manufactured goods remained "quite depressed," according to the Kansas City and San Francisco regions.

While sales of new cars and trucks stayed "exceptionally sluggish," used-car sales fared better, the Fed said.

Recession-battered consumers and companies cut back on travel, while some regions -- notably Kansas City and San Francisco -- noted a substantial drop in businesses at restaurants.

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