Fed paints dreary economic picture

Beige Book report shows weakness across all districts.

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By Ben Rooney, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- Economic conditions deteriorated further across the nation, according to the Federal Reserve's latest snapshot, suggesting the U.S. central bank may continue to lower interest rates in the near future.

"Overall economic activity weakened across all Federal Reserve districts," the Fed said Wednesday in the December edition of its Beige Book, a report on current economic conditions.

While the weakness was widespread, the St. Louis district, which encompasses Littlerock, Ark., Louisville, Ky. and Memphis, Tenn., showed slight improvements in commercial real estate and labor.

Among the main drivers were a deterioration in vehicle sales, weak consumer spending, further contraction of lending and a noticeable decline in manufacturing activity.

The report said retailers are preparing for a "relatively slow holiday sales season," as consumers shy away from big-ticket purchases amid the weak economy.

Falling home prices took a toll on real estate markets in most districts. But weak home sales remained at stable levels, according to the report.

Credit conditions remain tight, with several districts reporting increases in loan delinquencies and defaults, "especially in the real estate sector," the report said.

Commercial real estate weakened broadly, worsening from declines reported in October's Beige Book. Half of the 12 districts indicated that commercial real estate projects were being postponed or canceled, citing tight credit conditions.

Labor market conditions remained weak, with nearly half of the districts reporting current and future layoffs.

At the same time, the report indicated that price pressures continued to ease in most districts. Prices for energy, fuel, many raw materials and food fell, reversing course from the previous report.

Many economists say falling prices, while a sign of economic distress, give the Fed more leeway when it comes to further interest rate cuts.

Falling prices remove some of the threat posed by inflation, which is a by-product of lower interest rates.

The Fed's next policy meeting is scheduled for Dec. 15-16. Last month, the Fed cut its benchmark rate by a half percentage point to 1%. The Beige Book is released two weeks ahead of the Fed's meetings.

Fed chairman Ben Bernanke said Monday that additional interest rate cuts are "certainly feasible," though he added that the central bank does not have much more to trim.

Regional overview

District 1 - Boston: Overall economic conditions deteriorated with some retailers in the district indicating that sales fell below year ago levels.

The district's labor market remains under pressure. One staffing company contact offered this grim assessment: "Everybody's spooked. There's no hiring going on at all."

One bright spot: home sales in the New England region declined modestly or rose versus previous months. But the slight improvement reflects deals that were done 40 to 65 days earlier, according to the report.

District 2 - New York: Business conditions weakened substantially in the district as manufacturing activity declined and job losses increased.

The report said a growing number of businesses plan to curtail capital spending in the months ahead.

Bankers reported tightening credit standards and increasing delinquencies.

Both residential and commercial real estate markets softened.

District 3 - Philadelphia: The economy in this district remains weak and businesses expect further deterioration.

Declines were reported in retail sales, manufacturing activity, residential and commercial real estate markets.

Still, bank loan volume increased during November, even as credit quality deteriorated.

District 4 - Cleveland: The ailing Midwestern economy suffered marked declines since the last Beige Book.

Falling factory output, declining construction activity and an anemic job market were chief among the economic challenges facing the district.

District 5 - Richmond: As with other districts, weak retail sales topped the list of economic ills in the Richmond area.

Other soft spots include: diminished manufacturing activity, increased job cuts, declining construction activity and a weak commercial real estate market.

District 6 - Atlanta: Economic activity in the district was hampered by declines in retail sales and tourism, as consumers cut back on discretionary spending.

A large number of foreclosed properties drove down home prices in the district.

Tight credit and a soft labor market also added to the district's economic malaise.

District 7 - Chicago: Businesses in the district expressed concern about the duration of the current downturn as economic conditions continue to deteriorate.

The district was plagued by anemic consumer spending, a weak labor market, declines in construction activity and tight credit.

Additionally, heavy precipitation hampered agricultural activity in the district.

District 8 - St. Louis: While the overall economy the eighth district declined, there were some areas of improvement.

A contact in the commercial real estate business said upcoming construction of several facilities related to wind energy has improved the outlook for the sector.

The labor market in the district experienced layoffs in the manufacturing sector. But certain businesses in aerospace, auto parts, food and primary metal manufacturing indicated plans to expand facilities and hire new workers.

District 9 - Minneapolis: Contraction in the district's economy was caused by waning consumer spending, declining manufacturing and construction activity.

On the bright side, the energy sector was mixed. Oil and gas exploration continued and new wind energy farms were built. Also, agricultural conditions improved since the last report.

District 10 - Kansas City: A slowdown in commercial real estate market intensified in the district.

Consumer spending and manufacturing activity declined as credit conditions tightened.

Most business contacts in the district expressed little optimism about economic activity going forward, the report said.

District 11 - Dallas: Weakness in the district was broad-based as manufacturing and staffing activity declined sharply.

Housing market conditions worsened significantly amid reports of buyers walking away from their new homes, forfeiting their deposits. Rising foreclosures pushed down home prices.

District 12 - San Francisco: The district's economy contracted amid declines in retail sales, manufacturing and commercial real estate.

Home sales increased in certain areas where buyers scooped up foreclosed properties at rock-bottom prices. But overall residential real estate sales remain weak and demand for commercial real estate fell.  To top of page

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