Fed report shows widespread signs growth easing

A 'sale' sign is seen outside a house in Alexandria, Virginia, July 22, 2010.

WASHINGTON (Reuters) - The economy has shown "widespread signs" of slowing over recent weeks, the Federal Reserve said on Wednesday in a report suggesting that while the recovery has been faltering, the economy may skirt a second recession.

The Fed said in its Beige Book compilation of anecdotal reports that modest growth was the most common characterization of economic activity in Fed districts, primarily those in the western and middle portions of the country such as San Francisco, Dallas, and Kansas City.

However, other areas, including New York, Philadelphia, and Chicago, reported economic growth was mixed or had slowed.

"The economy continues to plod forward, neither gaining momentum nor lurching back into recession," said Sal Guatieri, an economist for BMO Capital Markets in Toronto.

The Fed said consumer spending appeared to increase even as shoppers were limiting themselves to essential items, a further sign the economy may escape a relapse.

However, a separate Fed report showed consumer credit had contracted for the sixth month in a row as households repaired their balance sheets after a debt binge in the early 2000s.

Upward price pressures remained quite limited for most categories of goods and services, and wage pressures were also subdued, the Fed said.

"The reports suggested ample supply of qualified applicants for open positions," the Beige Book said.

Economists are divided over the degree to which the nation's 9.6 percent jobless rate reflects a labor market battered by a deep recession and sluggish recovery, or a mismatch between workers skills and locations and the jobs available.

U.S. UNEMPLOYMENT PARTLY STRUCTURAL

In a speech in Montana on Wednesday, Minneapolis Federal Reserve President Narayana Kocherlakota said that more than a quarter of U.S. unemployment could be due to a mismatch between workers' skills and jobs. The Fed, by easing financial conditions further, would not be likely to have much impact in reducing unemployment if this is the case, he said.

Markets paid the report scant notice as it was seen as confirming that the recovery had flagged over the summer.

The hard hit housing sector showed further declines after an initial drop following the expiration of a popular tax credit, the Fed said.

The Beige Book was prepared ahead of the Fed's next policy-setting meeting September 21, where policy makers will debate whether to provide further support for the stumbling recovery.

The Fed cut interest rates to near zero and then bought longer-term securities worth more than $1.7 trillion to pull the economy out of one of the deepest recessions in decades.

It had appeared set to start withdrawing stimulus, but as the recovery's green shoots withered over the summer, it moved to resume buying securities to hold its portfolio at a steady level. Policy makers are debating whether the Fed needs to actively increase the size of its holdings to supply additional stimulus.

(With additional reporting by Lucia Mutikani and Amy Linn in Missoula, Montana; Editing by Neil Stempleman)