Fed report says U.S. growth slowed in early 2008

WASHINGTON (Reuters) - Federal Reserve districts all saw decelerating economic growth in early 2008, even as prices pressed upward almost everywhere, the central bank's "Beige Book" report on economic conditions said on Wednesday.

"Reports from the twelve Federal Reserve Districts suggest that economic growth has slowed since the beginning of the year," the Fed said in its anecdotal summary.

The Beige Book was compiled with information collected through February 25.

The Fed's survey found service industries slowing in most Fed districts, while manufacturing was sluggish in half of the Fed's 12 regions. Residential real estate markets were generally weak, and reports on retail spending were downbeat, the report said.

At the same time, upward pressure on prices from rising materials and energy costs showed up in almost all the district reports, the Fed said. Businesses in many regions said they had only mixed success in raising their prices to recoup increased costs.

Price pressures also translated into higher transportation and shipping costs, the Fed said. Businesses also saw higher prices for metals, petrochemicals, and food, the survey found.

"Firms' ability to pass along cost increases by raising selling prices varied," the central bank said.

Meanwhile, most districts said businesses were reporting limited wage pressures and some loosening of labor markets.

"It looks pretty weak across the board," said Robert Brusca, chief economist at Fact and Opinion Economics in New York. "It says that the Fed needs to and can continue to cut rates."

The Fed has lowered overnight interest rates to 3 percent from 5.25 percent in five steps since mid-September. Financial markets widely expect at least another half-percentage point cut at the Fed's next meeting on March 18.

Futures trading on Wednesday indicated a 58 percent chance the Fed could cut rates by three-quarters of a percentage point, down from 78 percent overnight after a key indicator, the Institute of Supply Management's services sector index, was not as weak as expected in February.

Fed officials acknowledge the simultaneous challenges of sluggish growth and rising inflation give them less room to maneuver.

Fed Chairman Ben Bernanke told Congress February 27 that the central bank expects weak growth through 2008. But he said there are risks that growth may be even slower than the Fed forecasts.

Financial markets will watch the government's employment report in February, due on Friday, for evidence of the severity of the slowdown.

The Fed also expects inflation to moderate as a result of the underachieving economy, but Bernanke said recently elevated price levels have raised the risks that inflation could tick higher.

(Additional reporting by Richard Leong; Editing by Neil Stempleman)