Economy slowing, prices rising: Fed Beige Book

WASHINGTON (Reuters) - Economic conditions are weakening across much of the United States at the same time that food, fuel and raw material prices are increasing, the Federal Reserve said on Wednesday.

In a decidedly downbeat Beige Book summary of regional economic conditions, the Fed said manufacturers reported widespread increases in raw material prices and planned to raise selling prices to recover those costs.

"In particular, price increases were consistently reported for food products, fuel and energy products, and many raw materials," the Fed -- the U.S. central bank -- said.

"More specifically, increases in the price of chemicals, metals, plastics and other petroleum-based products were commonly cited."

In a further sign that inflation pressures could be building, the Fed said that despite generally weaker labor markets, there were some reports of wage pressures and continuing shortages of skilled workers.

But analysts generally viewed the report as furthering the case for another Fed interest rate cut on April 30. The Beige Book will feed into analysis and debate by Fed policy makers.

"The Beige Book either portrayed a slowdown in already sub-par economic growth or a deepening recession. We judge it's the latter," said Michael Gregory, Senior economist at BMO Capital Markets in Toronto.

"But regardless of the interpretation, there are undeniable negatives in front of the U.S. economy's first derivative and a green light in front of the Fed's next rate cut decision," he added.

Stocks rallied on Wednesday afternoon as earnings reports from Intel Corp (INTC.O) and JPMorgan Chase & Co (JPM.N) reassured investors worried that a weakening economy would sap corporate profits. The Beige Book did little to shift the dollar from its weaker trend while U.S. Treasury debt prices were lower.

Harm Bandholz, economist at UniCredit Markets in New York, noted the report highlights the threat of higher inflation. "This is why we expect only two benign 25 bp (basis point) rate cuts during the upcoming meetings in April and June, with the high likelihood of more dissents." There are 100 basis points in a percentage point.

There were few bright spots in the Fed's summary of economic activity between March 5 and April 7, when the current report by the New York Fed was compiled. It said tourism was up in several districts as foreigners benefited from dollar weakness to save on U.S. vacations. Demand for export goods such as aircraft and food products was strong, as was demand for some products that normally compete with imports, such as steel.

But the report mentioned the word "recession" for the first time in years, quoting one Boston district contact as saying "the recession probably started in December for retailers."

Housing markets and home construction remained sluggish throughout most of the country, but the Fed said there were "few signs of any quickening in the pace of deterioration."

Still, it described residential real estate as "generally anemic", with home construction "at depressed levels." Commercial real estate also was showing signs of softening.

SHOPPERS FEEL PINCH

Consumers were clearly under pressure. The Fed said spending at retailers was softening across the country and that new car sales were flat or declining in most districts.

Banks said that consumer loan demand was weakening but that lending standards were becoming stiffer and asset quality was deteriorating. U.S. housing markets have been under severe stress since a meltdown last August in risky subprime mortgage markets, and the Fed report indicated that was continuing.

Many Fed banks said home prices were being pushed downward, including in Boston, New York, Philadelphia, Richmond, Atlanta, Chicago, Minneapolis, Kansas City and San Francisco.

The Fed surveys dozens of businesses and banks in each of its 12 districts at about six-week intervals to compile the Beige Book. Some of the anecdotal findings offer particular insight into conditions in individual regions.

For example, the Chicago Fed reported that while service companies, such as small trucking companies, were being driven out of business by soaring diesel fuel prices, some manufacturers said they could not sell their products for enough to recover costs.

"A contact in the construction industry reported that wallboard prices had declined to the degree that they no longer covered production costs," the Chicago Fed said, a reflection of the building downturn.

In Dallas, there were shortages of skilled workers and labor markets were described as "tight" but it was not solely because of economic conditions.

"Some contacts say tighter enforcement of immigration laws has led to scattered farm labor shortages, notably for harvesting vegetables and fruit," the Dallas Fed said.

(Reporting by David Lawder and Glenn Somerville; editing by Gary Crosse)