Fed says contacts worry about trade war; economy growing modestly

WASHINGTON, June 5 (Reuters) - The U.S. Federal Reserve on Wednesday reported that its contacts at companies across the country were worried that international trade tensions could weigh on business even as economic activity picked up.

FILE PHOTO: The Federal Reserve building is pictured in Washington, DC, U.S., August 22, 2018. REUTERS/Chris Wattie

The U.S. central bank said its surveys of business contacts pointed to a “slight improvement” in growth in economic activity, which it described as being “modest” from April through mid-May.

The Fed’s so-called “Beige Book” report, a compendium of anecdotes on the state of the economy, pointed to numerous cases of businesses citing concern over the Trump administration’s trade war with China.

“Contacts in the corrugated packaging industry reported slow growth attributed to the current trade dispute with China,” the Fed said in the report, referring to activity in the St. Louis Federal Reserve Bank’s district in the middle of the country.

The report was prepared with information from business contacts through May 24, meaning it caught none of the uproar in business circles over U.S. President Donald Trump’s threat last week to slap new tariffs on all Mexican imports if Mexico doesn’t crack down on illegal immigration into America.

Already, the Fed’s contacts at service industries in the Dallas Federal Reserve district, home to many businesses that trade with both China and Mexico, were reporting concerns.

“Several contacts indicated a down shift in demand growth if there is a not a resolution to the trade dispute with China, although a few were optimistic that an agreement would be reached and benefit the U.S. long term,” according to the latest Beige Book report, which was prepared by the Minneapolis Fed.

The U.S. economy will mark 10 years of expansion in July, the longest on record. But rising trade tensions between the United States and China have led to tit-for-tat tariffs, put a chill on U.S. businesses’ spending and exacerbated a manufacturing slowdown.

The Beige Book report pointed to employment growth nationwide with prices rising at a modest pace in most of the Fed’s 12 districts.

Economists generally expect policymakers to treat tariff-fueled price increases as a temporary issue. Investors are increasingly betting the Fed will cut interest rates this year and a few policymakers have hinted this could be in the cards.

Concerns are rising that the trade war will take a toll on the economy.

“Many contacts are concerned that the increased tariffs on goods traded with China will further exacerbate softening manufacturing activity in China, leading to less demand for American products from Chinese manufacturers,” the Fed said in its report, referring to manufacturing contacts in the Cleveland Federal Reserve Bank’s district.

Reporting by Jason Lange; Editing by Andrea Ricci