July 17, 2019 / 6:04 PM / a month ago

Fed: Sunny outlook for U.S. despite shade thrown by trade

WASHINGTON, July 17 (Reuters) - The U.S. economy continued growing at a “modest” rate in recent weeks, with consumers continuing to spend and a “generally positive” outlook overall even in the face of disruptions caused by U.S. trade policy, the Federal Reserve reported on Wednesday.

Employment continued to expand and “labor markets remained tight, with contacts across the country experiencing difficulties filling open positions,” the Fed reported in its latest Beige Book compendium of anecdotes from businesses around the country. “The outlook generally was positive for the coming months, with expectations of continued modest growth, despite widespread concerns about the possible negative impact of trade-related uncertainty.”

The document in summary portrayed an economy that was largely in good shape ahead of a July 30-31 Fed meeting at which the central bank is widely expected to reduce interest rates. Indeed the apparent strength of the economy has led some Fed officials to question whether a rate cut is needed.

But the more detailed text showed why the rate cut is likely to proceed, with businesses adapting on the fly to supply chain, tariff, visa and other problems. Linked to both a weakened global economy and to Trump administration policies, those trade-related issues provided the major element of doubt in the report’s otherwise optimistic outlook.

A Dallas Fed survey of 360 firms noted that 28% were “negatively affected” by recent tariffs, while only 5% felt a positive impact.

The report noted emerging weakness in business for transport companies, trade-related troubles in manufacturing, and even traced layoffs in some cases to administration-imposed tariffs as companies shifted final production of goods using Chinese parts from the United States to elsewhere.

In the Boston Fed district, one electronic components maker had shifted an assembly line to Germany “because most of the components in the product came from China and making the product in Germany allowed them to avoid the tariffs.”

In Cleveland, “manufacturing continued to weaken because of trade wars, high customer inventories and slowing global growth. Freight haulers saw a modest decline in demand, despite summer’s typically being the strong season, and they are concerned about the future.”

That point was emphasized by poor results reported overnight by CSX Corp, the nation’s third-largest railroad, that was leading U.S. markets lower on Wednesday.

The Fed reported other firms had experienced “difficulties in securing and renewing” work visas for employees with specific skills.

The Beige Book was compiled by the San Francisco Fed from reports assembled from all 12 regional reserve banks before July 8, a period that included new tariff threats leveled by the president against Mexico, as well as the subsequent lull in those and other trade tensions.

Reporting by Howard Schneider; Editi

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