Wednesday, July 23, 2008

Fed reports economy continues to stagnate

The Federal Reserve beige book for June and July, a snapshot of the economy, reports that Americans are cutting back on everything from cars to food to brand-name products, in another sign that the economy is slowing.

The report raises concerns that as money from the federal stimulus checks dries up, the recession could become even more severe.

The Fed highlighted fears that economic growth will continue to stagnate as Americans cut back in the face of a weak job market and higher gasoline prices. Consumer spending accounts for more than two-thirds of the nation’s total growth.

The Chicago District (7th) which includes Milwaukee reported that:

Economic activity...was sluggish in June. Consumer spending was mixed and labor market conditions weakened some...Residential construction declined further and nonresidential construction showed signs of slowing. Manufacturing activity weakened slightly. Consumer lending declined, while business lending was stable. Cost pressures from rising material and energy prices remained high, while wage pressures continued to be low. Flooding and cool weather further set back crop conditions in June, although they improved toward the end of the month and in early July.

The full report is linked here.


Anonymous said...

Cost push inflation requires an injection of money (spending power)to maintain the same level of real purchasing power and economic output. Unfortunately, the FED usually reacts to cost push inflation the same way it reacts to demand pull inflation, i.e., with a slowdown in the growth of money, which only worsens the recession. We'll see what the FED does this time. (comment of Jim Carpenter)

Michael Rosen said...


You are correct to be concerned about how the Fed will respond.

While the current beige book suggest the Fed will hold the line on interests rates the next time it meets, several governors have stated that rising inflation is a bigger problem than stagnation and unemployment and that they would like to raise interest rates.

Such a policy approach ignores the fact that rising prices are primarily the result of the world wide increase is commodity prices driven by increased global demand and rising energy costs, not too much domestic demand. Raising the federal funds rate would have no effect on these drivers, but would further restrict the U.S. money supply and throw more U.S. citizens out of work.