Fed says May expansion was ‘moderate’

BLOOMBERG — The Federal Reserve said today that the U.S. economy maintained a moderate pace of growth as factory output rose and the real-estate market improved.

“Overall economic activity expanded at a moderate pace” from early April to late May, the Fed said in its Beige Book business survey, which is based on reports from its 12 district banks. “Hiring was steady or increased slightly.”

The report gives central bankers anecdotal evidence on the state of the world’s largest economy two weeks before they meet in Washington. Atlanta Fed President Dennis Lockhart said Wednesday (June 6) that an extension of the central bank’s Operation Twist program to reduce borrowing costs is “on the table” following data that showed job growth in May was the weakest in a year.

The Beige Book used language similar to the previous report in April, which said the economy “continued to expand at a modest to moderate pace” in all 12 Fed districts. That report also said “hiring was steady or showed a modest increase across many districts.”

GUARDED OPTIMISM
The Fed said that “economic outlooks remain positive, but contacts were slightly more guarded in their optimism.” Manufacturers were concerned “that a slowdown in Europe and domestic political uncertainty may affect future business decisions.”

Several districts noted “consistent indications of recovery in the single-family housing market, although the recovery was characterized as fragile.”

The housing market, a laggard in the expansion, may be reviving after a six-year slump in which home prices, sales and construction collapsed.

Starts through the first four months of this year were 24% higher than the comparable 2011 period, and home values in 20 cities fell in the 12 months ended March at the slowest pace in more than a year.

The leadership of the Fed will probably provide more clarity on their views before the June 19-20 meeting. Fed Vice Chairman Janet Yellen will speak tonight in Boston about the economic outlook, and Chairman Ben S. Bernanke will testify about the economy before Congress on Thursday (June 7).

“All options are on the table for the Fed,” Ellen Zentner, a senior economist at Nomura Holdings Inc. in New York, said before the report. “Clearly the downside risks have intensified, and the Fed will surely acknowledge that in the June statement.”

MANUFACTURING SLOWDOWN
A Bloomberg News survey of economists shows the economy is likely to weather slumping stocks, a slowdown in hiring and the European debt crisis.

Gross domestic product will increase by 2.2% in 2012 and by 2.4% in 2013, the median of 70 economists surveyed from June 1 to June 5 shows. The estimates are down 0.1 percentage point from those issued last month.

Today’s Beige Book reflects information collected on or before May 25 and summarized by the Dallas Fed.

Manufacturing “continued to expand in most districts” and vehicle sales “remained strong,” the Beige Book said. Most districts reported gains in production or new orders, except for Philadelphia, Richmond and St. Louis.

Manufacturing in the U.S. grew at a slower pace in May as factories tempered production and pared inventories in response to weakness in the global economy, according to a report last week from the Institute for Supply Management.

The ISM’s factory index fell to 53.5 after reaching a 10- month high of 54.8 in April, the Tempe, Ariz.-based group reported June 1. Readings greater than 50 signal growth.

RETAIL GAINS
Service industries sustained their pace of growth in May, showing the biggest part of the U.S. economy is withstanding the impact of the European crisis, the Institute said in a separate report yesterday. Their index of non-manufacturing businesses, which covers about 90 percent of the economy, unexpectedly rose to 53.7 last month from April’s 53.5.

“Retail spending was flat to modestly positive in nearly all districts,” the Fed said Wednesday, and “demand for nonfinancial services was generally stable to slightly stronger since the previous report.”

Consumer spending rose in April, according to a Commerce Department report last week. Purchases increased 0.3% as incomes rose 0.2%.

The central bank’s report said that hiring was “steady or showed a modest increase,” a description at odds with Labor Department data that showed a decline in payroll growth for four consecutive months.

Employers added 69,000 jobs in May, down from 275,000 in January, and the unemployment rate climbed to 8.2 percent, according to Labor Department data.

“We still see a consumer out there who is making some tough choices,” Timothy Johnson, senior vice president of finance at Columbus, Ohio-based retailed Big Lots Inc., said in an earnings call on Tuesday. “He is concerned about where the economy currently sits.”