US economy still on growth path amid dollar headwind, Beige Book shows

The U.S. economy expanded in the past two months, even as manufacturers in some regions took a hit from a stronger dollar and a slowdown in energy-related investment, a Federal Reserve report showed. -- PHOTO: REUTERS
The U.S. economy expanded in the past two months, even as manufacturers in some regions took a hit from a stronger dollar and a slowdown in energy-related investment, a Federal Reserve report showed. -- PHOTO: REUTERS

WASHINGTON (Bloomberg) - The U.S. economy expanded in the past two months, even as manufacturers in some regions took a hit from a stronger dollar and a slowdown in energy-related investment, a Federal Reserve report showed.

Four of 12 Fed districts reported "moderate" growth, and three others described the expansion as "modest," according to the Beige Book, released Wednesday in Washington, which is based on reports gathered from early April to late May by regional Fed banks. Elsewhere, the pace of growth varied from "mixed" to "slight." Growth slowed in the Dallas Fed district.

The report offers central bank officials, who next meet June 16-17, anecdotal evidence about the state of the economy as they consider when to raise interest rates for the first time since 2006. Figures released May 29 showed the economy shrank in the first quarter amid harsh winter weather, a strong dollar and delays at ports.

Fed chair Janet Yellen on May 22 said she expects to raise rates this year if the economy meets her forecasts for a rebound. Governor Lael Brainard, in a speech that suggested she was open to delaying a rate increase, this week said recent soft data cast doubt on the economy's strength.

"Manufacturing was mostly flat to up over the reporting period, except for in the Dallas district where it was steady to slightly weaker and in the Kansas City district where it declined sharply," according to the Beige Book.

A stronger dollar crimped industries including steel, with Fed banks in Boston, Cleveland, Chicago, Minneapolis and Dallas "noting its negative impact on export sales or capital investment in segments with significant overseas exposure."

Lower oil prices are taking a toll on the economy, the Beige Book showed: "The downturn in the oil and gas industry tempered manufacturing growth in over half the districts, particularly for industries dependent on the energy sector."

Employment was "up slightly across districts," while "slight growth in wages was reported by most districts."

St. Louis Fed President James Bullard, who has argued the central bank should be getting ready to raise rates, said the recent string of soft readings from the economy gave him pause.

"The data has been weaker and I think that the markets have appropriately moved back the likely date of policy firming," he told reporters during a conference at his bank. Investors currently expect the Fed to move in December, according to bets placed in interest rate futures markets.

Chicago Fed chief Charles Evans, who has repeatedly urged the fed not to move until 2016, separately said the "hurdle is pretty high for raising rates at the moment."

Speaking with reporters after a speech in Chicago, he said "the thing that worries me the most in the forecast is the fact that the inflation outlook is too slow to get to 2 per cent."

Still, data from Roseland, New Jersey-based ADP Research Institute on Wednesday showed companies added 201,000 workers to payrolls in May, an improvement from the prior month.

A Labor Department report in two days is projected to show a 226,000 increase in May employment, including government agencies, according to the median estimate of economists surveyed by Bloomberg. That compares with an increase of 223,000 in April.

The latest Beige Book was prepared by the Dallas Fed based on information collected on or before May 22.