US slowdown may call for boost

Washington: Federal Reserve policymakers, acknowledging a slowing in the economic recovery at their meeting in late June, have begun to consider the possibility of providing additional stimulus if growth fell sharply.

The possibility has become all the more real as signs of weakness have piled up.

Minutes of the Fed's June 22-23 meeting, released Wednesday, indicated that while board members discussed the need for a contingency plan, they did not raise major new concerns about the economy.

In fact, even as Fed members noted the debt problems in Europe and the weak US job market, they made only a tiny downgrade in their forecast for moderate economic growth this year and acceleration in 2011.

But that was before the release of a string of data that have pointed to further deterioration in key drivers of the economy, including consumer spending, housing and manufacturing.

Adding to that, the government reported Wednesday that retail sales fell in June for the second straight month, with car dealers, furniture outlets and building-supply stores all taking a hit.

Analysts said they expected the Fed's report later yesterday on factory production to show that it lost some steam last month, confirming other recent reports.

In its June meeting, the Fed said it "did not foresee the weakness that has developed" since then, said Lyle Gramley, a former Fed governor who is a senior economic consultant at the Potomac Research Group.

But he said he expected policymakers to express significantly stronger concerns about the economy at their next meeting set for August 10.

Most analysts agreed that it would take a sharp decline in key economic indicators before Fed officials would seriously contemplate further stimulus measures, especially given that any additional action by the Fed was likely to have only limited effect.

The central bank's short-term interest rate is already near zero, and mortgage rates, which the Fed has helped to drive down by purchasing certain securities, are also at historical lows.

Oversized assets

Moreover, some Fed members indicated they were reluctant to take steps that would further boost the central bank's already oversized assets, which may present potential inflation and other problems down the road.

"There isn't really that much more it can do at the moment anyway," said Capital Economics senior US economist Paul Ashworth.

For most of this year, discussions about the Fed's stimulus programs have been focused on the need for a so-called exit strategy, the point at which the central bank would begin tightening credit and reduce the money supply to lower the risk of inflation.

But with the economic recovery proceeding more slowly than anticipated, some Fed members have expressed more concern about the risk of falling wages and prices, or deflation, according to the minutes of the June meeting, which was released with the usual three-week lag.

Fed policymakers in June projected that US gross domestic product would grow between three and 3.5 per cent this year, down from the 3.2 to 3.7 per cent range in their prior meeting in April.

That was the first downward projection in more than a year. However, recent economic data has suggested even these estimates were too optimistic.

The nation's Gross Domestic Product, a broad measure of total economic output, expanded at an annual rate of 2.7 per cent in the first quarter.

And by most measures, GDP in the second quarter looks to be below three per cent as well.

Consumer spending in June lower than expected

Sales at US retailers dropped in June for a second month, indicating the economic recovery dissipated heading into the second half of 2010.

Purchases decreased 0.5 per cent, more than projected, after declining 1.1 per cent in May, Commerce Department figures showed on Tuesday in Washington. Excluding auto dealers, demand fell 0.1 per cent, matching the median forecast of economists.

Shares of retailers from Target to Amazon.com fell on concern a lack of jobs and a loss of wealth will restrain consumers, whose spending accounts for 70 per cent of the economy. Other reports showed the cost of imported goods fell more than forecast and companies boosted inventories at the slowest pace of the year in preparation for slackening demand.

"The consumer is losing some momentum," said Harm Bandholz, chief US economist at UniCredit Group in New York. "Job gains are not enough to bring the unemployment rate down. It means the recovery goes on, just at a slower pace."

Prices of goods imported into the US fell in June by the most since January 2009, led by declines in costs of oil, business equipment and consumer goods, a Labour Department report showed.