Hope for Higher Third Quarter Growth Hits a Roadblock
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The Fiscal Times
July 27, 2011

The economy continued to weaken across much of the U.S. in June and early July, according to a Federal Reserve report released Wednesday, a disappointing start to the 3rd quarter and the first month of the second half of the year. A weak housing market coupled with a slowdown in manufacturing led to seven of the Fed’s 12 bank regions reporting slower growth, worse than the previous report.

“The problem is the manufacturing sector is actually only a very small part of the economy, adding up to a little more than 10 percent of GDP,” said Paul Dales, senior U.S. economist at Capital Economics. “So it means unfortunately that overall economic activity is going to remain flat while that remains the case.”

Additional bad news was delivered to the manufacturing sector from a Commerce Department report Wednesday showing that durable-goods orders unexpectedly fell last month, which had been one of the few growing sectors of the economy in months past.

The job market remained weak in most districts, with employers adding fewer jobs in June. Droughts and severe flooding also took a toll on the seven districts with large agricultural sectors, the report said.

Severe drought conditions adversely affected parts of the Atlanta, Kansas City, Dallas, and San Francisco Districts, causing low crop yields, complete crop losses, wildfires, and loss of grazing land in many areas,” according to the report.

Meanwhile, Dales estimates that real consumption growth, measured at an annualized rate, will end up being the weakest since the recession ended. “But we’re hopeful that the modest fall back in gas will mean that households will have a bit more cash in their wallets and they’ll be able to increase their spending in the 3rd quarter,” Dales added.

The report did indicate a few positive signs, including a modest growth in non-auto retail sales. Also a decline in energy prices, specifically gas prices, helped bump energy consumption.

Residential real estate sales in almost all districts were little changed from the last report, but of the reporting districts, home prices remained flat or declined.

The Fed’s “Beige Book” report is a carefully watched regional summary of current and economic conditions because it can provide hints about future monetary policy. Many economists expected to see a vastly negative report after Federal Reserve Chairman Ben Bernanke told lawmakers earlier this month that he was uncertain whether the recovery would prove “durable.” The markets, however, remained steady Wednesday after the report’s release.

The “Beige Book” is released eight times a year. Wednesday’s report covered the roughly seven weeks between May 27 and July 15