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Fed Banks See Sluggish Growth, Flat Inflation

June 20, 1990

WASHINGTON (AP) _ The U.S. economy is continuing to grow sluggishly although the construction sector appears to be weakening, according to a Federal Reserve survey released Wednesday.

″The tone of district reports suggests continued slow growth in the economy with little change in the underlying inflation rate,″ said a summary of the survey of the 12 Fed district banks.

The survey, completed June 8, was similar to three polls conducted earlier this year that found slow but continued economic expansion with moderate inflation.

It was conducted by the Cleveland district bank for use at the July 2-3 meeting of the central bank’s Federal Open Market Committee, which establishes U.S. monetary policy.

The Fed has kept a tight grip on credit to slow the economy and lessen inflationary pressure. Some officials and economists believe the economy has slowed too much and could slide into recession if the Fed does not loosen its grip.

One sign of sluggishness, the survey found, was ″very little growth, if not a decline, in real consumer spending for durable and non-durable goods this quarter from last.″

Consumer spending accounts for about two-thirds of the nation’s economic activity and has been a driving force for the economy for much of the last eight years since the last recession.

″Recent behavior in retail sales and reports from retailers in several districts indicate that sales have been slow in recent months and are expected to remain so in the short term,″ the summary said.

Retail sales, about half of consumer spending, fell in May for the third consecutive month, the Commerce Department reported last week. The last time retail sales declined for three straight months was in the fall of 1981, during the last recession.

The Fed said it was unclear how much unusual weather and other temporary factors contributed to the sales softness.

″Both residential and non-residential construction have been edging downward in recent months in most districts and indicators of future construction suggest further softening,″ the survey found.

″An underlying problem in commercial construction is an apparent excess supply of new office space in many parts of the country,″ particularly downtown Manhattan and in metropolitan areas of the Dallas district, the report said.

Credit demand appears to be easing, but real estate, consumer and business loans are still growing, although at reduced rates, it said.

″Lenders are reported to have tightened standards especially for real estate loans, but there is still little information that suggests credit restraint is spreading to other markets,″ the survey found.

It reported that manufacturing production has been relatively flat for several months. This sector has been particularly affected by the Fed’s high- interest rate policies since many of its products are purchased with loans.

However, several districts reported they expect manufacturing to strengthen despite softness in some industries including defense, building construction machinery and apparel.

Automobile and related industries have been a drag on manufacturing in the Atlanta district, but Chicago and Cleveland respondents noted some strengthening in production that should add to total output this quarter and perhaps next.

″In contrast, the aerospace industry is a source of strength in several regions of the country (Boston, Minneapolis and San Francisco) and the energy sector is expanding (Dallas and Kansas City),″ it added.

The survey found indications of continued growth in capital goods industries, another area of strength in recent months.

″Prospects for a good harvest this year should be improved as a result of ample rainfall in previously drought-stricken regions of the country,″ the survey found, ″but cool, wet weather has delayed planting by as much as several weeks.″

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