Somber Fed says economy has lost punch

WASHINGTON - Retailers, home builders and many manufacturers should brace for even more rough times ahead, a somber Federal Reserve suggested Wednesday amid growing fears that the U.S. might be sliding into recession.

The Fed's snapshot of business conditions showed a national economy losing momentum heading into the new year and a future riddled with uncertainty. The persistent housing slump and harder-to-get credit are making people and businesses ever more cautious, it said.

Separately on Wednesday, more big banks reported losses and said people were having trouble making payments for everything from credit cards to cars. Stocks were mostly down for the day, the Dow Jones industrial average declining 34.95 points, or 0.28 percent.

The Fed report was the unwelcome icing on a recent batch of economic indicators — ranging from a plunge in retail sales to a big jump in unemployment — raising concern that the country is heading for its first recession since 2001.

At the beginning of last year, many economists put the chance of a recession at less than 1-in-3; now an increasing number say 50-50 or even worse. Goldman Sachs, the biggest investment bank on Wall Street, thinks a recession is inevitable this year.

The Fed report said the economy did grow during the survey period — from the middle of November through December — but more slowly than during the late fall. Credit problems intensified in December as did troubles in the housing market. That threw Wall Street into new turbulence.

The economy probably grew at a feeble pace of about 1.5 percent or less in the final three months of last year and will stay weak in the first quarter of this year as consumers — major shapers of the nation's economic health — tighten their belts.

After retailers suffered their worst sales season in five years in 2007, "the outlook for 2008 among retail merchants was cautious," the Fed said in its report. And the outlook for housing remains gloomy: "weak during the first part of 2008."

Fallout from a meltdown in risky "subprime" mortgages continued to sock financial institutions. JPMorgan Chase & Co. and Wells Fargo Inc. both reported Wednesday that their earnings fell — raising fresh fears of a widespread lending crisis.

Federal Reserve Chairman Ben Bernanke, in a speech last week, pledged to aggressively cut a key interest rate as needed to try to prevent all these problems from plunging the economy into a major recession. That may well mean a bold half-point cut at the end of a two-day meeting on Jan. 30. The Fed started cutting rates in September, but some critics on Wall Street and elsewhere say Bernanke should have acted sooner and more forcefully.

"Clearly there is a high level of caution," said Ken Mayland, president of ClearView Economics. "Everyone's guard is up to protect and insulate one's businesses from the high degree of sluggishness that is expected to prevail in the months ahead."

With voters expressing angst over the economy, the White House and the Democrat-controlled Congress are exploring ways — including the possibility of temporary tax rebates — to get money quickly into the hands of consumers and help stimulate spending. Presidential contenders also are floating their own ideas for rescue packages.

The chairman of Congress' Joint Economic Committee said he had spoken Monday with Bernanke and found him "generally supportive" of lawmakers and Bush approving a stimulus bill.

Bernanke, who hasn't supported any specific plan, testifies before the House Budget Committee Thursday.

The recent leap in the nation's unemployment rate, from 4.7 percent in November to 5 percent in December, rang one of the loudest warning bells. It raised concerns that consumers would clamp down, sending the economy into a tailspin.

On Wednesday, the Fed observed that "holiday sales were generally disappointing" and pointed to "further weakness in auto sales."

A day earlier, the government reported that shoppers cut back on their spending by 0.4 percent in December, wrapping up the weakest year for retailers since 2002.

Adding to worry about how consumers will hold up: Consumer confidence, as measured by the RBC Cash Index, fell in January to its lowest point in figures dating back to 2002.

The housing picture remains bleak — "quite weak" in all Fed regions, the survey said. Sales continued to be sluggish, and inventories of unsold homes "persisted at historically high levels."

Manufacturing activity varied around the country, but there was one common thread: Factories reported "pronounced weakness" in housing-related industries as well as the automobile business. The Fed, in a separate report Wednesday, said production by big industry was flat in December, fresh evidence of an economic slowdown.

Mayland was more graphic. "Manufacturers have gotten cold feet," he said.

Businesses are having to cope with high costs for energy and food, too. That's squeezing profit margins for companies and boosting prices to some customers.

Consumer prices moderated in December, rising by 0.3 percent, the Labor Department reported Wednesday. For all of 2007, prices jumped 4.1 percent, the biggest increase in 17 years.