- The Washington Times - Thursday, June 11, 2009

Economic conditions remained weak or deteriorated further from mid-April through the end of May, the Federal Reserve reported Wednesday.

However, in a sign that the longest postwar recession may be bottoming out, the Fed reported that five of its 12 district banks noted that the downward trend is showing signs of moderating. Also, several districts said their expectations had improved, but they do not expect a substantial increase in economic activity through the end of the year.

Manufacturing activity, which has plunged more than 16 percent since the recession began in December 2007, either declined or remained at low levels across most districts, the Fed reported in its Beige Book, which it releases prior to each of the eight policy committee meetings it holds each year. The next Fed meeting, at which the level of short-term interest rates is decided, will be held June 23-24.

Labor market conditions “continued to be weak across the country, with wages generally remaining flat or falling,” the report said. The unemployment rate jumped to 9.4 percent in May, its highest level in more than a quarter century.

Consumer spending, which accounts for 70 percent of economic activity, “remained soft as households focused on purchasing less-expensive necessities,” the report said.

“While financial market conditions have improved, the Fed is now confronted with a new set of challenges, as term borrowing costs, including mortgage rates, have increased sharply in the past six weeks,” said Nigel Gault, chief U.S. economist at IHS Global Insight. “With product prices generally flat or falling, and housing prices still under downward pressure, this is an effective tightening of monetary policy at a critical phase of the business cycle.”

The same cannot be said for fiscal policy.

The Treasury Department reported Wednesday that the federal budget deficit jumped another $190 billion in May, reaching $992 billion for the first eight months of the 2009 fiscal year. The Obama administration projects that the 2009 budget deficit will total $1.84 trillion, four times the size of last year’s record deficit of $459 billion.

“While it has not yet become a problem to finance the deficit, interest payments may become increasingly burdensome to the Treasury” as bond yields rise and foreign creditors look to diversify their holdings, said Kim Whelan, economic analyst at Wachovia Economics Group.

Federal spending during the first eight months of this fiscal year was $372 billion higher than last fiscal year, while tax revenues were $300 billion below 2008 levels.

The U.S. trade deficit slightly increased in April to $29.2 billion as exports fell $2.8 billion and imports declined $2.2 billion, the Commerce Department reported Wednesday.

Exports hit their lowest level since July 2006. Even though the price of imported oil increased from $41.36 per barrel in March to $46.60 in April, total imports fell 1.4 percent, reaching their lowest level since September 2004. The declines in both imports and exports indicate the worldwide global recession, the deepest in postwar history, continues to worsen.

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