Fed: Economy remains soft

The Federal Reserve's new snapshot of business conditions, released Wednesday, underscored the toll that the housing, credit and financial debacles are having on the economy and the challenges likely to be faced by the next president.

Fed Chairman Ben Bernanke and his colleagues are all but certain to leave a key interest rate at 2 percent when they meet next on Sept. 16 and probably through the rest of this year.

Heading into the fall, economic activity continues to be slow, the Fed said. Businesses described the climate as “weak” or “soft” or “subdued.”

Shoppers “concentrated on necessary items and retrenchment in discretionary spending,” the Fed observed.

The Fed regions of Chicago, Dallas and San Francisco, for instance, reported noticeable declines in spending on clothing, electronics and jewelry. Sales of furniture and household appliances, meanwhile, were weak in most parts of the country — victims of the housing slump.

On the inflation front, many businesses and consumers felt the sting of high prices for food, energy and other things. The recent drop in oil prices from a record-high of $147.27 in mid-July does give the Fed more leeway to keep its key rate steady. Oil prices are now hovering above $108 a barrel.

And, while businesses welcomed this drop, they told the Fed that prices still remain elevated. “Business contacts in a number of (Fed) districts indicated that they had increased selling prices in response to the high costs” for certain commodities.

Workers' wage gains — characterized as “modest” — aren't raising inflation worries. Wary employers have cut jobs every month so far this year and aren't inclined to be overly generous in their compensation amid “a general pullback in hiring,” the Fed said.

The nation's unemployment rate jumped in July to a four-year high of 5.7 percent. Many economists predict the jobless rate will climb to 5.8 percent when the government releases the August employment figures on Friday. More job losses also are expected.

The Fed's report also said that manufacturing activity was “weak or declining” in most Fed regions. Demand for housing-related goods and construction materials continued to wane. Although some manufacturers said exports were helping bolster their activity, they also noted “some recent slowing in growth from this source,” the Fed said.