Fed reports growth but warns inflation, optimism flagging

The U.S. economy continued to grow "modestly" or "moderately" in most regions in recent weeks, though new signs showed that optimism has waned in some districts, a Federal Reserve survey showed.

The central bank's Beige Book economic report, based on anecdotal information collected by the 12 regional Fed banks through May 22, said several sectors, including manufacturing and housing, continued to expand slowly. Consumer spending softened, however, with many districts reporting little or no change in non-auto retail sales.

"A majority of districts reported that firms expressed positive near-term outlooks; however, optimism waned somewhat in a few districts," according to the report released Wednesday.

While policymakers are expected to raise interest rates in June, the survey's findings underlined the growing tension in the U.S. economy, and among Fed officials, over seemingly contradictory signals from inflation and the labor market.

Unemployment fell to 4.4 percent in April, its lowest in a decade. Despite that, the Fed's preferred gauge of inflation, after stripping out food and energy, rose just 1.5 percent in the 12 months through April, the third-straight month it has slowed.

"Labor markets continued to tighten, with most districts citing shortages across a broadening range of occupations and regions," the report said. Still, "most firms across the districts noted little change to the recent trend of modest to moderate wage growth."

Fed officials in the St. Louis district, which includes Arkansas, reported that 57 percent of "contacts expect economic conditions in 2017 to be somewhat better than last year."

The St. Louis district also mentioned that Little Rock contacts "reported that wages for skilled workers continue to increase slowly, with more employees changing employers for higher wages."

While costs for some commodities rose, prices overall "were little changed from the prior report, with most districts reporting modest increases," the Beige Book said.

In a speech Tuesday, Lael Brainard, a member of the Fed's board of governors, agreed with the central bank's short-term outlook for policy but also said she's worried about the recent weak data on inflation. If the softness persists, she said, she might rethink the appropriate path for monetary policy.

The next Fed meeting is June 13-14. Investors put the probability of an interest-rate increase at that meeting at almost 90 percent.

The Richmond Fed reported persistent labor shortages, pushing upward pressure on wages and hindering growth in some industries.

The New York Fed said economic activity had flattened in recent weeks, while Boston said only half of retail and manufacturing contacts reported year-over-year revenue gains. The Boston Fed added, "The outlook remained positive, with a bit of added caution."

Business on 06/01/2017

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