Economic outlook is 'generally soft'

WASHINGTON - The U.S. economy remained "generally weak" heading into summer as rising costs for energy and food pounded consumers and forced some companies to push their own prices higher, according to a Federal Reserve report yesterday.

The Fed's snapshot of business conditions in May underscored two big sore spots for the country: listless economic activity coupled with high energy and food prices.

"Consumer spending slowed . . . as incomes were pinched by rising energy and food prices," the Fed said. Manufacturing activity, meanwhile, was "generally soft," and the housing market remained stuck in a rut.

Businesses also were hit by higher costs for their raw materials, especially for energy, metals, plastics, chemicals and food. Such reports were "widespread," the Fed said.

To cope, manufacturers in several areas "noted some ability to pass along higher costs to customers," the Fed said. Retailers, however, reported "mixed results with respect to raising final-goods prices," the Fed said.

In the Philadelphia area, it said, manufacturers' outlook improved, with increases in orders and shipments expected. But retailers saw no significant sales gains during the summer. Auto dealers, in particular, expect sales to weaken, especially for light trucks and SUVs, the report said.

"High gas and food prices are sucking money out of retail," one Philadelphia-area retailer told the Fed.

Activity in the region's residential real estate market has shown some improvement in recent weeks, but remains well below the pace of a year ago.

With hiring slowing, the Fed's report yesterday suggested there was little danger of wage inflation taking off. Wage pressures were reported as "moderate or limited for all but a few skilled-labor positions," the Fed said.

That is consistent with Fed Chairman Ben S. Bernanke's recent assessment that he does not see a repeat of the 1970s-style situation where workers demanded - and received - higher wages to keep up with ever-rising prices.

The Fed's survey is based on information supplied by the Fed's 12 regional banks. The information was collected before June 2.

Highlights from yesterday's Federal Reserve report on the region's economy in May:

Overall business conditions showed signs of stabilizing, but some sectors weakened while others strengthened.

Manufacturers reported steady rates of shipments and new orders. About half the producers expect orders and shipments to rise in the next six months, and only 10 percent see declines.

Retailers said sales remained slow and did not meet expectations. They blamed low consumer confidence and high food and energy costs for deterring discretionary spending. The outlook is "subdued."

Bank loans rose slowly, with real estate loans especially weak. But commercial and industrial lending is rising. Loan delinquencies and charge-offs rose slightly.

Costs for raw materials and prices charged to customers increased again - especially in the food, chemicals, industrial materials and metals industries. Wage increases were moderate.