Fed: Slow growth, still-high prices hit economy

WASHINGTON — The nation struggled with slow economic growth and still-high prices that are weighing on consumers and businesses alike as the race for the White House kicks into high gear.

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

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

Given the fragile state of the economy, the Fed isn't in a hurry to boost rates to fend off creeping inflation. A growing number of analysts believe the economy is likely to hit another dangerous rough patch later this year as consumers and businesses curtail their spending even more.

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

Consumers, the lifeblood of the economy, showed caution. 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.

"Over the course of this summer it became clear that the economic headwinds have not subsided as hoped," Eric Rosengren, president of the Federal Reserve Bank of Boston, said in a speech Wednesday in New Hampshire.

"Most private forecasters are expecting significantly slowed growth in the second half of this year — as residential investment continues to be a drag on the economy, as consumers tighten up on their spending as the impact of the federal tax rebate subsides, and as weakness among some of our major trading partners makes the outlook for many exports more restrained," he explained.

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.