Fed stays course

Associated Press file photo -- An employee works on an engine on the assembly line at a Ford plant in Brook Park, Ohio. Automakers reported strong sales for April on Wednesday, but the Federal Reserve expressed concerns about the economy and reports reflected some weakness. Show caption
Associated Press file photo -- An employee works on an engine on the assembly line at a Ford plant in Brook Park, Ohio. Automakers reported strong sales for April on Wednesday, but the Federal Reserve expressed concerns about the economy and reports reflected some weakness.

Stimulus to remain in place

“I think the Fed is in a wait-and-see  mode, like the rest of us.” David Jones, chief economist at DMJ Advisors

The Federal Reserve on Wednesday stood by its aggressive efforts to stimulate the economy and reduce unemployment. And it sent its most explicit signal to date that tax increases and spending cuts that kicked in this year are slowing the economy.

“Fiscal policy is restraining economic growth,” the Fed said in a statement after a two-day policy meeting.

The Fed maintained its plan to keep short-term interest rates at record lows at least until unemployment falls to 6.5 percent. And it said it will continue to buy $85 billion a month in Treasury and mortgage bonds. The bond purchases are intended to keep long-term borrowing costs down and encourage borrowing and spending.

In its statement, the Fed made clear that it could increase or decrease its bond purchases, depending on the performance of the job market and inflation.

David Jones, chief economist at DMJ Advisors, said that in saying it could increase or decrease its bond purchases, the Fed wants to show its flexibility: It’s ready to respond, whether the economy improves or weakens significantly.

“I think the Fed is in a wait-and-see mode, like the rest of us,” Jones said.

Jones said he expects no change in the level of bond purchases until September or later this year. The Fed wants time to see whether the economy can grow fast enough to drive sustained improvement in the job market, Jones said.

Debate among Fed policymakers at the March meeting had prompted some economists to speculate that the Fed might scale back its bond purchases if job growth accelerated.

But several reports in recent weeks have signaled the economy has weakened since the start of the year.

On Wednesday there were several economic reports:

  • A private survey shows U.S. companies added just 119,000 jobs in April, the fewest in seven months.

The report Wednesday from payroll processor ADP suggests that government spending cuts and higher taxes could be starting to weigh on the job market. And new requirements under President Barack Obama’s health care law may be prompting some small and mid-size companies to hold back on hiring.

ADP also said that hiring in March was slower than first thought: the survey shows just 131,000 added, down from an initial estimate of 158,000.

“This is a bit disappointing, it shows the economy is growing more slowly as we go into the spring and summer,” said Mark Zandi, chief economist at Moody’s Analytics, which compiles the report from ADP’s data.

The slowdown in April was broad-based. Manufacturers cut 10,000 jobs, while firms in the service sector added the fewest in seven months. Construction firms added 15,000 jobs.

  • U.S. factory activity expanded at a slower pace in April, held back by weaker hiring and less company stockpiling. The report is the latest sign that economic growth may be slowing this spring.

The Institute for Supply Management said Wednesday that its index of manufacturing activity slipped to 50.7 last month. That’s down from 51.3 in March and the slowest pace this year. A reading above 50 indicates expansion.

A measure of hiring fell sharply to 50.2, the lowest level since November. That suggests factories cut jobs again in April. And manufacturers cut back on stockpiling for the second straight month.

The ISM’s employment gauge hasn’t been a reliable indicator in recent months: It reached a nine-month high in March, conflicting with government data that reported factories shed 3,000 jobs.

Despite the decline in the pace of growth, economists noted that the survey still shows that manufacturing expanded for the fifth straight month. And there were some positive signs in the report.

A measure of production and new orders rose. More new orders indicate companies may have to rebuild their stockpiles in the coming months. Order backlogs grew at a faster pace. Higher orders points to more factory output in the coming months.

  • Spending on U.S. construction projects fell in March as the biggest drop in government projects in more than a decade overwhelmed strength in home building.

Construction spending fell 1.7 percent in March, compared with February, the Commerce Department reported. It marked the second decline in the past three months. January activity plunged a record 4 percent, which represented a downward revision from a previous estimate of a 2.1 percent decline.

Even with the recent weakness, construction activity was 4.8 percent higher in March than a year ago at a seasonally adjusted $856.7 billion.

In a positive report, Ford, GM, Chrysler and Nissan all saw double-digit U.S. sales increases last month, signaling the best April for car and truck sales in six years.

A rebound in pickup truck sales led the way, especially for the Detroit automakers. Small businesses are replacing aging trucks that they’ve kept since the Great Recession.

The economy grew at an annual rate of 2.5 percent in the January-March quarter — a decent growth rate but one that’s expected to weaken in coming months because of federal spending cuts and higher Social Security taxes.

At the same time, consumer inflation as measured by the gauge the Fed most closely monitors remains well below its 2 percent target. That gauge rose just 1 percent in the 12 months that ended in March.