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(Agencies)
Updated: 2008-01-17 07:05

WASHINGTON -- The economy lost momentum heading into the new year as shoppers tightened their belts and manufacturers were stung by weak demand for cars and housing-related goods.

The Federal Reserve's new snapshot of business conditions around the country, released Wednesday, suggested that the strains from a persistent housing slump and harder-to-get credit are affecting the behavior of individuals and businesses alike -- making them more cautious.

The report comes as a recent string of economic indicators -- ranging from a plunge in retail sales to a big jump in the unemployment rate -- stokes worries that the country is heading for its first recession since 2001.

The Fed report said the economy in fact grew during the survey period -- from the middle of November through December -- "but at a slower pace" than the previous survey taken during the late fall. Credit problems intensified in December as did troubles in the housing market. That threw Wall Street into a fresh bout of turbulence.

Federal Reserve Chairman Ben Bernanke, in a major speech last week, pledged to aggressively cut a key interest rate to prevent all these problems from plunging the economy into a recession.

Many economists now predict the Fed will lower rates by a bold half-percentage point at the end of a two-day meeting on Jan. 30.

The Fed started cutting rates in September, the first time in four years; it lowered rates three times last year. However, some critics on Wall Street and elsewhere criticized Bernanke for not taking action sooner and more forcefully.

Bernanke made clear last week that the chances of the economy seriously weakening was the biggest danger, and he sought to send a reassuring message to Wall Street and Main Street that the Fed will do all it can to bolster economic activity.

The recent leap in the nation's unemployment rate from 4.7 percent in November to 5 percent in December, a two-year high, rang a warning bell on the economy. It raised concerns that consumers, whose spending is vital to a healthy economy, would clamp down, sending the economy into a tailspin.

The Fed report observed that "holiday sales were generally disappointing" and pointed to "further weakness in auto sales."

A report, released by the Commerce Department on Tuesday, showed that frugal shoppers cut back on their spending by 0.4 percent in December, wrapping up the weakest year for retailers since 2002. The gloomy report fanned fears of a recession and sent Wall Street in a nosedive.

Shoppers turned into penny-pinchers under the strains of a deteriorating job market, high energy bills and a persistent housing slump that has weakened home values and propelled foreclosures to record highs.

Looking ahead, the Fed report said that: "Overall, the outlook for 2008 among retail merchants was cautious."

Meanwhile, the picture of housing remained bleak.

"Residential real-estate conditions continued to be quite weak" in all Fed regions, the survey said. The pace of home sales continued to be sluggish and the inventories of unsold homes "persisted at historically high levels," the Fed found.

Reports on home prices varied. The Dallas Fed region observed that home prices were steady, while the regions of Atlanta, Cleveland, Kansas City, New York and Richmond reported that prices declined. The Boston and San Francisco regions said that changes in home prices were mixed.

Still, "overall contacts anticipate that housing markets will remain weak during the first part of 2008," the Fed survey concluded. The survey was based on information supplied by the Fed's 12 regional banks.

On the manufacturing front, activity varied around the country. But there was one common thread: Factories reported "pronounced weakness" in housing-related industries as well as the automobile industry.

Similarly, demand for construction workers and those in housing-related fields continued to drop, although the market for other types of skilled workers was solid, the Fed noted. "Increases in employment costs were generally described as moderate," the Fed said, suggesting that wages aren't growing so fast as to generate an inflation problem for the economy.

Still, businesses are having to cope with high costs for energy and food. That's squeezing profit margins for companies and boosting prices to some customers.

Consumer prices moderated in December, rising by 0.3 percent, the Labor Department reported Wednesday. For all of 2007, however, they leaped 4.1 percent. That was the biggest increase in 17 years.