By Howard Schneider and Lindsay Dunsmuir
WASHINGTON (Reuters) – A “moderately” expanding U.S. economy was slowed last year by a manufacturing slump and weak global growth, but key risks have receded and the likelihood of recession has declined, the U.S. Federal Reserve said in its latest monetary policy report to the U.S. Congress.
“Downside risks to the U.S. outlook seem to have receded in the latter part of the year, as the conflicts over trade policy diminished somewhat, economic growth abroad showed signs of stabilizing, and financial conditions eased,” the Fed said on Friday, noting that the U.S. job market and consumer spending remained strong.
“The likelihood of a recession occurring over the next year has fallen noticeably in recent months,” the Fed said, basing its conclusion on models of recession probabilities that incorporate the behavior of bond markets and other factors.
Among the risks the Fed did note: the fallout from the spreading outbreak of coronavirus in China, “elevated” asset values, and near-record levels of low-grade corporate debt that the Fed fears could become a problem in an economic downturn.
Concerns about the virus and the possible disruption to Chinese economic growth as a result of it sent stock markets lower on Friday, despite a strong U.S. jobs report showing the economy added 225,000 jobs in January.
While a White House official on Friday said the likely impact on the United States will be “minimal,” the disease has introduced an unexpected and unpredictable problem into an economic outlook that the Fed felt was starting to improve after a turbulent year.
Overall, the Fed said, risks to a more than decade long U.S. recovery seemed to be easing following its three interest rate cuts in 2019 and evidence that a worldwide dip in trade and manufacturing “appears to be at an end.”
“Consumer spending and services activity around the world continue to hold up,” the Fed reported.
ECONOMY’S REPORT CARD
By law the Fed twice a year prepares a formal report for the U.S. Congress on the state of the economy and monetary policy.
Much of its amounts to a review of recent events.
The new document repeats the Fed’s assessment that the current level of the federal funds rate, in a range of between 1.5% and 1.75% was “appropriate” to keep the recovery on track.
It also reviewed the spike in the federal funds rate last fall and the steps the Fed has taken to relieve funding pressures, repeating it considers the measures technical and not a change in monetary policy.
Fed Chair Jerome Powell will present the report at two public hearings next week, and some Democratic U.S. senators have already posed questions in a letter to Powell challenging the Fed’s actions in those short-term funding markets.
The report did highlight how a slump in U.S. manufacturing last year – the product of factors from trade tensions to the cuts in production of Boeing’s troubled 737 Max aircraft – impacted economic growth overall.
The manufacturing downturn led to concerns that the sector might pull the United States into a recession, a worry compounded by stresses in U.S. bond markets.
The Fed concluded that the slowdown in factory output, which also meant less business for parts and services suppliers, cut overall growth in gross domestic product between 0.2 and 0.5 percentage point.
However the decline in factory output, the Fed said, was “well short” of the much steeper manufacturing slumps associated with past recessions. GDP growth for 2019 was 2.3%
(Reporting by Howard Schneider and Lindsay Dunsmuir; Editing by Andrea Ricci)