More retrenching

The U.S. economy started the new year on weaker footing as recession-shocked Americans retrenched further, forcing retailers to ring up fewer sales and factories to cut back production.

The Federal Reserve's new snapshot of business conditions nationwide widely known as its Beige Book, released yesterday, suggested the country's economic picture has darkened during the past two months. The outlook appears equally dim.


"Overall economic activity continued to weaken across almost all of the Federal Reserve's districts," the report concluded.

Separately, another report by the Commerce Department showed that retail sales fell in December by 2.7 percent, a worse-than-expected number highlighting how rising unemployment, stagnant wages and a continuing housing crisis have undermined one of the basic props of the U.S. economy. For all of 2008, retail sales dipped 0.1 percent, the first annual drop on government records going back to 1992.


To help brace the economy, Fed Chairman Ben S. Bernanke and his colleagues have signaled that they will leave a key interest rate at record-low levels for some time.

In an unprecedented move last month, the Fed ratcheted down its rate to hover between zero and 0.25 percent. The Fed will keep rates in that range at its next meeting on Jan. 27-28 and probably for much - if not all - of this year, economists predict. The Fed also has pledged to use other unconventional tools to revive the economy.

The recession, which just entered its second year, is the longest in a quarter-century and appears likely to be the longest downturn since World War II.

Most retailers reported "generally negative" holiday sales and are cautious about sales prospects in the months ahead, according to the Fed report based on information collected between late November and Jan. 5.

This week, regional department store chain Gottschalks Inc. put itself up for sale and said it had filed to reorganize in a Chapter 11 bankruptcy; discount clothing chain Goody's Family Clothing also filed for Chapter 11 bankruptcy protection; and luxury department store retailer Neiman Marcus Group Inc. said it was cutting about 375 jobs.

Retailers engaged in "deep discounting" during the holidays, with "sizable" price cuts, while wage pressures were "largely contained," the report found.

"Many retailers became convinced the Grinch did indeed steal Christmas," Charles Plosser, president of the Federal Reserve Bank of Philadelphia, said in a speech yesterday.

Consumer spending - which includes retail sales - is a major shaper of national economic activity. But job cuts, sinking home values and cracked nest eggs have made American consumers wary of spending.


At factories, "activity continued to fall" in most Fed districts, with "declines reported across a wide range of industries," the Fed reported.

Activity in the services sector of the economy also declined in most Fed regions. Transportation, travel and tourism-related services were among the industries hit. Meanwhile, the housing market fell deeper into a rut and commercial real-estate markets deteriorated in most Fed regions.

"The tone of this report gave no indication that conditions were about to suddenly improve," said Abiel Reinhart, economist at JPMorgan Chase Bank.

Reinhart now predicts economic activity in the first three months of this year will shrink at pace of 5 percent, worse than the 3 percent rate of decline previously forecast.

Many analysts believe the overall economy, as measured by the gross domestic product, plunged at an annual rate of about 6 percent in the just-completed fourth quarter after dropping by 0.5 percent in the third quarter.

With companies seeing customers' appetites sag, employers throttled back hiring, the Fed report said. They axed jobs, cut workers' hours, froze workers' pay or reduced compensation.


The nation's unemployment rate bolted to 7.2 percent in December, a 16-year high, the government reported last week. For all of last year, a staggering 2.6 million jobs were eliminated, the most since World War II.

The Fed report, based on information supplied by the Fed's 12 regional banks, will figure into discussions by Bernanke and his colleagues later this month when they assess economic and financial conditions.

"The economy is in the midst of a serious recession that seems likely to persist for at least another two quarters," Gary Stern, president of the Federal Reserve Bank of Minneapolis, said in a speech yesterday.

Another report due out today shows that more than 2.3 million American homeowners faced foreclosure proceedings last year, an 81 percent increase from 2007, with the worst yet to come.

Nationwide, more than 860,000 properties were repossessed by lenders, more than double the 2007 level, according to RealtyTrac, a foreclosure listing firm based in Irvine, Calif., which compiled the figures.

Moody's, a research firm, predicts the number of homes lost to foreclosure is likely to rise by another 18 percent this year before tapering off slightly through 2011.


The Associated Press, Bloomberg News and The Washington Post contributed to this article.