US economy 'facing stagflation'

The construction industry has been hit by the weak housing market

The US economy is facing slow growth and higher prices, according to the most recent survey by the US central bank, the Federal Reserve.

Economic activity was "weak, soft or subdued" across the country, said the Fed's latest Beige Book report.

And spending slowed, with consumers concentrating on "food, staples and essential items" rather than luxuries.

In six of the 12 Fed regions, businessmen said they were being squeezed by higher raw material prices.

Car sales were particularly weak, a trend confirmed by the latest industry figures, which show a double-digit drop in orders at Ford, GM, and Chrysler.

The figures suggest that the US economy will be weaker in the next two quarters, following its surprisingly strong growth in the second quarter, boosted by exports.

The survey points to the same dilemma that is facing central banks around the world - the contradictory pressures of rising inflation and slowing growth.

"What it is describing is basically stagflation," said Ethan Harris, chief economist at Lehman Brothers.

Rate decision

The Fed has kept interest rates unchanged at 2% for the past six months, and the market expects no change when the Fed's open market committee next meets on 16 September.

Fed chairman Ben Bernanke has recently argued that the dangers of the US falling into a recession have receded, following the $168bn (£94bn) stimulus package which was distributed to taxpayers in July.

However, with housing prices still falling at 15% annually, and financial firms restricting their lending, consumer confidence is at an all-time low.

The weak employment market, with nearly 500,000 job losses so far this year, is another drag on consumer spending, but exports have so far helped stem further losses in the manufacturing sector.

But with growth slowing to a standstill in Europe and Japan, some of the US's biggest export markets are likely to take fewer goods in the future.

In addition, the dollar has halted its slide, and began the strengthen again on the back of weaker-than-expected growth in Europe.

The one bright spot in the US economy is the energy and mining sector, which is strengthening on the back of the worldwide commodities boom.