The US economy grew at a slower pace in the late fall as shoppers watched their pennies heading into the busy holiday season.
The US Federal Reserve's new snapshot, released on Wednesday, suggested the strains from a severe housing slump and a painful credit crunch are affecting the behavior of individuals and businesses alike -- making them somewhat more cautious.
Yet, the hope that the Federal Reserve will cut a key interest rate for a third time this year to energize the economy sent stocks soaring on Wall Street. The Dow Jones industrials jumped for the second day in a row, gaining 331.01 points to close at 13,289.45. It marked the index's biggest two-day point gain in five years.
"Reports on retail spending were downbeat in general," the Fed survey said.
"Most retailers said that they were expecting a slow holiday season, with only small gains in sales volumes compared with last year," the Fed said.
Spending by consumers and businesses is the lifeblood of the nation's economic activity. The big worry for economists is that consumers and businesses will cut back on spending and investing, dealing a blow to economic growth. The odds of a recession have grown this year. Still, Fed officials and many other economists remain hopeful the country will weather the financial storm without falling into recession.
The Fed report found the national economy continued to grow during the survey period of October through mid-November but at a "reduced pace." Of the 12 Fed regions surveyed, seven reported a slower pace of economic activity, while the remainder generally pointed to "modest expansion or mixed conditions," the Fed said.
The findings will figure prominently into discussions when Federal Reserve Chairman Ben Bernanke and his colleagues meet on Dec. 11 to decide their next move on interest rates. Investors and some economists believe the Fed report, along with recent turbulence on Wall Street, would justify another rate reduction.
"The Fed realizes markets are fragile, and the ongoing dislocations we expect will lead the [Fed] to ease on Dec. 11," said T.J. Marta, fixed income strategist at RBC Capital Markets.
Fed Governor Donald Kohn, in a speech Wednesday, warned that if the financial turmoil seen in recent weeks were to persist, it could further crimp the flow of credit to people and businesses, raising risks to economic growth.
Kohn, the No. 2 official at the Fed, said the recent gyrations on Wall Street "partly reversed some of the improvement in market functioning" seen in late September and last month. The credit crunch had taken a turn for the worse in August, causing stocks to nosedive.
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," Kohn said in remarks to the Council on Foreign Relations in New York.
Against the backdrop of such uncertainty about how forces will play out with consumers and businesses, Kohn once again said Federal Reserve policymakers must remain "nimble."
Wall Street viewed Kohn's comments as hinting that another rate cut could be forthcoming.
On the inflation front, the Fed repor said expensive energy and food put "significant" pressure on the prices of products and services that rely heavily on these materials. But most other prices were largely stable or down a bit, the Fed said. That suggested that high energy and food prices aren't spreading inflation through the economy.