U.S. Federal Reserve officials agreed at their December meeting inflation was the predominant concern, but some felt the "subdued tone" of economic data meant risks to growth had increased, minutes released on Wednesday show.
Meanwhile, economic activity in the manufacturing sector expanded in December following a one-month decline, according to a survey of the nation's supply executives. And construction activity showed further weakness as spending on homes dropped for a record eighth consecutive month.
"Several members judged that the subdued tone of some incoming indicators meant that the downside risks to economic growth in the near term had increased a little and become a bit
more broadly based than previously thought," said the minutes of the Dec 12 meeting.
"Nonetheless, all members agreed that the risk that inflation would fail to moderate as desired remained the predominant concern," the minutes added.
The U.S. central bank at that meeting held benchmark interest rates steady at 5.25%, renewing a warning on inflation but also nodding to "mixed" economic signals and a
"substantial" housing slowdown.
The statement the Fed issued last month said only that additional firming--increases in interest rates--might be necessary to address risks from inflation.
ISM Index Rises
The Institute for Supply Management's manufacturing index rose to 51.4 from its reading of 49.5 in November. The increase was stronger than expected, and suggests the economy may be on firmer footing than some had believed.
Reflecting movement in some regional manufacturing surveys, economists had expected a reading of 50.0 in December.
Any measure above 50 indicates expansion in manufacturing. But last month the index dropped below that level for the first time in 3-1/2 years, raising concerns about how sharp the slowdown in the U.S. economy will be. Manufacturing cooled in 2006 due to a slowing housing market and struggling automakers.
"The apparent slowdown in manufacturing seems more moderate than might have been feared," said Pierre Ellis, senior economist at Decision Economics. "That makes the general economy look steadier and even firmer than it was thought to be."
The release of the ISM index was delayed by one day because of the national day of mourning for President Gerald R. Ford.
Both new orders and production made significant gains to drive the index back above the breakeven point.
Employment Measure Low
All news was not positive, however, with the survey's employment measure still below 50 at 49.7, albeit slightly higher than November's 49.2.
However, the trend was encouraging. The prices paid index, for instance, which measures industrial inflation pressures, fell to 47.5 from 53.5, while a measure of new orders climbed
to 52.1 from 48.7.
The jobs component of the ISM survey indicates manufacturing continued to be a drag on the overall health of the labor market, although Friday's report may show that last-minute retail hiring to support the holiday shopping season made up the difference.
Much of the weakness in the economy has been linked to the slump in housing, which trimmed 1.2 percentage points off growth in the July-September quarter, when the economy slowed to a 2% growth rate.
Earlier, the Commerce Department reported that building activity edged down 0.2% in November to a seasonally adjusted annual rate of $1.18 trillion. That followed declines of 0.3% in October and 0.8% in September.
The weakness was led by a 1.6% plunge in home construction, which followed an even bigger 1.7% drop in October. Analysts believe home building will remain weak for several more months as builders struggle to work down a huge backlog of unsold homes.
The slump in October and November indicates housing will remain a serious drag in the final three months of the year.