Fed: Punch-drunk economy reels into new year; outlook dim

WASHINGTON -- 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, released Wednesday, suggested the country's economic picture has darkened over the last 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.

To help brace the economy, Fed Chairman Ben 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%. 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 already 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.

"Many retailers in the Philadelphia, Atlanta, Kansas City and Dallas districts expected continued weakness or sluggish sales," the report said. "Expectations were mixed in the Cleveland district, and retailers in the Boston district were watchful."

This week alone, regional department store chain Gottschalks 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 said it was cutting about 375 jobs.

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.