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Low-wattage bright spots in Fed report on economy
Manufacturing and housing lead a tentative recovery

By Neil Irwin
Washington Post Staff Writer
Thursday, October 22, 2009

Many parts of the U.S. economy are showing "modest improvements," the Federal Reserve reported on Wednesday, but bursts of activity in the manufacturing and housing sectors were overshadowed by weakness in the job market.

The Fed's latest "beige book," a compilation of anecdotal reports from businesses around the country published eight times a year, offers a portrait of an economy in transition in the early weeks of the fall, moving from recession into a tentative and uncertain expansion.

Businesses surveyed "indicated either stabilization or modest improvements in many sectors since the last report," the beige book says, "albeit often from depressed levels."

The Fed added that while reported gains in economic activity generally outnumbered declines, "virtually every reference to improvement was qualified as either small or scattered."

And, consistent with recent data about the moribund job market, "labor markets were typically characterized as weak or mixed, but with occasional pockets of improvement," the report says.

Indeed, a separate Labor Department report on Wednesday underscored the breadth of the downturn. The number of jobs fell in 43 states and the District in September, the agency said, and the unemployment rate rose in 23 states, compared with 19 states where it declined. The steepest job losses, in percentage terms, were in the District, New York, Kentucky and Wisconsin.

The industries with the strongest economic gains were residential real estate and manufacturing, the report says, matching other recent evidence. Those sectors were so thoroughly hammered by the recession that it didn't take much to create gains.

More houses have been sold in recent months and factories have increased production, even as millions of homes still sit empty and factories continue to produce well below their potential. Inventories of homes for sale remain far above historical norms, and the nation's factories are operating at only 70.5 percent of capacity.

But both home sales and industrial production have risen in recent months, creating a boost to overall economic activity. The beige book indicates that bank lending to first-time home buyers was a bright spot in the otherwise poor availability of credit.

"The economy is turning around," said Patrick Newport, an economist at IHS Global Insight. "But job losses are continuing, and the level of economic activity is significantly below what it was before the recession began."

And even with those improvements, it is not clear whether the momentum can be sustained. For example, manufacturers contacted by the regional Fed banks in Boston, Philadelphia, Cleveland and Kansas City said that they "expected only slight gains and modest economic growth during the next six months. Therefore, capital spending plans remained subdued, and centered mostly on new product development and cost reduction."

The most consistently weak sector, meanwhile, was commercial real estate, which is groaning under the weight of business closures and troubles in obtaining loans.

As economists would expect amid a still-weak economy, there were few signs of upward pressures on prices -- and indeed, some prices seem to be coming down. "Product competition and customer clout are leading to downward pressure on prices," according to the Boston Fed.

The beige book is prepared in advance of every Fed policymaking meeting, and is meant to help top officials of the central bank decide on the nation's monetary policy. Staff at the 12 regional Fed banks call business contacts in a wide range of industries and compile a summary of business conditions based on those interviews.

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