Fed finds optimism about holiday sales but says real estate is still a drag on growth

The Fed's "beige book" reported increases in home sales, but said fewer homes were being built.
The Fed's "beige book" reported increases in home sales, but said fewer homes were being built. (Reed Saxon/associated Press)
By Zachary A. Goldfarb
Washington Post Staff Writer
Thursday, December 3, 2009

Economic conditions around most of the country continued to improve "modestly," and even the weak labor market showed "scattered" signs of progress, according to a report by the Federal Reserve on Wednesday.

The Fed said retailers across the country were growing more optimistic about holiday sales. But the central bank warned that home prices in many markets were still declining and said that severe distress in the commercial real estate market continued to present formidable barriers to economic recovery.

Analysts said the Fed's latest "beige book," a compilation of anecdotal reports from businesses around the country published eight times a year, showed an economy still gradually improving, but with no significant pickups that would give rise to a speedy turnaround.

Separately on Wednesday, Treasury Secretary Timothy F. Geithner said the economy was showing signs of stability, which is leading the government to "wind down" its $700 billion financial bailout initiative. But he said, "We're not quite there yet," strongly suggesting that the Treasury Department would seek to extend the Troubled Assets Relief Program for some time more.

The Fed report, meanwhile, said that consumer spending increased "moderately," with particular strength in purchases of used cars. The Fed said this uptick helped reduce fears that the car market would remain distressed after the expiration of the government's "Cash for Clunkers" program. As a result, auto dealers began to rebuild their inventories.

But business lending -- considered critical to accelerating the economy's recovery -- still remained weak, according to the report. The Fed said demand for loans was shrinking and banks were also less willing to lend. This posed a problem for manufacturing in some markets. For instance, the report said "tightened credit limited the ability of customers to place new orders" in the Richmond district, which stretches from Maryland to South Carolina.

The Fed also expressed concern about increasing losses on commercial real estate, warning that the sector was "very weak and, in many cases, deteriorating," with rents falling, vacancy rates rising and little new construction underway.

But the residential real estate outlook was improved. Home sales continued to increase, mainly for less expensive homes. However, the increases bypassed many parts of the Northeast. In addition, fewer homes overall were being built.

The Fed said the job market remained weak "with further layoffs, sluggish hiring and high levels of unemployment." But some markets reported that the pace of job cuts was declining. In Boston, some firms said they were beginning to hire and increase pay.

Still, the Fed said wages overall aren't rising significantly, and there is little sign of inflation aside from rising prices in some markets for food and energy.

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.

Expecting unemployment to continue to rise into 2010, the Fed has been keeping its central interest rate at zero, while starting to roll back some of the extraordinary programs it introduced to ease the credit crisis.

The Fed report suggests "that real growth is losing some momentum at the end of 2009 and in early 2010. Businesses are playing the recovery on the conservative side, and more time is needed for banks to recapitalize," Brian A. Bethune, an economist at IHS Global Insight, wrote in a report. "This slow-motion recovery is going to take an extraordinary amount of patience."

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