Fed's 'beige book' shows modest improvement in economy

A real estate agent shows a house to a family in California. Residential home sales improved recently in most of the country, the Federal Reserve's "beige book" says.
A real estate agent shows a house to a family in California. Residential home sales improved recently in most of the country, the Federal Reserve's "beige book" says. (Marcio Jose Sanchez/associated Press)
By Renae Merle
Washington Post Staff Writer
Thursday, January 14, 2010

The economy's modest recovery broadened during the last months of 2009 with the help of an uptick in home sales and improvements in the manufacturing sector, according to a Federal Reserve report issued Wednesday. The report also reinforces that the weak labor market continues to be a drag on the economic rebound.

The Fed's latest "beige book," a compilation of anecdotal reports from businesses around the country, finds that while economic activity remains at low levels, businesspeople reported improvements in most of the country. Those contacted in 10 of the 12 Federal Reserve districts said there was increased economic activity or an improvement in conditions, compared with eight districts with such advances last time.

The report offers a snapshot of an economy experiencing incremental improvements but weighed down with lingering concerns. Conditions "have improved modestly further, and those improvements are broader geographically than in the last report," says the beige book, which covers the period from late November to early January.

Consumer spending, a key driver of economic growth, was "slightly greater" during the 2009 holiday season than in 2008 but still far below 2007 levels, the report says. "Consumers were variously described as cautious, price sensitive, and focused on necessities, but sometimes willing to spend on discretionary purchases," the beige book says. Meanwhile, auto sales were flat or slightly up in many regions, with dealer incentives boosting year-end inventory clearance in Chicago.

The commercial real estate market remain soft in nearly all districts, reflected in rising vacancy rates and declining rents. But residential home sales were up in most places toward the end of 2009, with the help of a tax credit aimed at first-time home buyers, the beige book says. Most of the increased activity was among lower-priced homes. Congress extended the tax credit through April, and many economists expect it to spur more sales this spring, though some warn that more foreclosures and rising interest rates could dampen that growth.

Meanwhile, manufacturing activity improved in half the districts, and the businesspeople contacted were mostly optimistic about the near future. But capital spending remains cautious, and the Federal Reserve Bank of Richmond, which covers the Washington region, reported continued declines. "Richmond reported widespread weakness across shipments, new orders, and employment within its manufacturing sector," the beige book says.

The labor market remained troublesome, according to the report. Some businesses reported that hiring was up, but the "labor market conditions remained generally weak with modest wage increases appearing in just a few Districts." That follows a Labor Department report last week showing that employers shed 85,000 net jobs in December, disappointing economists who forecast that the government report would show no job loss or even modest growth.

Continuing weakness in commercial real estate, consumer spending and the labor market should be cautionary signals, despite the upbeat tenor of the stock markets, said Steven Ricchiuto, chief economist for Mizuho Securities in New York. "I think [investors] are ignoring the threat of double dip [recession]," Ricchiuto said. "They have gotten lulled into complacency."

The beige book is prepared eight times a year in advance of Fed policymaking meeting to help the central bank decide on the nation's monetary policy.

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