Street Smarts

Fed Beige Book Says Economy Improved in 10 Districts

Jan. 13 (Bloomberg) -- The U.S. economy improved in 10 of the Federal Reserve’s 12 districts last month, marking a broadening of the recovery, the central bank said today.

“While economic activity remains at a low level, conditions have improved modestly further,” the Fed said in its Beige Book business survey, published two weeks before the Federal Open Market Committee meets to set monetary policy. The Philadelphia and Richmond Fed districts were the exceptions, reporting “mixed conditions.”

The Beige Book offers anecdotal evidence that will help central bankers weigh developments in an economy where unemployment is projected to remain above 10 percent through the first half of the year. Policy makers, who next meet Jan. 26-27, last month repeated a pledge to keep borrowing costs “exceptionally low” for an “extended period.”

Most district banks reported that holiday-season consumer spending was “slightly greater” in 2009 than the year before, while remaining “far below” levels of 2007, according to the report, which reflects information collected through Jan. 4. Manufacturing improved or held steady in most districts, while the labor market and loan demand remained weak.

The Standard & Poor’s 500 Index extended gains after the report, rising 1 percent to 1,147.08 at 3:42 p.m. in New York. The yield on the 10-year Treasury note was up eight basis points to 3.79 percent.

‘Picking Up’

The report “suggests the economy is very gradually gaining steam,” said Zach Pandl, an economist at Nomura Securities International Inc. in New York. “The risks of a dip back into recession are declining.”

Chicago Fed President Charles Evans said separately today that economic “headwinds” such as tight bank credit will abate this year. Evans, in a speech in Coralville, Iowa, said the economy may expand 3 percent to 3.5 percent with inflation remaining stable as bank lending and consumer spending pick up.

“We are going to be waiting for the economy to improve in a strongly sustainable fashion and until that happens, then it is unlikely we would change policy,” Evans, who doesn’t vote on interest rates this year, told reporters after his speech. “Inflation currently is under-running my guideline for price stability so that also supports continued accommodation.”

Employers unexpectedly cut 85,000 jobs in December, the Labor Department reported on Jan. 8, and the jobless rate was unchanged at 10 percent, close to a 26-year high. Payrolls have declined by more than 7.2 million since the recession began in December 2007.

‘Out of Recession’

“Most people would agree we’re out of recession, but I just don’t think we’re going to see the unemployment rate coming down all that much very soon,” said Robert MacIntosh, chief economist at Eaton Vance Management in Boston.

Thomas Hoenig, president of the Fed Bank of Kansas City, said in an interview Jan. 11 that December’s job losses don’t change his outlook for a “modest” and “persistent” recovery.

Consumer confidence is increasing as companies slow the pace of job cuts and stocks rise. Retailers including TXJ Cos. and Sears Holdings Corp. reported improved sales over the holiday shopping season.

Sales climbed 14 percent in December at TJX Cos.’ stores open at least a year, beating the 5.9 percent average of analysts’ estimates compiled by Retail Metrics Inc. Sears posted a sales gain and issued a profit forecast that topped analysts’ projections.

‘Willing to Spend’

“Consumers were variously described as cautious, price sensitive, and focused on necessities, but sometimes willing to spend on discretionary purchases,” the Beige Book said. Auto sales were “flat or up slightly for some dealers” since the last Beige Book was released on Dec. 2.

The labor market “remained soft” in most districts, keeping wage and price pressures “subdued” in all but the Boston and Minneapolis districts. Hiring of temporary workers rose in New York, Cleveland, Chicago, and Dallas.

Peoria, Illinois-based Caterpillar Inc., the world’s largest maker of bulldozers and excavators, aims to bring back some laid-off workers next year as sales improve, said Chief Executive Officer Jim Owens.

“We’ll gradually begin to call people back and to rebuild our overall sales and ability to ship product,” Owens, 63, said in a Dec. 11 interview. Caterpillar cut about 18,700 full-time jobs and about the same number of temporary workers since December 2008.

Largest Economy

The world’s largest economy grew at a 2.2 percent annual pace in the third quarter, the first expansion after four quarters of contraction.

Gross domestic product probably grew 5.4 percent in the fourth quarter, according to Macroeconomic Advisers LLC, a St. Louis-based consulting firm founded by former Fed governor Laurence Meyer.

Home sales “increased toward the end of 2009 in most Federal Reserve Districts,” except San Francisco, where “demand for housing has been steady,” the report said.

Sales of new and existing homes rose 43 percent through November from a recession low in January. An index of pending home sales, or signed purchase agreements that have not closed, fell 16 percent in November, the first decrease in 10 months.

Americans may have been waiting for a first-time buyer tax credit to be extended. President Barack Obama on Nov. 6 extended the $8,000 tax credit until April 30 from Nov. 30 and expanded it to include some current owners.

Borrowing Costs

The Fed’s program to buy $1.45 trillion of mortgage-backed securities and agency debt through March 31 is helping to push down borrowing costs for home buyers.

Commercial real estate “remained soft” in nearly all districts, the Fed said, with New York, Philadelphia, Kansas City, and San Francisco reporting “further weakening in demand.”

Loan demand “continued to decline or remained weak” in most districts, with a number reporting that “credit quality continued to deteriorate.”

Fed Chairman Ben S. Bernanke, in a Dec. 7 speech, cited tight credit among “formidable headwinds” likely to hinder growth. Total loans and leases by banks in the U.S. fell to $6.79 trillion in November from $7.23 trillion a year earlier, according to Fed data.

To contact the reporter on this story: Michael McKee in New York at mmckee@bloomberg.net

Last Updated: January 13, 2010 16:02 EST