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Federal Reserve Sees Improvement In The Economy

But housing market remains a big problem

The U.S. Federal Reserve, which has administered life support to the economy over the last two years, says it's seeing some promising signs of life.

In its “Beige Book,” containing reports from the twelve Federal Reserve Districts, the central bank finds “moderate expansion” of economic activity at the end of the year.

It said conditions were improving in the Boston, New York, Philadelphia, and Richmond Districts. Activity increased modestly to moderately in the Cleveland, Atlanta, Chicago, St. Louis, Kansas City, and Dallas Districts.

The economy of the Minneapolis District "continued its moderate recovery," while that of the San Francisco District "firmed further" in the reporting period leading up to the close of 2010. Conditions were generally said to be better in Districts' manufacturing, retail, and nonfinancial services sectors than in financial services or real estate.

Housing woes continue

Real estate remains the weakest link in the economy at this point.

“Residential real estate markets remained weak across all Districts,” the Fed said in its report. “Commercial construction was described as subdued or slow, while commercial leasing activity reportedly increased in the Richmond, Chicago, Minneapolis, and Kansas City Districts.”

Residential real estate has also failed to respond. Home values have fallen 26 percent since their peak in June 2006, worse than the 25.9-percent decline seen during the Depression years between 1928 and 1933, according to a recent report by the real estate website Zillow.com.

To drive home the point, Zillow notes that the value of the White House, at 1600 Pennsylvania Ave., in Washington, DC has dropped from a high of $331.5 million to $251.6 million.

Home values are expected to continue to slide as inventories pile up, and likely won't recover until the job market improves. The business news cable channel CNBC says it isn't a stretch to call the “housing recession” a “housing depression.”

Better jobs outlook

Fortunately, the Fed says there has also been some improvement in the jobs area. Labor markets appeared to be firming somewhat in most Districts at the end of the year, as some modest hiring beyond replacement positions was occurring.

“At the same time, however, upward pressure on wages was reportedly very limited,” the Fed said.

Even the manufacturing sector was showing some improvement. The Fed said its contacts in the Richmond, Chicago, and St. Louis Districts identified a strong flow of new orders. Respondents in the Chicago District pointed to pent-up demand for both light and heavy motor vehicles, attributed to an aging fleet, as a key driver of activity in the manufacturing sector.

The Cleveland District described orders as above expectations and respondents in the New York District noted that orders had picked up since the prior report.

“Overall, demand was generally characterized as stable and steady, and no District made mention of lingering fears of a double-dip recession, in contrast to the summer reporting periods,” the Fed reported.

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