Beige Book Points to Moderate Growth but Weak Housing Conditions

The ""Federal Reserve"":http://www.federalreserve.gov published its latest edition of the popular ""Beige Book"":http://www.federalreserve.gov/fomc/beigebook/2011/20110112/default.htm Wednesday. Based on information received from contacts in the field, the central bank says economic activity across the country ""continued to expand moderately"" during the last part of 2010 with steady[IMAGE]improvements seen in labor markets. However, the real estate sector, and residential housing in particular, continues to be a significant hurdle for the economic recovery.

Beige Book findings are based on anecdotal commentary and observations collected by the 12 Fed districts from businesses and contacts outside the Federal Reserve. Data included in the latest version covers the reporting period from mid-November through January 3, 2011.

Overall economic conditions were said to be ""improving"" in the Boston, New York, Philadelphia, and Richmond districts. Activity was described as increasing ""modestly to moderately"" in Cleveland, Atlanta, Chicago, St. Louis, Kansas City, Dallas. 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 last year.

Residential real estate markets, though, were characterized as ""weak"" across all districts, as contacts in the field corroborated Fed Chairman Ben Bernanke's assessment from his testimony at a Senate hearing last week.

Bernanke told lawmakers, ""[T]he housing sector remains depressed, as the overhang of vacant houses continues to weigh heavily on both home prices and construction, and nonresidential construction is also quite weak.""

But even with the albatross of real estate conditions hanging heavy, Bernanke said, ""Overall, the pace of economic recovery seems likely to be moderately stronger in 2011 than it was in 2010.""

According to the latest Beige Book findings, a majority of the districts, including Boston, New York, Cleveland, Atlanta, Chicago, Minneapolis, Dallas, and San Francisco

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characterized local housing markets as ""sluggish"" with little change from the previous reporting period. Kansas City noted further weakening, while Richmond received reports of both flat activity and further declines. The St. Louis district saw additional declines in existing home sales, but also cited increased new home construction permits.

All districts attributed slumping activity to concerns about the pace of economic recovery, especially in employment, while the Philadelphia, Atlanta, and Chicago Districts mentioned difficulty obtaining credit as another constraint on demand.

Nine of the 12 districts reported home prices generally declined or held steady, with contacts in New York, Atlanta, Chicago, and San Francisco placing the blame for downward pressure on home prices squarely on large supplies of distressed properties.

Boston reported rising median home prices across most states in the district, but contacts attributed those increases to relatively higher sales of more expensive properties rather than a general upward movement in home prices. Neither St. Louis or Dallas reported on home price trends in their districts.

Outlooks for residential real estate in the coming year were mixed, with contacts in most districts expecting continued weak conditions.

Commercial construction was described as subdued or slow, while commercial leasing activity reportedly increased in the Richmond, Chicago, Minneapolis, and Kansas City. Vacancy rates, while quite high across the country, fell marginally in the Kansas City district and in New York City's office market. Boston, Richmond, Dallas, and San Francisco mentioned pick-ups in multifamily construction within their districts.

Reports on credit activity were mixed across the districts, with overall loan demand slowly improving in Philadelphia and Richmond but weaker in St. Louis and Dallas. Bankers in Philadelphia, Cleveland, and Richmond anticipate consumer lending to expand in 2011.

Lenders in the New York, Cleveland, Minneapolis, Kansas City, and San Francisco districts noted a drop in residential mortgage refinancing owing to the recent rise in interest rates, whereas Richmond reported strong demand for home refinancing.

Labor markets appeared to be firming somewhat in most districts, as some modest hiring beyond replacement was said to have occurred or was planned in a variety of sectors. Most districts indicated that business contacts were positive about the outlook, although still generally cautious.