The U.S. housing sector remains “quite depressed” with a turnaround not foreseen by builders until late 2008 at the earliest, the Federal Reserve said today in its latest assessment of economic conditions.

Inflation remains under wraps when food and energy prices are stripped out, the Fed added, suggesting officials have the flexibility to lower rates when they meet next month.

“Demand for residential real estate remained quite depressed, with only a few tentative and scattered signs of stabilization amidst the ongoing slowdown,” the Fed said in its beige book report, a summary of economic activity prepared for the Dec. 11 Federal Open Market Committee meeting.

The Fed has lowered the fed-funds rate three-quarters of a percentage point since September.

The latest beige book dwelled heavily on the economy’s soft spots. “Builders continued to shelve projects and lay off workers in many areas,” according to the beige book, and “contacts generally do not expect a significant pickup in homebuilding until well into next year at the earliest.”

The latest beige book was compiled by the San Francisco Fed. The survey period ended Nov. 16.

Housing weakness may be spilling over to consumer spending, which makes up two-thirds of economic activity. “Reports on retail spending were downbeat in general,” the Fed said, and “looking ahead, the reports were slightly pessimistic about prospects for the holiday retail season.”

There were some exceptions, the Fed noted. Boston, Philadelphia, Minneapolis and Kansas City reported firmer spending in their districts, and consumer electronics continued to see solid demand.

Despite the housing drag, the overall economy continued to expand, “but at a reduced pace compared with the previous survey period,” according to the beige book.

Exports remain a bright spot, the beige book noted, thanks in part to the weaker dollar, though manufacturing as a whole was “mixed.”

Inflation pressures, meanwhile, “remained modest overall but were significant for products and services that rely heavily on food and energy inputs,” the Fed said.

However, excluding food and energy, “final prices were reported to be largely stable or down a bit,” the Fed said, as “limited pricing power” forced some firms to absorb higher costs in their profit margins.

Labor markets remained “relatively tight,” the Fed added, though wage pressures “were largely unchanged” from the previous survey period.