The U.S. Federal Reserve Board released its latest ‘beige book’ report on Wednesday, highlighting a somewhat softer outlook for the recovery. Economists see rates remaining on hold as a result.

In its report, the Fed said that economic activity has “continued to increase, on balance, since the previous survey”. The districts of Cleveland and Kansas City reported that their levels of economic activity generally held steady, while a number of those reporting improvements noted that the increases were modest, and two districts, Atlanta and Chicago, said that the pace of economic activity had slowed recently.

TD Economics says this represents a decline from the June report in which all regions reported gains. RBC Economics notes the greatest source of weakness seems to emanate from real estate and construction with “nearly all districts report[ing] sluggish housing markets”. “The picture was bleaker for the commercial and industrial real estate side of the economy,” RBC says, where markets “continued to struggle in all 12 Fed Districts”.

The Fed was a bit more positive about consumer spending. But in most districts the increases were modest, RBC notes, and it was necessities that were selling well. Manufacturing saw slower growth, while tourism and transportation saw increased activity.

“Overall labor market conditions improved modestly across the districts, with several reports of temporary hiring,” the Fed said. “Wage pressures remained largely contained across most districts.”

Reports on banking conditions were mixed, the Fed noted. Banking activity in Richmond and loan demand in Kansas City increased modestly. Overall loan demand was reported as soft or weak in Cleveland, Atlanta, and Dallas, while total outstanding loan volume decreased in recent months in St. Louis but was steady in Philadelphia and San Francisco. Additionally, most of the districts reporting on credit standards continued to note that lending standards remain restrictive.

TD says that following average annualized growth of 3.5% over the first three quarters of recovery, real GDP growth likely slowed to around 2.0% in the second quarter of the year. “Moreover, similar to the monthly data, activity appears to have slowed late in the quarter, as stimulus measures unwound, setting the stage for a slower growth trend in the second half of this year,” it adds.

“Today’s beige book report implies some easing in the pace of growth,” RBC concludes. “Although some of this deterioration may be attributable to earlier strength in areas such as housing that borrowed from subsequent periods, this was not generally the case. This slowing implies even less progress in terms of reducing a still high unemployment rate.” As a result, it doesn’t see the Fed hiking rates until the second quarter of 2011.

IE