Fed: Consumer Spending Fueling Economic Growth

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Beige Book
Mel Evans/AP
By Pedro Nicolaci da Costa

WASHINGTON --- The U.S. economy expanded at a "modest to moderate" pace in most of the country between early July and late August, according to a Federal Reserve report that was just strong enough to reinforce the prospect of a pullback in monetary stimulus.

With most Fed officials seemingly bent on moving away from controversial asset purchases aimed at keeping long-term rates down, investors are expecting the Fed to begin reducing the pace of its $85 billion monthly bond buys at policymakers' next meeting later this month.

Recent economic data has been mixed, but not weak enough to suggest any upset to a sluggish recent recovery, which is slowly bringing down unemployment.

The Beige Book report, which is compiled from conversations with Fed business contacts and was published on Wednesday, pointed to firming residential real estate activity, confirming this year's rebound in the housing market.
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"Reports from several districts suggested that rising home prices and mortgage interest rates may have spurred a pickup in recent market activity, as many 'fence sitters' were prompted to commit to purchases," the report said.

Consumer spending rose in most of the Fed's 12 regional districts, with some citing back-to-school sales as a driver for retailers. The Fed's overall characterization of the economy was not much changed from the prior report.

As for jobs, hiring "held steady or increased modestly" for most occupations or industries, the report said. Loan activity was mixed, with lending standards unchanged but credit quality improving.

The U.S. economy expanded 2.5 percent in the second quarter. But with overseas economies slowing, there are fears about whether forecasts for a strong second half will come true.

Economists are awaiting Friday's employment report for August, which is expected to show 180,000 new jobs were created -- not spectacular, but probably enough to meet the Fed's criteria of "substantial improvement."

Unemployment is forecast to remain steady at a historically-elevated 7.4 percent, according to a Reuters poll.

In response to the deepest recession in generations, the U.S. central bank not only slashed official borrowing costs to effectively zero but is also on track to buy over $3 trillion in mortgage and Treasury bonds to help spur lending and growth.

There is wide disagreement, even among Fed officials, about how effective these policies have been.

San Francisco Fed President John Williams indicated Wednesday his own preference for employing forward guidance about the likely future path of rates as a primary tool of policy rather than asset buying.

"If economy were to slow and inflation were to drift below what we would like," the Fed's "first" tool to ease policy further should be interest-rate guidance, Williams said.

-Additional reporting by Ann Saphir in Portland, Ore.

Fed: Consumer Spending Fueling Economic Growth
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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