Fed Says Economy Improved at ‘Modest’ Pace in Regions (Update2)

March 3 (Bloomberg) -- The U.S. economy improved in nine of the Federal Reserve’s 12 regions in January and February while being hampered by snowstorms in the eastern U.S., the central bank said today.

“In most cases the increases were modest,” the Fed said in its Beige Book business survey, published two weeks before the Federal Open Market Committee meets to set monetary policy. Consumer spending increased in many regions, while commercial real estate and loan demand were “weak” and labor markets “soft,” the Fed said.

The report informs Fed policy makers ahead of their next meeting on March 16. While Chairman Ben S. Bernanke reiterated the Fed would leave rates very low for an “extended period” in congressional testimony last week, Kansas City Fed President Thomas Hoenig, the longest-serving policy maker, wants to eliminate the phrase because the financial crisis is fading.

The report probably reinforces the likelihood policy makers will repeat the “extended period” language this month, said Michael Feroli, an economist at JPMorgan Chase & Co. in New York. Growth “was described in pretty restrained terms,” said Feroli, a former Fed researcher.

The Fed said today that while consumer spending “improved slightly in many districts,” the snowstorms in February “limited activity” in some. The Atlanta and St. Louis regions reported “mixed” economies, while the Richmond district said the economy “slackened or remained soft across most sectors” owing to the weather.

Stocks, Treasuries

The Standard & Poor’s 500 Stock Index rose 0.1 percent to 1,119.49 at 3:21 p.m. in New York after climbing as much as 0.7 percent. The yield on the 10-year Treasury note rose two basis points to 3.62 percent following a report earlier today showing service industries expanded in February at the fastest pace since October 2007.

While payroll reductions slowed in most areas, “hiring plans still remained generally soft,” and pressures on employers to raise wages were “minimal,” the Fed said.

Economists surveyed by Bloomberg News anticipate a government report March 5 will show U.S. payrolls declined by 63,000 in February, in part because snowstorms caused some businesses to close. The jobless rate probably increased to 9.8 percent from 9.7 percent.

Jobs Lost

The U.S. has lost 8.4 million jobs since the start of the recession in December 2007, the most of any slowdown in the post-World War II era. U.S. companies last month cut 20,000 jobs, the fewest in two years, according to data today from ADP Employer Services.

The U.S. economy expanded at a 5.9 percent annual rate in the fourth quarter, the most in six years, as the country recovers from the worst recession since the 1930s.

Retail sales rose in many areas, while the Atlanta, Kansas City and St. Louis districts reported lower-than-expected figures or declines, the Beige Book said. The Commerce Department said this week that personal spending rose 0.5 percent in January, the fourth straight increase. Household purchases account for about 70 percent of the economy.

Atlanta-based Home Depot Inc., the largest U.S. home- improvement retailer, last month projected comparable-store sales will climb 2.5 percent from February 2010 to January 2011 after dropping 6.6 percent last year. Cincinnati-based Macy’s Inc. said sales at established stores will grow by as much as 2 percent after slumping 5.3 percent in the 12 months through January.

Non-Financial Services

The Fed’s Beige Book said non-financial services were “steady or improved” in the majority of districts, and manufacturing “increased further” in most areas. The report reflects information collected on or before Feb. 22 and summarized by staffers at the Kansas City Fed.

The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the economy, rose to 53 from 50.5 the prior month, a report today showed. Readings higher than 50 signal growth.

The Fed said housing markets improved in some areas, were “weak or softened further” in three districts, including New York, and little changed or mixed in two other regions. The weather hampered the market along the East Coast.

Sales of previously owned U.S. homes unexpectedly declined in January for a second month, falling 7.2 percent to an annual pace of 5.05 million, the National Association of Realtors said Feb. 26.

Tax Credit

The government extended a tax credit in November aimed at boosting home purchases. At the same time, the Fed this month plans to complete purchasing $1.25 trillion of mortgage-backed securities and $175 billion of federal agency debt, a program aimed at reducing home-loan rates over the past year.

“Most districts attributed stronger home sales to the home-buyer tax credit, with several contacts apprehensive about future sales once the credit expires on April 30,” the Fed said.

Commercial real estate “remained weak or declined further in most districts,” and all areas said construction was “weak or slow, except for some moderate boost” from federal stimulus and public construction, the Beige Book said.

Many companies were unable to raise selling prices, even with higher costs for metals and lumber, the Beige Book said. The Fed’s preferred price index, which excludes food and energy costs, rose 1.4 percent in January from a year earlier, below the long-run range of 1.7 percent to 2 percent policy makers want for total inflation.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net.