Fed Says Modest Growth Spurred by Housing in Survey

The U.S. economy grew at a modest to moderate pace across most of the country amid rising consumer demand for homes and autos, the Federal Reserve (TREFQE2) said.

“The majority of districts reported modest improvements in labor market conditions, although hiring plans were limited in several districts,” the central bank said in its Beige Book business survey, which is based on reports from the Fed’s 12 regional banks. “Residential real estate markets strengthened in nearly all districts and home prices rose amid falling inventories across much of the country.”

The anecdotal snapshot of the economy helps the Federal Open Market Committee evaluate whether the labor market shows signs of the substantial improvement it says would warrant shrinking or halting $85 billion in monthly bond purchases. The committee is scheduled to meet March 19-20.

Companies added 198,000 workers last month, more than projected and an indication the job market will keep expanding, according to figures released today by the Roseland, New Jersey- based ADP Research Institute. The jobless rate, while falling from a 26-year high of 10 percent in 2009, has stayed at 7.8 percent to 7.9 percent since September.

“This shows there’s no seismic change in the underlying momentum of the economy,” said Eric Green, the global head of research at TD Securities Inc. in New York. “It’s steady as she goes, and in this context that’s growth in the 1.5 to 2 percent range in the first half.”

‘Slow Pace’

The U.S. economy “generally expanded at a modest to moderate pace since the previous Beige Book,” the Fed said in a description that was similar to the prior report. Five districts reported economic growth was “moderate” and five as “at a modest pace,” with the Boston district expanding “slowly” and Chicago activity “at a slow pace,” the Fed report said.

Manufacturing tied to home construction “was a source of strength for many districts,” the report said. It cited wood product manufacturing in St. Louis and San Francisco, household goods production in the Chicago region and cement in Dallas.

Housing has gained as Fed easing pushed mortgage rates to record lows. Home prices rose 6.8 percent in December from a year earlier, according to the Case-Shiller 20 City index, the fastest increase since 2006. The gauge rose every month last year. New home sales accelerated in January to a 437,000 annual pace, the highest since 2008.

‘Looks Positive’

“We’re tracking growth right now that looks positive but not very exciting,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York and a former researcher at the Fed Board in Washington, said before the report. “House prices continue to go up. So far that seems to be holding up pretty well and doesn’t show any signs of faltering in the new year.”

Most districts said housing activity continued to strengthen. While six reserve banks “noted strong growth in home sales,” New York and Chicago saw “slight improvements.”

Demand for home loans was “strong” in five districts, “mainly driven by refinances due to continued low interest rates.” Demand for commercial real estate lending was “strong” in the Cleveland, Richmond, and Kansas City regions.

Sales growth at Home Depot Inc (HD)., the largest U.S. home- improvement retailer, will be buoyed by about 2 percent economic growth and a “warming-up housing market,” this year, Senior Vice President Kevin Hofmann said at an investor conference March 4. “The housing market -- while it’s recovering -- we don’t expect a full recovery in 2013,” he said.

‘Modest’ Pressure

The Fed said inflationary pressures were “modest” and “most district contacts did not plan to increase prices.”

“The majority of districts reported modest improvements in labor market conditions, although hiring plans were limited in several districts,” the report said. “Wage pressures were mostly limited, but some contacts reported upward pressure for skilled positions in certain industries due to worker shortages.”

The anecdotal accounts were collected on or before Feb. 22 and compiled by the Federal Reserve Bank of Kansas City.

Fed purchases of mortgage bonds and Treasuries have helped push the Dow Jones Industrial Average (INDU) to a record, erasing losses from the financial crisis after a four-year rally that was also fueled by the fastest corporate profit growth since the 1990s. The Dow rose 0.3 percent to 14,296.24 today in New York, while the yield on the benchmark 10-year Treasury note climbed 0.04 percentage point to 1.94 percent.

FOMC Minutes

Minutes from the Jan. 29-30 FOMC meeting show officials were divided over the bond buying. Several participants at the gathering “emphasized that the committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved,” the minutes showed.

Chairman Ben S. Bernanke defended the Fed’s bond purchases in congressional testimony last week, saying the benefits of reducing borrowing costs and fueling growth outweigh any potential costs.

The Fed chairman said in a speech last week that “premature removal of accommodation” may weaken the three-year recovery. Vice Chairman Janet Yellen, the Fed’s No. 2 official, said in a speech in Washington this week that ending the bond- buying too soon could damp growth. Policy makers are tracking possible costs and risks from the record accommodation, she said.

The FOMC cut its target interest rate to a range of zero to 0.25 percent in December 2008 and has said it will keep the rate in that band as long as unemployment remains above 6.5 percent and inflation is projected to be no more than 2.5 percent. The committee at its January meeting said it will continue asset purchases until the labor market improves “substantially.”

To contact the reporters on this story: Jeff Kearns in Washington at jkearns3@bloomberg.net; Steve Matthews in Atlanta at smatthews@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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