Fed Saw ‘Moderate’ Growth in Most of U.S. on Retailing

The Federal Reserve said “moderate” growth across most of the country last month was buoyed by gains in holiday spending by consumers, an improving labor market and strength in manufacturing.

“The economic outlook is positive in most districts, with some reports citing expectations of ‘more of the same’ and some expecting a pickup in growth,” the Fed said today in its Beige Book business survey, based on reports gathered on or before Jan. 6.

Nine of 12 Fed districts grew at a moderate pace, up from seven in the previous report, released on Dec. 4. Two districts said growth was modest, down from four. Yelena Shulyatyeva, a U.S. economist at BNP Paribas SA in New York, wrote in a note that the report is a “modest upgrade” from the last report.

The Beige Book gives the Federal Open Market Committee anecdotal information about the state of the economy two weeks before it meets Jan. 28-29 to discuss monetary policy. The committee last month decided to reduce monthly bond purchases to $75 billion from $85 billion, citing improvements in the labor market, and adopted a strategy of further gradual reductions.

“It keeps getting brighter all the time,” Ward McCarthy, chief financial economist at Jefferies LLC in New York, said of the survey. “It portrays an economy and labor market that continue to improve and also have positive outlooks.”

‘Moderate’ Upgrade

The Standard & Poor’s 500 Index maintained gains after the report, rising 0.5 percent to 1,848.38 in New York. The yield on the benchmark 10-year Treasury note increased 0.02 percentage point to 2.89 percent.

“Economic activity continued to expand across most regions and sectors from late November through the end of the year,” the Beige Book said. “Most districts reported that retail spending was up, with activity described as modestly to moderately higher and holiday sales on plan or up a bit compared with 2012.”

Anecdotes “generally painted a picture of steady growth in manufacturing,” with all 12 districts citing increases in manufacturing from a year earlier and 11 reporting “both growing sales and an optimistic outlook,” the Fed said. Employment was “steady” with some instances of “rapid growth” and there were few reports of staff cuts or plant closings. Businesses said they anticipated further growth.

Multiple districts cited strength in commercial aviation, autos and construction materials, the survey said. Boston, Chicago and San Francisco saw “exceptional strength in commercial aviation driven by record backlogs at major aircraft producers.” Four districts reported above-average strength in the auto industry. Cleveland said most auto suppliers were at or near capacity.

Rising Prices

Real estate markets “continued to improve” with most regions citing “increased residential sales activity and construction as well as rising home prices,” the Fed said. Commercial real estate reports were “positive” with construction generally increasing, and eight districts reported increases in commercial sales and leasing activity.

Eight of 12 districts saw “upward movements in wages” that were described as small to moderate, while the same number of reserve banks reported increases in hiring. Richmond cited “numerous reports of strong labor demand.”

Payrolls rose by 74,000 in December, less than the most pessimistic projection in a Bloomberg survey, while November’s gain was revised higher to 241,000, the Labor Department said. Cold weather may have distorted the jobs report, which showed 273,000 Americans weren’t at work because of low temperatures during the survey week, the most for any December since 1977. Last month the survey week included Dec. 5.

‘An Aberration’

“This was really an aberration and a lot of the weakness is weather driven,” Aneta Markowska, chief U.S. economist at Societe Generale SA in New York, said of the jobs report before the Beige Book release. “This economy is definitely showing some good momentum. We’re pretty upbeat on growth, which we think will translate into job creation.”

The New York Fed said harsh weather reduced consumer spending, while the Philadelphia, Cleveland and Chicago regions said “cold-weather gear and winter items were selling well.” The Minneapolis Fed said the winter tourism season got off to “a solid start on account of snowy weather.”

Even with December’s drop, monthly payroll gains last year averaged 182,000. A private payrolls gauge from the ADP Research Institute showed U.S. companies added 238,000 workers in December for the biggest increase in more than a year.

Fed Target

Still, the personal consumption expenditures price index -- the Fed’s preferred inflation measure -- rose just 0.9 percent for the 12 months ending November, more than a percentage point below the central bank’s target.

Fed Chairman Ben S. Bernanke said at a press conference after last month’s meeting that the FOMC may taper its buying by about $10 billion per gathering. Vice Chairman Janet Yellen is set to succeed Bernanke after his term ends Jan. 31.

December’s payrolls slump probably won’t keep policy makers from discussing another $10 billion cut in asset purchases, Richmond Fed President Jeffrey Lacker said to reporters Jan. 10 after a speech in Raleigh, North Carolina.

The Beige Book’s upbeat tone is “consistent with the skew to tapering” at the January meeting and beyond, David Ader, a strategist at CRT Capital Group LLC in Stamford, Connecticut, wrote in a note to clients today. The report doesn’t suggest a need to accelerate or decelerate tapering, he said.

Halting Purchases

Fed policy makers will probably reduce their bond purchases in $10 billion increments over the next six meetings before announcing an end to the program no later than December, according to a Bloomberg News survey of economists following the latest jobs report.

Fed officials favoring bond buying cuts can point to signs the economy is strengthening. Gross domestic product expanded at a 4.1 percent annualized pace in the third quarter, the fastest since the last quarter of 2011.

Consumers are getting a boost from the stock market. The Standard & Poor’s 500 Index climbed 30 percent last year for its best advance since 1997.

The surge in equities will prompt greater spending and, in turn, help generate jobs, according to Michael Dueker, a former St. Louis Fed economist who is chief economist for Seattle-based Russell Investments, which oversees about $240 billion.

“It’s just such an out-sized return,” Dueker said before today’s report, referring to the surge in stocks. “Everyone’s confidence is going to increase enough to boost spending and that’s going to lead to a virtuous cycle in the economy. We’ll see spending pick up in all areas.”

Auto Demand

Retail sales rose 0.2 percent last month after a 0.4 percent advance in November, government data showed yesterday. Excluding a drop in auto demand that vehicle makers partly attributed to bad weather, sales jumped by the most in almost a year.

Reduced partisan wrangling in Washington may improve the outlook of consumers and businesses. House and Senate lawmakers this week agreed to a bipartisan compromise to fund the U.S. government through Sept. 30. The $1.01 trillion measure, unveiled days before financing for federal agencies is scheduled to lapse, would fund those agencies as well as a health-care law and separate war financing to bring the total to $1.1 trillion.

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