Beige Book Says Economic Recovery Still Slow. What Now?
Danielle Kurtzleben

The economy is growing, but barely. What more might the Fed do to spur recovery?

One might say that the Federal Reserve's Beige Book report is aptly named. The report, issued eight times annually, uses anecdotal evidence from the nation's 12 Federal Reserve districts to summarize recent economic conditions. The latest Beige Book report may not pack many surprises, but the latest installment provides some guidance to where the nation can expect future recovery.

Overall, says the report, "economic activity continued to expand in September, although many Districts described the pace of growth as 'modest' or 'slight.'" Broadly speaking, the report indicates that one area of improvement is consumer spending, which was up slightly in September, helped by increases in auto sales in most districts. Likewise, manufacturing and transportation also saw increased activity. Meanwhile, real estate and construction remained weak nationwide, with flat or declining house prices nationwide, and the finance industry continues to flag. And the job market remains little changed, with firms in industries like manufacturing, transportation, and energy reporting a lack of adequately qualified or skilled labor.

All of that affirms much of what recent jobs reports and GDP figures have seemed to indicate -- the recovery continues, albeit modestly. "It's a slowed economy, but it's still growing," says Eduardo Martinez, senior economist at Moody's Analytics. "What [the Beige Book report] shows is that the last reporting period...the economy was spared a lot of the turbulence and uncertainty that affected it this summer" with events like the debt-ceiling deadlock and incidents of violent weather battering the economy.

However, some of the report's positive signs could just be the result of month-to-month fluctuations. For example, though consumer spending was up during the reporting period, consumer confidence remains abysmal, and unemployment remains high. "There's no way...that there can be a robust consumer recovery on the horizon," says James Camp, managing director of fixed income at Eagle Asset Management.

The report provides a wealth of information specific regional economic trends, but it does not provide an answer to one burning question: What more does the Fed plan to do to help bolster the recovery?

Already the Fed has undertaken a number of major steps: It has maintained near-zero interest rates, enacted two large-scale asset-buying programs known as "quantitative easing," and, most recently, lengthened the average maturity of the bonds on its balance sheet, a move known as "Operation Twist."

Many have wondered whether a third round of easing, also known as "QE3," is around the corner. Some opponents fear that such a program could spur inflation and be counterproductive in terms of the Fed's dual mandate: to foster both price stability and high employment.

Yet persistent unemployment might spur the Fed to "reframe" its mandate to focus more attention on solving the nation's jobs problem, says Mark Pawlak, CFA at financial services firm Keefe, Bruyette, and Woods. While monetary stimulus cannot fix the skills mismatch that many firms are facing, he says, it can stop the growth in that structural unemployment. "Cyclical unemployment can become structural," as unemployed workers lose skills, for example. "What's driving a certain amount of urgency on the part of the Fed is they're afraid if they don't reduce the unemployment rate, the structural unemployment rate will rise," says Pawlak.

Indeed, some Fed leaders are showing an openness to allowing inflation to creep higher. In a speech earlier this week, Chicago Fed President Charles Evans noted the difficulty in targeting both unemployment and inflation. When the two interests conflict, he said, "a flexible targeter does not accept a large miss in one target in order to hit the other perfectly, but instead accepts moderate misses in both in order to minimize the total loss." Likewise, Federal Reserve Chairman Ben Bernanke in a speech this week said that the Fed "does not have a formal, numerical inflation target" for price stability or employment.

Whether members of the Federal Open Market Committee would agree to such a program could be difficult. Three members of the 12-member committee already voted against the more modest Operation Twist. Even with persistent economic weakness, further policy accommodation could be difficult to enact.