The Federal Reserve's latest "beige book" report on the economy is notable for the increasingly conventional picture it paints of a halting economy, where lingering -- and now nearly resolved -- problems in housing have stopped the recovery from ever really taking off.
The best thing about the beige book is how ordinary its description of the recovery is. For years, economists have said that recoveries from recessions induced by financial panics were different. Housing probably couldn't lead the recovery, because consumers owed too much money, and until a years-long process of paying down debt was mostly complete not much would happen.
But consumer debt is lower, and housing is improving. And six years after housing peaked, the beige book paints a picture of a recovery led by the classically cyclical factors of improving housing markets, better car sales and stronger credit quality.
"Residential real estate showed widespread improvement since the last report," the central bank said in Wednesday's report. "New home sales and construction were more mixed but still mostly improved."
The language the Fed used wasn't really much different than in its Aug. 29 beige book. The report, a closely watched roundup of interviews that Fed staffers conduct with business people and other contacts in the 12 Federal Reserve bank districts nationwide, is always vaguely worded and mostly non-quantitative.
But the slightest nuance in language is jumped upon by investors and policymakers to bolster their view of the economy's health.
In August, the Fed said improvements in the economy were "modest" or "moderate," depending on the region. This time, improvements were characterized overall as "modest."
In particular, the news is good, the report says, on housing, auto sales and the credit availability and loan demand that drives them. "Overall loan demand was steady to stronger in most districts," the Fed reported.
Now, none of this means the economy is about to stage a sharp recovery that will remind anyone of 1983-84.
Households still owe far more than they did in the early 1980s, when very low debt helped accelerate the recovery. And housing is a much smaller percentage of the economy than it was in the mid-2000s: Builders only constructed about 587,600 homes last year, the second-fewest since the 1950s. An uptick in housing alone just won't have the same effect it would have had coming out of past recessions. Indeed, there are still clouds out there.
Most economists expect growth to slow in the fourth quarter, as businesses and consumers pull back while they wait to see if Congress and the president can get through the end of the year without triggering a recession. The risk comes as a series of major tax cuts are set to expire and by law more than $1 trillion in federal spending must be cut.
The beige book underscores that business investment, while improving, is weaker than it should be now in the expansion, and jobs in many industries that depend on it aren't materializing, but they should come along if consumers begin to spend.
The benign scenario is that an improving housing market, coupled with a slowdown in state and local government budget cuts, gives the economy enough of a boost to offset Washington's mandated budget restraint, Moody's Analytics chief economist Mark Zandi said this summer. Moody's forecasts the economy will grow 2.1% next year, as Congress delays most of the tax boosting and spending cuts.
The picture the beige book paints, in its own muted way, would allow that prediction to come true. And then the most-unconventional tale of this downturn, from near-collapse to a protracted and slow recovery marked by the Fed pouring trillions of dollars into the economy, may prove to have a fairly ordinary ending.
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