The Federal Reserve released its collection of largely anecdotal information from the 12 Federal Reserve Districts today. It painted a somewhat more upbeat picture of the economy than it did in the report last month, continuing a pattern of gradual improvement that started last summer. Here is a summary of the report:

“Reports from the twelve Federal Reserve Districts indicated that while economic activity remains at a low level, conditions have improved modestly further, and those improvements are broader geographically than in the last report. Ten Districts reported some increased activity or improvement in conditions, while the remaining two — Philadelphia and Richmond –reported mixed conditions. The last Beige Book reported eight Districts with increased activity or improving conditions and four Districts showing little change and/or mixed conditions.

“Most Districts reported that consumer spending in the recent 2009 holiday season was slightly greater than in 2008, but still far below 2007 levels. Retail inventory levels remain very lean in nearly all Districts. Auto sales held steady or increased slightly since the last Beige Book in most Districts.

“Reports on tourism were mostly flat or weak, but for two Districts whose ski resorts enjoyed early season snowstorms. Nonfinancial services activity generally improved in Districts that reported on this sector. Of five Districts reporting transportation services, volumes were slightly up or mixed. Manufacturing activity has increased or held steady since the last report in most Districts. Among Districts reporting on near-term expectations, the manufacturing outlook was optimistic, but spending plans remain cautious.

“Toward the end of 2009, home sales increased in most Districts, especially for lower-priced homes. Home prices appeared to have changed little since the last Beige Book, and residential construction remained at low levels in most Districts.

“Commercial real estate was still weak in nearly all Districts with rising vacancy rates and falling rents. Since the last report, loan demand continued to decline or remained weak in most Districts, while credit quality continued to deteriorate.

“Cold weather at the end of the year adversely affected some late crops and stressed livestock, but above-average yields for early crops were reported by some Districts. Energy-related production has risen moderately since the last Beige Book.

“Although some hiring was reported in a few Federal Reserve Districts, labor market conditions remained generally weak with modest wage increases appearing in just a few Districts. Price pressures remained subdued in nearly all Districts, though increases in metals prices were reported and agricultural prices have been mixed.”

The broader geographic reach of the recovery is good news. While we have a long way to go to get back to where we were before the recession started, it looks like we are on the right path.

The lean retail inventories mean that even though sales were not very robust this holiday season, the margins should hold up. Retailers will be some of the last firms to report their fourth quarter earnings (most of them have January fiscal year ends). When they do, take a look at how they are doing in terms of inventory turnover. I suspect that there should be widespread improvement.

That should help the ROEs (returns on equity) of the firms. I still think that the best numbers will be posted in a barbell fashion, with the deep discounters like Wal-Mart (WMT) and Big Lots (BIG) doing better than the mid-range retailers like JC Penney (JCP). There was probably a lot of trading down to cheaper stores going on.

The carriage trade firms like Tiffany (TIF) should also do well. There it is about customers’ desire to spend, not their ability to spend, and with the market up sharply in the last three quarters of 2009, the psychology of the very rich was probably a bit more upbeat.

Existing home sales really don’t matter that much to the economy, although the prices of existing homes are very important since houses represent the biggest asset that the vast majority of people own. If people owe more on their house than it is worth, it makes a lot of sense simply to walk away from the house and the mortgage. As people do that it will hurt the balance sheets of the banks and all other holders of the mortgages (or parts of them after they had been sliced and diced).

I have my doubts about the sustainability of the stabilization in housing prices. While relative to rents and incomes housing prices are no longer absurdly expensive, they are not particularly cheap either, at least relative to historical norms. While mortgage delinquencies rising, regardless of type (prime, Alt-A and subprime delinquencies are all up, with prime delinquencies rising the fastest now) there is probably another wave of foreclosures coming, although the first wave has been pretty well cleared up now (those are the higher sales of lower-priced houses that the Fed was referring to).

Clearly unemployment is a bigger problem right now than is inflation. By law the Fed has a dual mandate: to keep prices stable and to promote full employment. It is the full employment side of the mandate that needs the most attention right now.

The Fed is not joking when it says it will keep rates at extraordinarily low rates for an extended period of time. At a minimum, that means six months, but more like a year. The Fed will be doing exactly the right thing in keeping rates low. This will probably mean a weak dollar and higher commodity prices, but it will help stimulate growth and help create jobs. Those calling for an early exit strategy are deeply misguided.

Read the full analyst report on “WMT”
Read the full analyst report on “BIG”
Read the full analyst report on “JCP”
Read the full analyst report on “TIF”
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