Fed Beige Book: Economic Activity Increased Through Mid-Nov.

WASHINGTON – U.S. economic activity increased across the country through mid-November but the housing market has cooled and high energy prices have raised concern about consumer spending and production costs, the Federal Reserve said Wednesday.

"Consumer prices remained stable or experienced generally modest increases, but most districts reported increasing input prices, particularly of energy-related products, construction and raw materials, and transportation," the Fed said in its "beige book" summary of economic conditions.

Some Fed districts saw mixed reports on the ability of businesses to pass these higher input prices to consumers. If companies succeed in raising prices, the inflation being felt by producers will trickle down to American shoppers, who are already feeling the pinch of gasoline and heating oil costs.

Analysts said the report confirmed the U.S. economy was on solid footing and reinforced market expectations that the Fed will soon end a 17-month policy of interest-rate increases.

"They do note inflationary pressures but nothing we are not aware of, and people continue to expect them to stop (rate hikes) at 4.50 percent," said David Powell, analyst at IDEAglobal in New York.

The Fed has raised short-term rates to 4 percent in 12 quarter-point moves since June 2004 in a bid to head off inflation and return policy to a more neutral level after borrowing costs were lowered to just 1 percent in the wake of the Sept. 11, 2001, attacks.

Several districts noted an increase in hiring in a variety of industries, some tightening of the labor market, and scattered skills shortages, but said there was only modest upward pressure on wages.

The Fed said several districts were "generally optimistic" about the holiday shopping season, expecting at least a moderate increase in sales compared to last year.

"Some contacts in Boston and Kansas City, however, expressed concerns about the effect of high energy prices on consumer spending in the upcoming season," the Fed said.

Declining auto sales were reported by many, with some citing a lack of new incentive programs or the ending of price discounts as one reason for the declines. Several regions said the shift from larger autos and sport utility vehicles toward more fuel-efficient cars had continued.

Many Fed districts reported moderating housing sectors, with Philadelphia, Richmond and Cleveland experiencing slowing home sales. Chicago and Atlanta reported flat home sales, and the Kansas City region experienced excess inventories.

"Generally, residential real estate market activity remained high, but many districts reported a slowing or cooling of activity," the Fed said.

At the same time, many districts saw a pickup in commercial real estate activity.

Fed districts said there were still disruptions to energy production, despite recovery from hurricanes Katrina and Rita in the late summer.

The Atlanta district reported production in the Gulf of Mexico had improved since September. However, nearly 40 percent of natural gas and half of oil production still remained off-line.

"Most of the petroleum refining capacity in Louisiana and Mississippi was back on-line, but natural gas processing remains a concern as repair of processing facilities is taking longer than expected," the Fed said.

The report was prepared by the St. Louis Fed with data collected before Nov. 21.