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Fed: Economy Still Weak, Outlook Promising

Economic conditions remained sluggish from mid-April through May, according to reports today from the US Federal Reserve in its periodic "Beige Book" report.

However, some Federal Reserve districts say the economy's downward spiral is showing signs of moderating. And though they do not see a "substantial increase" in economic activity through the end of the year, the Fed's forward-looking expectations have improved.

A number of Districts -- eight out of 12 -- reported an uptick in home sales, both pending and existing. And many said new home construction appeared to have stabilized at very low levels. Home inventories were trending down in big metros such as Philadelphia, Richmond, Atlanta, Kansas City, and Dallas, according to the anecdotal report, which is published eight times a year.

The US Census Bureau and the Department of Housing and Urban Development (HUD) said at the end of May new home sales increased 0.3% over the month as inventories steadily decreased. January ended with 12.4 months of supply at the sales rate recorded that month, HUD said, while February ended with 10.8 months of supply, and March closed with a 10.6-month supply.

Still, many markets vital to the economy's well-being, are struggling. Manufacturing activity declined or remained at a low levels across most Districts, the Beige Book reported.

Retail spending remained conservative as consumers focused on purchasing the necessities and opted out of most luxury goods -- including those associated with luxury traveling, which sent travel and tourism activity downward. New car purchases remained depressed as well -- surprise! -- with several Districts indicating that tight credit conditions were hampering auto sales.

And as residential markets showed signs of improvement, commercial properties proved to be a drag on the real estate market. Vacancy rates for commercial properties were on the rise in many parts of the country during April and May, as developers found financing for new commercial projects increasingly difficult to obtain, due to tight credit conditions.

Most Districts reported that overall lending activity was stable or weak, but with mixed results across loan categories.

The labor market, a closely monitored factor for determining an economic turn-around, continued to report weak conditions across the country. Wages generally remaining flat or falling, the Fed said. Places such as Kansas City, Dallas, and San Francisco reported that businesses were cutting or freezing wages.

Write to Kelly Curran.

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