Bernanke is doing something right, but he can't get housing to come back to life - Getty Images via... [+]
The U.S. economic recovery marches on, the latest Fed Beige Book shows. Covering the month of December, all twelve Fed districts noted some level of expansion in activity, as the economy rode the holiday wave and increased consumption trends vis-à-vis 2010. Still, commercial and residential real estate remains weak, prompting a response by three Fed governors noting they were failing at pumping life into the beleaguered sector.
Stronger consumer spending was the biggest positive data point to come out of Wednesday’s report, “reflecting significant gains in holiday retail sales compared with last year’s season.” The Beige Book confirms other reports showing the U.S. economy is indeed expanding, namely the latest jobs report which registered a 200,000 increase in jobs in December.
Despite heavy criticism, Fed Chairman Ben Bernanke can once again point to concrete evidence that his attempts to support the economy have, to some extent, worked. Inflation, one of the most important data points, continued to ease as “prior increases in the costs of selected inputs have eased.”
While inflation proved to be transitory, the reading is ambiguous as it suggests disinflation which, in extreme cases, can become deflation. Bernanke has managed to conduct market expectations at his will, engaging in Operation Twist and managing to keep his silver bullet, quantitative easing, still in the barrel.
But it’s not time to cork champagne bottles just yet. Wednesday’s Beige Book clearly highlighted continued fragility in real estate markets, considered necessary for any sort of self-sustaining recovery. “Activity stayed sluggish in residential real estate markets, and conditions in commercial real estate markets remained somewhat soft overall,” read the report, which saw slight improvements in commercial markets in some districts.
Housing remains in the gutter, as the latest Case-Shiller Home Price Indices suggest. Prices have barely moved off their crisis lows despite unprecedented support from the Federal Reserve. On Wednesday, three separate Federal Reserve Governors noted their efforts hadn’t done enough to reactivate the economy.
Before the open, Richmond Fed’s Jeffrey Lacker, considered the sole hawk remaining on the FOMC, warned QE hadn’t done much to help the unemployment situation. Lacker also expressed his reservations regarding the Fed’s policy proposals for the housing market, according to Trade the News.
Atlanta Fed President Dennis Lockhart echoed his colleague, noting the continued decline in housing prices indicated a bottom hadn’t been reached yet. Finally, Chicago Fed president Charles Evans, the dovish dissenter spoke about how to revive housing markets, adding the Fed could offer as much as $600 billion in another round of asset purchases, or QE.
Markets were mixed on Wednesday with a few clear outliers. Bank of America, one of 2011’s worst performers, traded up 3.5% to $6.87 in New York, while Citigroup gained 4.2% to $31.25. Ford was another strong performer, up 2.3% to $12.07. On the flipside were stocks like Netflix, down 3.8% to $92.15, and Chesapeake Energy, which slid 3% to $22.59.
