manufacturingThe latest Beige Book report by the Federal Reserve basically mirrored the evaluation of the economy offered in Fed Chairman Ben Bernanke's Capitol Hill testimony Wednesday: A U.S. economy that's growing modestly, with most sectors rebounding, but with only a slight improvement in labor markets.

"Economic activity continued to improve since the last report across all 12 Federal Reserve districts, although many districts described the pace of growth as 'modest,' " the Fed said in its June Beige Book report. The Fed also noted that some bankers were concerned about the European debt crisis' impact on U.S. credit markets and business conditions.

Unexpected Positive: Stronger Auto Demand

The report's major positives? The Fed cited the non-financial services, manufacturing and transportation sectors as gradually improving, and also noted that residential real estate activity in many districts was buoyed by the April deadline for the home-buyer tax credit. Inflation was low, with prices of final goods and services largely stable, and wage pressure remained minimal -- to be expected, given considerable labor market slack.

In addition, business spending rose on a net basis, with employment and capital spending edging up but inventory investment slowing, the Fed said. The latter slowdown in inventory building is consistent with an economy ending the second stage of an expansion, with the first being largely driven by fiscal stimulus.

One unexpected positive: Several districts reported that auto production was failing to keep up with demand, pressuring already lean auto dealer stocks, the Fed said.

If the pace of vehicle sales and production continues to improve, that would represent a feather in the economy's cap. While many economists had expected a recovery in the hard-hit auto sector, they didn't foresee one in which production has to increase substantially to keep up with sales demand.

Little Improvement in Job Market

The report's major negatives? Labor markets conditions improved only slightly in the two months since the last Beige Book report, and consumer spending, although higher, was "concentrated in necessities as opposed to discretionary, big-ticket items," the Fed said. Also, the report noted that commercial lending remained weak.

Most economist agree that if spending on big-ticket items doesn't rise in a sustained way, that would, at minimum, slow GDP growth -- historically, strong big-ticket item sales have gone hand-in-hand with robust recoveries.

Finally, the Fed characterized financial activity as little-changed, with business lending remaining weak in most districts. Even so, the Fed characterized business-loan demand as "firming" in the districts of Philadelphia, Chicago, Dallas and San Francisco.

Fed Chair Bernanke, in prepared remarks prior to Capitol Hill testimony Wednesday, added that the Federal Reserve "will remain highly attentive to developments abroad [in Europe] and to their potential effects on the U.S. economy."

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