[DEC-03-2008]: A review of the latest Beige book findings can be found here.

If you pay attention to the financial news, one report or reference that keeps popping up every other month in relation to the Federal Reserve is the Beige book. This is not some top secret or highly complex book, but rather contains the Fed's latest snapshot of business and economic conditions looking at factors such as housing, manufacturing, credit, prices, wages and financial market conditions. It is known as the "Beige Book" (more of a report really) because the traditional color of its front cover is beige. The book's anecdotal data is gathered (8 times a year) through hundreds of telephone calls, news clippings and personal contact by the staff of the 12 Fed banks, whose districts cover all 50 U.S. states. The primary use of the information is to supplement quantitative forecasts and interest making decisions by the Fed officials. It is also used by elected representatives and investors to get a broad understanding on the state of the economy and where the Fed could be heading in terms of interest rate moves.

Given the audience it is prepared for and the importance of the information, it is a report you should pay attention to if you are an active investor or generally concerned about the nations future economic outlook. The latest beige book, reflecting recent weak conditions, paints a bleak picture of our economy. Here are some highlights and analysis from the Beige book/report:

- Consumer spending was “slow'' in most of the 12 Fed districts as the housing market weakened or remained soft. Findings in the beige book also stated that a general pullback in hiring helped keep wage increases moderate. This will alleviate pressures from wage driven inflation.

- Business across most of the U.S. was "slow'' last month, while almost all twelve Federal Reserve districts reported pressure to raise prices because of higher commodity costs. Slow growth and increasing inflation could lead to stagflation; a condition no one would want our economy to be in.

- While prices of energy and other commodities have declined recently, the Fed said companies in the San Francisco district, the largest region, reported that “upward price pressure remained significant,'' while “price levels remained high'” in three other key districts.

- Labor markets were unchanged or somewhat softer across most of the country, compared with the last Beige Book. Several districts said the energy industry had worker shortages (not surprising given high energy prices and associated company profits). About 463,000 Americans have lost jobs since January as the worst housing recession in a quarter century has curtailed spending and bank lending. Economists expect annualized rates of growth of 1 percent in the third quarter and 0.4 percent in the fourth quarter, according to the median estimate in a Bloomberg Survey in early August.

- The nation's unemployment rate jumped in July to a four-year high of 5.7 percent. Employers have cut jobs every month so far this year and aren't inclined to be overly generous in their compensation to workers amid "a general pullback in hiring," the Fed said. So don't bank on a big pay rise or bonus this year.

- Manufacturing “declined'' in most regions, and demand slowed for some mortgages and consumer loans. No surprise here, unless you were out of the country for the last year.

- The consumer price index (inflation) rose 5.6 percent for the 12 months ending in July. The Fed's preferred benchmark, the personal consumption expenditures price index, minus food and energy has been at 2 percent or higher since April 2004. However, I think most of us would agree more with the 5.6% inflation figure if the rise in grocery prices at our local supermarket is any indication.

With the economy weakening further under the impact of the ongoing financial crisis, housing recession, and lower consumer spending it is likely that the Fed will keep interest rates unchanged at their next meeting and probably through the rest of this year. Despite rising costs and prices it also unlikely the Fed will be in a hurry to boost rates to fend off creeping inflation, because the risk to economic growth would be too great. The Fed chairman, Ben Bernanke, however warned that policy makers will act if price increases don't slow over the "medium term.''

Outlook. A growing number of analysts believe the economy is likely to hit another dangerous rough patch later this year as consumers and businesses curtail their spending even more. Heading into the fall, economic activity continued to be slow, the Fed said. Businesses described the climate as "weak" or "soft" or "subdued." Consumers, the lifeblood of the economy, showed caution.

Export growth figured prominently in the second-quarter's economic rebound and resulted in economic growth clocking in at a 3.3% pace. However the rebound isn't expected to last, with a weakening global economy and strengthening US dollar. Economic slowdowns overseas could make exports tail off just as corporate America shows signs of growth after years of losing global market share. This also means you need to look at how your portfolio is diversified and if the global economy continues to weaken, rebalancing may be required.

The housing, credit and financial debacles are forecast to go on for awhile yet and are set to provide big challenges for the next president and his administration. However, once the economy stabilizes and all the excesses are cleared, there will plenty of opportunity for investors who have built up their savings over these trying times. Just make sure you keep an eye on the Beige book/report to get a pulse on the economy and where it may be heading.