President Barack Obama picks up his sub after meeting with five small business owners at Tastee Sub Shop in Edison, New Jersey, July 28, 2010. The President visited Edison to discuss the economy and urge Congress to pass support for small businesses.

The Federal Reserve's Beige Book report issued Wednesday, said that US economic activity was modest in June and the first half of July, one of several recent signs that the recovery may be running out of steam.

In its latest so-called Beige Book report - - an anecdotal summary of economic conditions in its 12 regional districts - - the Fed said economic advances were modest, with tepid gains in retail sales and housing and construction remaining weak. Bank lending, meanwhile, remained tight. Also on Wednesday, economic data showed that orders for durable goods  --  items expected to last at least 3 years  - -  fell in June for the second straight month.

Only 10 of the 12 Federal Reserve districts said that activity had risen compared with all of them last time. Cleveland and Kansas City both said that activity was flat; manufacturing activity in most districts continued to move up since the last report, although the pace of activity slowed or activity leveled off in the New York, Cleveland, Kansas City, Chicago, Atlanta, and Richmond districts; activity in the services sector improved across most districts since the previous report. The freight transportation industry experienced gains in the Cleveland, Atlanta, Kansas City, Dallas, and Philadelphia Districts. Boston, Minneapolis, and Dallas reported a pickup in demand for some consulting firms. Tourism activity increased in the San Francisco, New York, Minneapolis, Richmond, Kansas City, and Atlanta districts.

The Fed said reports on retail sales during the early summer months were generally positive, although in most districts the increases were modest. Retail sales in the New York, Philadelphia, Minneapolis, and Kansas City Districts were higher than year-earlier sales, and Dallas reported solid gains. But sales in the Boston District were mixed compared with the previous year. Recent sales increased slightly in the Cleveland, Atlanta, Chicago, and San Francisco Districts; sales in the Richmond district weakened; and sales in the Kansas City district were flat compared with the previous report. Several districts cited apparel, food, and other necessities as recent strong sellers, while big-ticket items were weak sellers.

Analysis of the Fed's latest Beige Book report, with Zane Brown, of Lord Abbett, and Jim Bianco, of Bianco Research:

The recent slowdown in the US economy should prove transient, although it will take years for the nation’s unemployment rate to dip toward more acceptable levels, an official at the Federal Reserve Bank of San Francisco said Wednesday.

“The recent softness in the economic data looks much more like a bump in the road of what we already thought would be a gradual recovery, rather than a swerve into the ditch,” said John Williams, the bank’s executive vice president and director of research. He noted that “monetary policy remains highly supportive of recovery” and “interest rates are extraordinarily low.”

Williams linked much of the recent weakness to trouble in Europe, coupled with the volatile stock market, soft housing and the poor conditions in labour markets.

“Unemployment will come down with agonizing slowness,” Williams said. “I expect unemployment to end 2010 at about its current level of 9 1/2%,” and “once growth picks up to a more robust pace, the unemployment rate should gradually decline, but only to about 8 1/2% by the end of next year,” he said.

SEE: Finfacts article, July 2010; Why is US employment so weak?

“I expect inflation to remain low, dipping to around 1%, but not get stuck in negative deflationary territory,” Williams said. “Inflation should move gradually back to about 2% as the economy fully recovers,” he added.