Fed's Beige Book: U.S. Economy Expands; Labor Market Sees Modest Improvement

By Jeffrey Sparshott and Eric Morath

WASHINGTON--The U.S. economy expanded and the labor market improved a little in January and February, amid higher payroll taxes and lingering uncertainty over Washington's spending plans, the Federal Reserve said in a report Wednesday.

Most of the Fed's 12 districts have seen either "modest" or "moderate" growth since the start of January, according to the Fed's "beige book" report, which is based on anecdotes from business contacts and economists across the country. Two districts, Boston and Chicago, reported slow growth.

The economic snapshot was prepared by the Federal Reserve Bank of Kansas City based on information gathered through Feb. 22 and will be used for discussions at the Fed's next policy meeting on March 19-20.

The latest Fed survey came against a backdrop of higher taxes and uncertain politics. Congress and the White House averted the so-called fiscal cliff with a Jan. 2 deal. But they allowed a temporary cut to payroll taxes to expire at the start of the year and only delayed $85 billion in across-the-board spending cuts, known as the sequester, which started last week. Fed Chairman Ben Bernanke has warned that the cuts would hurt hiring and incomes.

Still, Wednesday's report said employment conditions have improved, though hiring remained restrained in many districts. Wage pressure was muted for all but a handful of skilled jobs such as engineers and truck drivers.

The central bank has been closely monitoring the labor market as it buys long-term Treasury and mortgage debt in an effort to keep interest rates down and boost the economy. The Fed estimates that its policies have helped create jobs-- though officials still haven't seen the "substantial" labor market improvement they want.

The unemployment rate was 7.9% in January. The Labor Department is scheduled to release February's figure on Friday, with economists forecasting 7.8%.

Businesses told the Fed that consumer spending expanded in most districts, led by auto sales. But the expired payroll tax holiday, the Affordable Care Act--known widely as Obamacare--rising gasoline prices, fiscal policy and bad weather hurt retail sales elsewhere, leading to mixed or lower activity in some districts.

Write to Jeffrey Sparshott at jeffrey.sparshott@dowjones.com and Eric Morath at eric.morath@dowjones.com.

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