By Alister Bull
WASHINGTON (Reuters) - The U.S. economy was sailing smoothly, if not swiftly, before parts of the government shut down this month, according to a snapshot from the Federal Reserve on Wednesday that provided the fullest view of the recovery since federal data dried up.
The Fed's Beige Book report suggested the economy's momentum was solid through September and into early October, although confidence had been tempered somewhat by uncertainty caused by budget battles in Washington.
"Reports from the twelve Federal Reserve Districts suggest that national economic activity continued to expand at a modest to moderate pace during the reporting period of September through early October," the Fed said.
Financial markets have been flying almost blind since the government halted the publication of most economic data on October 1, leaving investors to rely largely on private sector surveys to gauge the impact of the federal shutdown and bitter debate between lawmakers on raising the U.S. debt limit.
The lack of data is expected to keep the central bank from making any shifts in its current $85 billion a month bond-buying pace at its next meeting on October 29-30. The Fed stunned markets in September by delaying a widely expected decision to scale back its purchases, citing disappointing growth and hiring.
The Beige Book was based on information collected on or before October 7 from the central bank's extensive network of business contacts. As such, it captured only the first week of the political impasse that led to a partial government shutdown at the start of the month.
"Contacts across Districts generally remained cautiously optimistic in their outlook for future economic activity, although many also noted an increase in uncertainty due largely to the federal government shutdown and debt ceiling debate," the Fed said.
FALLOUT FROM DYSFUNCTION
Economists have been trimming estimates for U.S. growth as the political impasse that has threatened to lead the nation into default has lengthened.
The Obama administration has said the nation will hit the $16.7 trillion ceiling on federal borrowing on Thursday.
Hopes that Congress would raise the debt limit in time grew on Wednesday as leading senators announced a deal to head off a default, and the top Republican in the House of Representatives said he would not stand in the way.
"The Beige Book points to a steadying in growth activity in recent months," said Millan Mulraine, director of U.S. research and strategy at TD Securities in New York.
"It might be early days yet before a true assessment of the fallout from the political dysfunction can be ascertained. However, the initial evidence points to only a modest negative impact on growth," he said.
The most important piece of the economic puzzle missing since the shutdown has been the government's monthly count of U.S. employment and the unemployed. But based on its conversations with businesses, the Fed judged that payrolls had continued to grow, albeit at a cautious rate.
"Employment growth remained modest in September. Several Districts reported that contacts were cautious to expand payrolls, citing uncertainty surrounding the implementation of the Affordable Care Act and fiscal policy more generally."
A number of companies have pointed to Washington's political gridlock for undercutting their business. Power tool maker Stanley Black & Decker (NYS:SWK) cut its 2013 profit forecast, while plane maker Boeing Co. (NYS:BA) said it might not be able to hold off worker furloughs.
The Fed report showed price and wage pressures stayed in check. Consumer spending was up modestly with auto sales strong, while retail sales were steady and business spending growing modestly in most parts of the country, it said.
The housing market, a vital engine of the U.S. recovery, also appeared to have retained its solid footing.
Construction and real estate activity continued to improve in September, the Fed said, while home sales and prices rose and inventories remained low.
(Reporting by Alister Bull; Editing by Bernadette Baum and Kenneth Barry)