By  on September 6, 2007

WASHINGTON — Economic activity expanded across the U.S. in late July and August, even as financial markets absorbed the shock of a breakdown in the mortgage market for subprime borrowers.

Retail sales were generally positive, with "modest to moderate" increases, according to the Federal Reserve Board's regional business survey released Wednesday and known as the Beige Book. The anecdotal snapshot examined trends in the Fed's 12 districts and is based on information collected before Aug. 27.

The Fed is scheduled to meet Sept. 18 to set interest rates. The interest rate on direct loans to banks was cut last month.

Fed chairman Ben Bernanke said last month that the nation's central bank "will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets.''

The upheaval in financial markets had limited impact beyond the real estate sector, according to the study.

"Boston and Kansas City reported strong sales of apparel items, while New York and St. Louis experienced mixed results," the report said. "Some weakening in apparel sales was seen in Philadelphia, Cleveland and Chicago."

With the exception of the Chicago district, the report found at least modest increases in employment across the country. This should help support spending, as shoppers are more willing to loosen their purse strings when they are confident another paycheck is on the way.

However, in Boston, retailers contacted by the Fed were concerned about consumer confidence.

"While one retailer expects fallout from the current turmoil in financial markets to be manageable, another asked, 'Will the consumer step up to the plate and keep shopping and buying?'" the report said.

Shoppers, however, are still drawn to stores.

The Fed's research turned up a major Minneapolis-based retailer that is looking for a 6 percent same-store sales bump in August, and a mall in North Dakota said traffic was up 2 percent from a year earlier.

In San Francisco, at least, going luxe still seems to be a winning strategy. The Fed's contacts in the region "noted that sales growth remained solid for luxury items and for higher-end retailers in general, but sales were weak for discount chains."

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