by BusinessWeek staff

Are the shoots getting any greener? Sort of. The Federal Reserve released its anecdotal report of economic conditions over the 12 Federal Reserve districts—the Beige Book—on July 29. The report, prepared by the Boston Fed for the Aug. 11-12 Fed Open Matket Committee meeting, pointed to a still-weak economy, but noted a moderating pace of decline, and in some Fed districts, stabilizing conditions.

What did market experts have to say about the Beige Book and other key topics for the economy and markets on July 29: BusinessWeek compiled these comments from economists and strategists:

Action Economics

The Fed’s Beige Book said the economy remained weak, but “most” districts reported the pace of decline had moderated or activity had begun to “stabilize.” Most districts reported retail sales remained “sluggish” with the focus on purchases of less expensive necessities. Sales of big ticket items were languishing. Auto sales were mixed. Travel and tourism declined in the majority of districts. But on an encouraging note, manufacturing activity showed some improvement in a few districts. Activity in nonfinancial services was generally negative. Residential real estate markets remained soft, but some signs of improvement were noted. But, commercial real estate markets weakened further.

Comments on the near-term outlook were mixed across districts, but a general theme of modest and uneven recovery was threaded throughout. Lending activity was stable or weakened further. As for the labor market, all districts indicated continued slack, with weakness having virtually eliminated upward pressures on wages. Additionally, upward price pressures were minimal.

David Greenlaw, Morgan Stanley

Although overall durable goods orders (-2.5%) were down significantly in June, all of the weakness was in the volatile aircraft and defense capital goods components. Nondefense capital goods—except for aircraft orders, the key core gauge—gained 1.4% on top of a 4.3% surge in May. Core capital goods shipments were also better than expected, posting a marginal gain instead of the decline we expected.

This had only a minor positive impact on our Q2 gross domestic product forecast, which we still see at -1.2%, but provides a more positive starting point for some flattening out in business investment in Q3 after a record collapse over the prior few quarters.

Alexander Young, Standard & Poor’s

Low expectations are helping U.S. equities rebound as corporate and economic news generally exceeds depressed consensus forecasts. Despite continued uncertainty regarding the strength of the global economic and earnings-per-share (EPS) recovery trajectory, the S&P 500 continues to climb a wall of worry amid what we see as mounting evidence the worst is over. Not surprisingly, cyclical sectors including Materials, Information Technology, and Consumer Discretionary are outperforming, but defensive, less economically sensitive sectors like Telecom, Consumer Staples, Health Care, and Utilities underperformed in July. With roughly 40% of S&P 500 companies having reported Q2 EPS (through 7/24), roughly three-quarters are exceeding consensus EPS expectations even though EPS are down 25% year-over-year.

We think revenue growth may remain elusive with unemployment unlikely to peak until 2010 amid continued corporate belt-tightening. Our current recommended sector positioning reflects a moderate cyclical tilt, with Information Technology and Energy recommended overweight. Conversely, we recommend underweighting sectors with limited EPS leverage such as Telecom and Health Care.

Edward McKelvey, Goldman Sachs

We have cut our estimates for the federal deficit to $1.725 trillion for fiscal year 2009 and to $1.4 trillion for fiscal year 2010. In late March we put these figures at $1.86 trillion and $1.5 trillion, respectively. While smaller than we previously thought, these deficits are still the largest since World War II by a wide margin, at an estimated 12.2% of GDP this year and 9.7% next year. The main reason for the change is that federal assistance to the financial markets has been much smaller than expected. The trends in other outlays and in revenues are actually a bit worse than we had anticipated four months ago.

Because the financial assistance has a dollar-for-dollar effect on federal borrowing but only a partial effect on the budget balance, the impact of these changes on Treasury financing needs is much larger. We now estimate net issuance of marketable debt at $1.9 trillion for fiscal year 2009, down from $2.7 trillion as of late March, and at $1 trillion for fiscal year 2010, down from about $1.35 trillion in late March.

As a result of the associated reduction in net interest expense, we have also reduced our 10-year (FY 2010-2019) projection of the federal budget balance to a cumulative shortfall of $9 trillion from $9.4 trillion. While this is good news on balance, the projected budget path is still unsustainable, featuring a deficit that never falls below 4% of GDP and ends the decade slightly above 5% of GDP.