The sluggish U.S. recovery failed to gain speed in recent weeks and softened in some areas of the country, as volatile stock markets and sputtering factory activity weighed on growth, the Federal Reserve said on Wednesday.

Economic activity continued to expand at a modest pace, though some Districts noted mixed or weakening activity, the Fed said in its Beige Book collection of anecdotal reports of economic conditions in the Fed's 12 districts.

A sharp decline in stock markets since mid-July and increased economic uncertainty have made businesses gloomier about the outlook in several regions, the Fed said.

Growth was modest or slight in five districts through late August, while the remaining seven described activity in terms such as very subdued or expanding more slowly.

U.S. consumer and business confidence nose-dived last month after a bruising political battle over the U.S. budget led Standard & Poor's to strip the nation of its much-prized triple-A credit rating and sent stock markets tumbling. Employers responded by putting the brakes on hiring.

The shiver sent through the economy has led analysts to warn of heightened recession risks and has spurred Fed officials to consider further steps to bolster growth.

Many economists think the U.S. central bank, which eased monetary policy in early August by stating that it expected to hold overnight interest rates near zero at least through mid-2013, could ease further at its next meeting, on September 20-21, despite clear divisions on its policy committee.

With unemployment stuck above 9 percent, President Barack Obama will lay out a plan to spur job creation in a nationally televised address on Thursday. Just hours before, Fed Chairman Ben Bernanke will discuss his outlook for the economy.

The Fed's Beige Book showed a slightly less downbeat mix of modest or weak growth in some districts balanced against slowing or minimal growth in others than did the prior report that covered the period into early July.

The mixed, if slightly negative, nature of this report may simply reinforce the existing diversity of views about the outlook, BofA Merrill Lynch economist Michael Hanson said in a research report.


Two Fed officials on Wednesday said further monetary stimulus might prevent the economy from running out of steam altogether.

Chicago Federal Reserve Bank President Charles Evans, one of the central bank's more growth-focused doves, repeated his view that the Fed should consider promising to keep rates low until unemployment drops to at least 7.5 percent.

We need to take strong action now, he told the European Economics and Financial Center in London. With inflation expected to stay below the Fed's 2 percent target in the medium term, the case is clear for more aggressive easing, he said.

Given how truly badly we are doing in meeting our employment mandate, I argue that the Fed should seriously consider actions that would add very significant amounts of policy accommodation.

If 5 percent inflation would have our hair on fire, so should 9 percent unemployment, Evans said.

The president of the San Francisco Fed, John Williams, also allied himself with the dovish wing on Wednesday, saying the economy was like a patient facing heightened risks. Doctors would likely offer a measure of protection against further deterioration in the patient's condition and perhaps help him get back on his feet, he said.

While the Fed may be inclined to ease policy further, some officials have made clear they stand opposed. In addition, Evans' idea of offering a rate vow tied to the level of unemployment does not appear to enjoy widespread support.

Even Williams, who suggested the economy might need further help from Fed policies, stopped short of endorsing Evans' suggestion of a direct link to the jobless rate, which he said could be confusing.

Instead, the central bank is more likely to move to rebalance its portfolio to weight its bond holdings more toward longer-term securities. That could push longer-term interest rates lower, perhaps stimulating mortgage refinancing, loans for car purchases, or business investment.

The Beige Book, which was prepared for the next Fed meeting, said consumer spending increased in most districts, but spending on items besides cars was flat or down in several places. Manufacturing conditions were mixed across the country and had slowed in many districts, it said.

Hard-hit residential real estate markets remained weak overall. A separate report on Wednesday showed demand for U.S. home loans fell for a third straight week last week although mortgage rates fell to or near record lows.

The Fed said price pressures edged lower in recent weeks, although retail prices rose in some districts. Labor markets were generally stable and some districts reported modest gains.

(Additional reporting by David Milliken in London and Ann Saphir in Seattle; Writing by Mark Felsenthal; Editing by Tim Ahmann and Leslie Adler)