The minutes of the Federal Reserve meeting held in late September were released today. Below we present the economic outlook section of the minutes, along with my comments and interpretation of them.

In general, they paint a picture of an economy that is starting to recover, but a recovery that is still very fragile. Inflation is not seen as likely to cause any serious problems in the short-to-medium term.

"...(O)verall economic activity was beginning to pick up. Factory output, particularly motor vehicle production, rose in July and August. Consumer spending on motor vehicles during that period was boosted by government rebates and greater dealer incentives, and household spending outside of motor vehicles appeared to rise in August after having been roughly flat from May through July.

"Although employment continued to contract in August, the pace of job losses slowed noticeably from that of earlier in the year. Investment in equipment and software (E&S) also seemed to be stabilizing. Sales and construction of single-family homes during July and August, while still at low levels, were significantly above the readings at the beginning of the year. The sharp cuts in production this year reduced inventory stocks significantly, though they remained elevated relative to the recent level of sales.

"Core consumer price inflation continued to be subdued in July and August, but higher gasoline prices raised overall consumer price inflation in August."

"Cash for Clunkers" was a very successful program, at least in the short term. Housing is starting to rebound, but like autos much of the reason for the turnaround is massive government support for the sector (FAR larger than the support for the auto industry).

"Firms continued to reduce payrolls, but job losses abated further in August, with the decline in private payroll employment the smallest since that of August 2008. Although employment losses continued to be widespread, the rate of decline diminished in most industries.

"The length of the average workweek for production and nonsupervisory workers remained steady, albeit at a low level, and the rate of decline in aggregate hours for this group over July and August was the smallest of the past year. In the household survey, although the unemployment rate rose in August to 9.7 percent, the rise in the unemployment rate slowed, on net, in recent months from its pace earlier in the year.

"The labor force participation rate in August remained at the low level that had prevailed through much of the year. Continuing claims for unemployment insurance through regular state programs fell slightly, on balance, from their earlier peak, but the total including extended and emergency benefits stayed near its recent high level.

"Initial claims for unemployment insurance fluctuated within a narrow range that was consistent with further declines in employment. With labor markets still weak, the year-over-year increase in average hourly earnings of production and nonsupervisory workers slowed further in August, even with the higher federal minimum wage that went into effect at the end of July."

The job situation is still getting worse, but at a slower pace that earlier this year. There is absolutely no way that the wage side of a wage-price spiral can get any traction under these conditions. Headline inflation might tick up with oil prices and the weak dollar, but deflation at the core level is a bigger danger right now than inflation.

"Industrial production rose in July and August, led by a rebound in motor vehicle production from the extraordinarily low assembly rates in the first half of the year. Manufacturing production outside of motor vehicles increased solidly, likely reflecting stronger demand for materials from the motor vehicle sector and a slower pace of inventory liquidation elsewhere. Business survey indicators suggested further gains in factory output over the near term. Nevertheless, the factory utilization rate in August was only modestly above its recent historical low."

When you stimulate auto sales you stimulate more than just autos, but also all the things that go into cars. Yes, obviously Cash for Clunkers helped Ford (F), but it also helped parts makers like TRW Automotive (TRW) and raw materials firms like U.S. Steel (X). Still we are digging out of a very deep hole and much of our productive capacity is sitting idle.

"Real personal consumption expenditures increased modestly in July, led by a strong advance in motor vehicle purchases, which were boosted appreciably by the government's 'cash-for-clunkers' program. This program contributed to a further surge in motor vehicle sales in August to their highest level since the first half of 2008.