Aug. 12--Against the backdrop of a housing market simmering back to life, a dip in unemployment and a healthier Wall Street, the Federal Reserve on Wednesday said the nation's economy is churning forward in the right direction.

But even as it delivered its note of confidence, the Fed, local economists and businesses cautioned that there's no panacea ahead.

"Economic activity is leveling out," Fed Chairman Ben Bernanke and his colleagues at the Reserve said.

That was an upgrade from the reserve's last meeting in June, when Fed policymakers observed only that a now year-and-a-half recession was slowing.

Instead, they held a key banking lending rate down at a record low near zero and pledged to keep it there for "an extended period" to help nurse a recovery.

Wall Street responded with healthy gains. The Dow Jones Industrial Average rose 120 points, with the Nasdaq up nearly 29 points.

"The worst is behind us," said Brad Kemp, regional director of research for Beacon Economics in Los Angeles. "That doesn't mean the bad is behind us."

The worst was the rapid meltdown of the housing market, a financial industry breakdown and sharp rises in unemployment in the San Gabriel Valley and Whittier areas over the past year.

Some communities, like El Monte and Baldwin Park, have touched 14 percent unemployment rates, far higher than the state's 11.6 percent.

But recently, the jobless rate has slowed slightly. Last week, the federal government reported that unemployment actually fell in July from 9.5 percent to 9.4 percent.

That led into this week, where some news had the Fed and Wall Street in a good mood.

For instance, home builders are beginning to see some signs of life in their industry, as dwindling home inventories and increasing demand among first-time homebuyers revs up.

Toll Brothers Inc.'s stock price reportedly jumped more than 10 percent Wednesday after the luxury homebuilder posted its first annual increase in signed contracts in four years.

"I think builders are beginning to see a little light at the end of the tunnel," said Tom Adams, a Monrovia Realtor.

As that light grows brighter, home repair and improvement stores, carpenters and refurnishers start to drum up business, he said.

Whittier-based Realtor Chris Vigil said he had a recent client who, after being outbid on a used home, decided to move into a community of new homes that was already 80 percent occupied.

Speaking of housing, U.S. home sales grew in the second quarter in 39 states -- yet another sign, economists said, the housing market is revving up.

But consumer demand is still down -- across industries, Kemp cautioned.

Even in housing, the National Association of Realtors reported Wednesday that California was among states that saw at least a 6 percent drop in sales gains.

"The consumer hasn't unraveled yet," Kemp said.

Unemployment, continuing foreclosures, tight credit, cautious consumers, and billions of dollars in bad assets still mean the economy has a way to go to actual recovery, he said, adding consumer spending should pick up by the end of the year.

Against that backdrop, the Fed expressed confidence that its low rates and other actions will bolster the economy. Inflation also will stay "subdued," since idle factories and weak employment will likely make it hard for companies to jack up prices, Fed policymakers predicted.

"These are all great indicators ...," Kemp said. "It's a positive shock on the consumer. But I don't think we can say the economy is back on track yet."

The Associated Press contributed to this story.

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