prompting increases in assemblies from the very low levels seen at midyear. more broadly, the slower pace of inventory liquidation likely provided an appreciable boost to manufacturing production in july and august, and should continue to push up factory output further in the near - term. but, more importantly for sustained recovery, final sales began to stabilize earlier this year and have shown some tentative signs of picking up more recently. improvement has been most evident in the housing sector. after three years of steep declines in residential construction, the recent news on housing has been encouraging, given the central role that this sector has played in the recession. sales of new and existing homes have been on an uptrend since early this year, and the rise in sales has pared the inventory of unsold new homes substantially. as demand has strengthened and inventories of new homes have come down, construction of single - family homes has risen markedly in recent months. meanwhile, several measures of house prices, after tumbling for the past two to three years, have increased in the past few months. moreover, survey data suggest that an increasing number of potential homebuyers seem to think that house prices are near their bottoms and will larry slifman and joyce zickler of the board's staff contributed to these remarks. increase over the coming year. and, based on prices from admittedly thinly traded futures, financial market participants appear to have become more optimistic about house prices as well. in light of these developments, i expect housing starts to continue to improve gradually in coming months. in the consumer sector, spending fell sharply in the second half of 2008 as households raised their saving in response to reduced net worth, tighter credit conditions, and increasing uncertainty about job and income prospects. following the steep declines in spending late last year, outlays were essentially flat on average during the first half of this year, and the saving rate leveled out. expenditures appear to have increased in the third quarter, boosted during july and august by the cash for clunkers program and by increased dealer incentives. in addition, the latest figures suggest that real outlays for other consumer goods and services rose considerably in august. the recent firming of consumer spending likely has been aided by the fiscal stimulus package, which lowered taxes and increased transfer payments. however, with the labor market still quite weak and income gains subdued, advances in consumption spending in the coming months likely will be muted. in the business sector, fixed investment plummeted late

the potential for hedge fund leverage to adversely affect market dynamics. perhaps the recent widening of credit spreads will engender increased caution by managers of credit risk. moreover, as in 1999, cooperative private - sector efforts to identify and implement sound risk - management practices have the potential to reinforce the efforts of individual firms and their prudential supervisors. in this regard, a very encouraging development is the recent formation, by leading banks, securities firms, insurance companies, asset managers, and hedge funds, of a new group ( crmpg ii ) to assess improvements in risk management since 1999 and to update the crmpg recommendations to reflect subsequent changes in risk - management practices and in the financial, regulatory, and legal environment. ensuring sound credit - risk management by hedge funds'counterparties remains the most promising approach to addressing concerns about hedge fund leverage. some may believe that government regulation of hedge fund leverage would be more effective. but it would be very difficult to design a set of capital requirements for hedge funds that is appropriately sensitive to the diversity and flexibility of investment strategies that different funds employ and to the lack of diversification in the portfolios of individual funds. a regulatory capital regime that was not extraordinarily risk - sensitive would be ineffective at constraining hedge funds'risk - taking. at the same time, it would impair their capacity to pursue strategies that enhance the efficiency and liquidity of our financial markets and thereby to contribute to the productivity and resilience of our economy. conclusion the rapid proliferation of derivatives products inevitably means that some will not have been adequately tested by market stress. even with sound credit - risk management, a sudden widening of credit spreads could result in unanticipated losses to investors in some of the newer, more complex structured credit products, and those investors could include some leveraged hedge funds. risk management involves judgment as well as science, and the science is based on the past behavior of markets, which is not an infallible guide to the future. yet the history of the development of these products encourages confidence that many of the newer products will be successfully embraced by counterparty risk management policy group ( 1999 ). " improving counterparty risk management practices ( 348 kb pdf ), " report available through the house committee on financial services. the markets. to be sure, for that favorable record to be extended, both market participants and policymakers must be aware of the risk - management challenges associated with the use of derivatives to transfer risk, both