improved more modestly, and the bulk of the evidence, including help - wanted advertising and surveys of employers ’ hiring plans, suggests that the job market is not poised for marked improvement in the months ahead. indeed, my own expectation is that while the trend in unemployment will be gradually lower, the path to get there might be choppy. on a brighter note, consumer spending looked a bit stronger in the latter part of last year after an anemic first half ( chart 4 ). the pickup in consumer spending was fairly widespread through november and, although we don ’ t yet have a full set of december data in hand, sales of motor vehicles remained solid at an annual rate of 13. 5 million units last month, and reports of holiday spending were upbeat. that said, there are some reasons not to get too optimistic about this sector of the economy : many of the underlying forces that typically support consumer spending are still quite weak, including the high unemployment rate, sluggish income growth, sentiment that remains relatively low despite recent improvements ( chart 5 ), and the lingering effects of the earlier declines in household wealth. bis central bankers ’ speeches housing markets – which i will discuss in more detail shortly – have shown only slight signs of improvement : housing demand and homebuilding ( chart 6 ) continue to be restrained by weak income and sentiment, tight lending standards, and a large overhang of vacant properties ( chart 7 ). as for the business sector, the uncertain durability of the recovery appears to be discouraging businesses from decisively increasing their productive capacity. notwithstanding a surge around mid - 2011, on balance, firms appear to have increased their spending on equipment and structures at a less robust pace in 2011 than they did in the prior year. the pace of inventory accumulation was also quite modest. the most recent indicators bis central bankers ’ speeches suggest more of the same : orders and shipments of capital goods have been subdued in the past few months, commercial vacancy rates remain elevated ( chart 8 ), and most indicators of business sentiment remain mediocre ( chart 9 ). the government sector also continues to be a substantial drag on activity, both at the federal level ( chart 10 ) – where defense and nondefense spending look to have dropped last year – and at the state and local levels ( chart 11 ). the declines in state and local government expenditures reflect continuing cutbacks in both employment and construction outlays. the budgets of these governments are quite strained by the ongoing phase -

different policies each have the potential to yield incremental improvement in housing and economic recovery. in the long term, policymakers will need to decide the future role, if any, that the government will play in housing finance. and they will need to decide how to best wean the gses away from government conservatorship. in the short term, however, i believe policymakers should at least consider policies that take into account the role the gses could play in hastening the healing of the housing market rather than focusing entirely on minimizing losses to the gses. in the end, breaking the current logjam created by large numbers of loans severely past due or in foreclosure and high levels of distressed sales should help reduce losses to the gses bis central bankers ’ speeches by breaking the downward cycle in prices. and, i think it is plausible that a faster recovery in the housing markets could speed, rather than slow, the end of gse conservatorship. in recent months, a group of staff at the federal reserve has been studying ways in which the housing market is hindering the economic recovery and possible remedies for those difficulties. this week we published a white paper that discusses issues and trade - offs to consider in developing policies that would facilitate recovery in the housing market. it contains discussions of a number of policies that i believe, if implemented effectively, could result in better economic performance. 4 for example, policies that increase credit availability for homeowners or investors seeking to purchase a home or to refinance an existing mortgage would allow more borrowers to access lower interest rates and thus improve the transmission of monetary policy to the economy. renewed attention to a broad menu of options to modify existing mortgages would provide aid to struggling homeowners and would help to reduce the flow of foreclosed homes into distressed inventory. when foreclosure cannot be avoided, incentives provided to homeowners that encourage short sales and deeds - in - lieu of foreclosure can reduce the time and costs of foreclosure and minimize negative effects on communities. in addition, expanding the options available for holders of foreclosed properties to dispose of their inventory responsibly could reduce the number of distressed sales and the effect of those sales on home prices. for example, in many housing markets the demand for rental housing is much stronger relative to supply than in the market for owner - occupied homes. reducing some of the barriers to converting