Fed: Economy Worsens Heading Into Holidays

In a separate report Wednesday, the U.S. service sector, which includes hotels, retailers and other industries, saw activity shrink more than expected in November. The Institute for Supply Management, a trade group of purchasing executives, said readings for new orders, employment and prices all hit the lowest levels on records dating back to 1997.

The Fed's survey suggested that businesses have little appetite to hire.

Employers in the Fed regions of Boston, Richmond, Chicago and Dallas reported that demand for temporary workers dropped. Employers in the regions of Boston and Cleveland also reported that seasonal hiring had been scaled back at retail stores. Employers in Atlanta noted that layoffs have accelerated and workers' hours declined. Employers in the San Francisco Fed region reported job cuts and hiring freezes across a wide range of industries.

The nation's unemployment rate jumped in October to 6.5%, a 14-year high. So far 1.2 million jobs have vanished this year and the losses will get worse. Many economists are predicting the jobless rate will climb to 6.8% for November and employers will chop another 320,000 jobs. The government releases the new employment report on Friday.

The housing picture continued to look bleak, the Fed report showed.

Sales were down and inventories of unsold homes remained high in most Fed regions. Commercial real-estate markets, meanwhile, "weakened broadly" and pushed up vacancy rates in about half of the Fed's regions, the survey said.

Against this backdrop, both consumer and business lending continued to slow, the Fed said. Despite a $700 billion financial bailout and a flurry of radical new programs, the government hasn't been able to bust through a credit clog that's contributed to the worst financial crisis to hit the country since the 1930s.

The Fed report is based on information supplied by the Fed's 12 regional banks. The information was collected before Nov. 24.