The Federal Reserve's inter-meeting report of conditions around the country depicts a nation that's slowing down -- no surprise to the markets, which are gripped by the much more dire notion of recession. The Fed's so-called beige book, released Wednesday, fell short of acknowledging the possibility of recession, but said that economic activity increased "at a slower pace compared with the previous survey period." Of the 12 districts surveyed, the Fed shows seven reported a "slight" increase in economic activity," while two noted "mixed conditions," and three reported signs of "slowing" growth. With Fed Chairman Ben Bernanke set to testify on Capitol Hill Thursday, the beige book serves as yet another indicator that the central bank and Washington lawmakers will be fighting a battle to revive the U.S. economy this year. Last week, Bernanke signaled the central bank is ready to be aggressive with its monetary policy. From Bernanke's testimony, traders could expect "validation of the market fully pricing in a 50 basis points rate cut ahead of the Jan. 29 FOMC meeting," and "the first sings of emerging consensuses over a possible stimulus package from the Congressional majority," writes Joe Brusuelas, chief economist at IDEAglobal. On key recession questions, such as how well the consumer is holding up, the beige book reported some unpleasant news. It noted that retailing "indicated subdued holiday spending," which was noted earlier in the week with December's glum retail sales report. Likewise, the Fed's report acknowledged weak auto sales. Once again, manufacturing, real estate and even commercial real estate softened in several sectors, according to the Fed's report, while the service sector of the economy remained somewhat more robust. Freight volumes were weaker, according to the report, echoing the sharp and dramatic drop in a key indicator of global shipping demand, the Baltic Dry Shipping Index, which has fallen 16% in the past week and a half. The labor market showed minor signs of softening, as consumer lending activity by banks slowed, once again stretching the average U.S. worker when it comes to spending and consumption. Lastly, on the ugly elephant in the room -- inflation -- the beige book echoed Wednesday's consumer price index report, which revealed another round of increasing costs coming this time from sharp rises in the prices of medical care and education. The beige book noted that most reports reveal businesses "continued to face rising costs for food, petrochemicals, metals, and energy-related inputs."