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The Federal Reserve issues its summary of economic conditions eight times a year in what is known as the beige book. The report features information gathered from respondents until Jan. 5.

Despite “heavy discounting,” retailers in the Fed's Seventh District reported “declines in sales, particularly for clothing and big-ticket and luxury items such as electronics, appliances, and jewelry,” the Fed said in its statement.

The Seventh Federal District includes most of Illinois, Indiana, Michigan, and Wisconsin, and the entire state of Iowa.

In its summary of the Seventh District data, the report stated that “credit conditions remained tight, but improved in some markets.”

The Seventh District trends mirrored what happened nationwide. The Fed stated that "overall economic activity continued to weaken."

Summarizing reports from all 12 of its district banks, the Fed said they "indicate that retail sales were generally weak," despite the fact that "a majority of Districts noted deep discounting during the holiday sales season."

Earlier on Wednesday, the Commerce Department reported that retail sales fell for the sixth straight month, by 2.7 percent.

“Retail sales in December were abysmal on every front,” said Asha Bangalore, vice president and economic of Northern Trust Co. in a research note. “Nearly all sub-components posted significant declines in sales.”

She added: “The weakness in retail sales supports expectations of a weak headline GDP number for the fourth quarter and also arithmetically consumer spending and GDP of the first quarter of 2009 are at a disadvantage,” Bangalore said in the note.

The Fed reported that retail sales during the holiday season were generally negative in most Districts. In the Seventh District, “layoffs were reported in financial services and several manufacturing industries.”

Senior Vice President and Economist Bill Hummer of Wayne Hummer Wealth Management predicted that by mid-2009, the economy would begin to move forward as a result of “fiscal and monetary stimulus.”

Hummer said that the manufacturing industry will rebound slower, and won’t see an increase until the end of this year.

“It will be a slow recovery for all of us,” he said.

The Fed reported that in the Seventh District the pace of business spending declined further from the previous reporting period.”

Many businesses were “scaling back or putting on hold capital spending plans given the uncertainty surrounding the economic outlook,” the report stated.

Hummer said that the path to recovery would be slower for small businesses, experiencing more strain. He said a higher number of bankruptcies would be likely.

Many districts, including the seventh, reported that credit conditions remained “tight” or “tightened further.”

Hummer said that the key to economic recovery would be a government emphasis on cutting taxes, instead of on increasing spending.

The Fed report highlighted that the “government, education, and healthcare sectors continued to expand,” sectors which Hummer predicted would continue to expand.