That's the picture that emerged from the Federal Reserve's survey of economic conditions released Wednesday.
Still, risks loom. Declining home prices and millions of foreclosures are depressing housing markets around the country, the survey said.
Companies are also paying more for materials including oil, food products, steel, textiles and chemicals, the survey noted. However, competitive pressures prevented them from passing those increased costs on to customers in the form of higher prices.
And even though employers are slowly hiring more, workers lack bargaining power to win bigger paychecks because of high unemployment, which is now at 9.4 percent.
Prices increases remain tame. The Fed will monitor inflation as it reviews its $600 billion Treasury bond-buying program, which is intended to boost the economy by lowering interest rates, encouraging spending and lifting stock prices.
Fed Chairman Ben Bernanke says he is optimistic that the economy will strengthen this year. But he warned last week that it will take up to five years for unemployment to drop to a historically normal level of around 6 percent.
The bond-buying program will come under scrutiny at the Fed's first meeting of 2011 on Jan. 25-26. Four regional Fed presidents become voting members of the Fed's policymaking group at that meeting. Two of them - Richard Fisher, president of the Federal Reserve Bank of Dallas, and Charles Plosser, president of the Federal Reserve Bank of Philadelphia - have voiced concerns that the bond-buying program could spur inflation.
Fisher and Plosser have reputations for being "inflation hawks," meaning they are more concerned about the prospects of rising inflation than they are about ratcheting down high unemployment. Both men are likely to put pressure on Bernanke to scale back the $600 billion program, especially later this year if the economy continues to gain momentum as expected.
The Fed indicated there would be a high threshold for changing the program, according to minutes from its Dec. 14 meeting. Bernanke offered no signals that any changes would be forthcoming when he testified before Congress last Friday.
"While the (Fed survey) was somewhat upbeat, it is clear that the economy is still a long way from the threshold which would induce any change in the Fed's extremely accommodative policy orientation," Brian Bethune, economist at IHS Global Insight, said referring to the central bank's bond-buying program.
The Fed survey also said:
- Hiring was firming and businesses in most regions planned to increase hiring at the same or faster pace this year.
- Retailers across all regions experienced better-than-expected sales after a strong holiday shopping season.
- Factories across the country boosted production, with demand growing for cars and high-tech equipment.
- Businesses said they no longer fear there will be a double-dip recession. Many had expressed concerns of a second downturn when surveyed over the summer.
Economists have said that a tax-cut package signed into law last month should spur people and businesses to spend more money this year. That should lead companies to hire more.
Bernanke has warned Congress and the White House to refrain from big spending cuts or tax hikes in near term because the economy is still fragile. But he has urged them to come up with a plan now to reduce the government budget deficit over the long run.
The government ran a budget deficit of $80 billion last month, down from a year ago, the Treasury Department reported Wednesday. Still, economists predict the government will run up a deficit of around $1.3 trillion this budget year. That would mark the third year in a row of one trillion-plus deficits.
