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U.S. factories that were idled during the recession are now humming with activity. Office and apartment buildings have less empty space. Unemployment is falling, while wages and benefits are growing slowly.

 

All are signs of an economy still healing from a deep downturn that created lots of economic slack: the gap between the resources we have and those we are using.

By many measures, such slack has narrowed considerably, but not completely, even five years after the recovery began. Conditions aren't quite back to what was normal before the 2008 financial crisis.

The degree and speed of this progress matters to the Federal Reserve as it weighs when to start raising interest rates. If the gap closes rapidly, inflation pressures could build faster: Companies might need to raise prices to cover the costs of adding extra shifts and hiring more staff, and a stronger job market could in turn fuel faster wage gains.

But if slack keeps ebbing slowly, price increases are likely to remain mild, allowing the central bank to keep rates lower for longer.

Fed officials, particularly Chairwoman Janet Yellen and allies who share her views, have emphasized their focus on labor-market slack, the degree to which the nation's workers and would-be workers aren't fully employed. They cite figures suggesting plenty of room for improvement, such as the still-high unemployment rate of 6.2%, the large number of people who are working part time but say they would prefer to work full time, and the weak wage growth of recent years.

These officials favor keeping their benchmark short-term rate near zero well into next year to help encourage stronger growth that should create more jobs and wage gains.

"A range of labor-market indicators suggests that there remains significant underutilization of labor resources," the Fed said in a statement after its most recent meeting, reflecting the consensus view.

Some Fed policy makers, however, say the economy has made up so much ground that they might have to start raising rates early next year or maybe even late this year to pre-empt an inflation surge.

"The economy is reaching our desired destination faster than we imagined," Dallas Fed President Richard Fisher said in a speech last month.

Other sectors of the economy paint a more mixed picture, with some showing significant improvement since the depths of the recession and some not so much.

For instance, the Fed's monthly gauge of industrial production shows the nation's manufacturers, mines and utilities together have gained most, but not all, of the ground they lost. They were using 79.1% of their capacity in June, up considerably from their recession low of 66.9% in June 2009 and just one percentage point below the long-term average of 80.1% from 1972 to 2013. These sectors combined represent a little over a 10th of U.S. economic activity.

Office vacancy rates still hover well above their 1985-2005 average of 15.4%, coming in at 16.8% in the first quarter of 2014, according to Reis Inc. With many streets still pocked by empty storefronts, the vacancy rate for neighborhood and community retail centers stood at 10.4% in the first quarter, not much lower than a postrecession high of 11.1%.

Regional malls fared better, though, with the first-quarter vacancy rate of 7.9% already below a long-term average for retail vacancies of 8.5%. Mall owner and operator Retail Properties of America Inc. reflects that optimism. The company's property portfolio was 93.5% full at the end of the second quarter, up two percentage points from a year earlier, Chief Executive Steve Grimes told investors last week. "While we anticipate that there will be some volatility as the recovery progresses, we believe that the economy continues to move in the right direction," he said.

And in the red-hot apartment market, which benefited from rising demand for rentals after the housing crisis, vacancy rates were down to 4% in the first quarter of this year, comfortably below a 1985-2000 average of 5.6%.

To be sure, slack can diminish both because demand is climbing or capacity is being reduced, as when companies shut factories or airlines cut routes. Either way, one potential result is more pricing power.

Fed officials see the weak inflation of recent years as one symptom of slack. Their preferred inflation measure has run below their 2% target for more than two years. But it has picked up recently, moving closer to that goal,—another sign of shrinking slack.

The problem for Fed officials: Slack in the labor market is harder to measure. They agree the employment picture is improving faster than expected but disagree on how much further it has to go before inflation becomes a risk.

Several see an important sign of lingering slack in the weak growth in paychecks. "If there is limited labor market slack, wage growth should pick up," San Francisco Fed research adviser Robert Valetta wrote in a research brief last month. "Comprehensive measures of compensation and wage growth provide no evidence of such labor market tightness."

Fed officials would welcome stronger wage growth for a while, but if it were to surge too much and if other measures show slack narrowing rapidly across the economy, the debate on when to raise rates could shift quickly