Fed’s Beige Book: ‘Stabilization at Depressed Levels’

The Federal Reserve released the Beige Book this afternoon.

The Beige Book is a summary of economic conditions around the country.  About a month before the upcoming FOMC meeting, each of the 12 regional Federal Reserve conducts interviews with local businesses, economists, banks, and researchers about their assessment of economic and business conditions in their respective region.

The findings are then published in the Beige Book. The results are used by the FOMC when it deliberates over monetary policy decisions, thus the findings of the BeigernBook can help forecast the direction short term interest rates mayrnhead in the near future.

Over the course of the month, there has been heavy speculation that the Fed was preparing to hike short term interest rates. Although the timing of a rate hike has been unclear, the recent trend of “better than expected” economic data has the market nervous that the FOMC would raise rates sooner than expected. 

Below are some excerpts taken from the Beige Book…

Reports from the 12 Federal Reserve Districts indicated either stabilization or modest improvements in many sectors since the last report, albeit often from depressed levels. Reportsrnof gains in economic activity generally outnumber declines, butrnvirtually every reference to improvement was qualified as either smallrnor scattered.

The weakest sector was commercial real estate, with conditionsrndescribed as either weak or deteriorating across all Districts. 

Consumer spending remained weak in most Districts since the last report, although some improvements were noted.

Finally, labor markets were typically characterized as weak or mixed, but with occasional pockets of improvement.

Real Estate and Construction
Most Districts reported that housing market conditions improved in recent weeks, primarily from a pickup in sales of low- to middle-priced houses.

Contacts reported that sales were boosted by the government's tax credit for first-time homebuyers.

Residential construction activity remained weak in most Districts.

Commercial real estate continued to weaken across the 12 Districts, although even this sector had scattered bright spots.

Anrninability to obtain credit was often cited as a problem for businessesrnthat wanted to purchase or build space. High vacancy rates were notedrnas a key concern especially for landlords who were not offeringrnconcessions.

Many Districts continued to report weak orrndeclining loan demand, and many noted further erosion of creditrnquality.Credit quality continued to be a problem, and risingrndelinquencies were often noted.

Most Districts cited the federal government's first-time homebuyer program as supporting residential lending activity.

Employment, Wages, and Prices
Labor market conditions were generally reported as weak or mixed across Districts, but a few encouraging signs were noted.

Employment activity was soft in the Kansas City District, and hiring remained limited in the Boston District.

While a slowdown in layoffs was reported by Atlanta, no hiring was generally expected.

Reports from Cleveland were mixed, but indicated declining employment in commercial construction and coal mining.

Employment levels held steady in the Dallas District, with scattered reports of layoffs. However, staffing firms there noted improvement in contract and temporary employment.

Minneapolis reported a weak labor market, but some signs of improvement were noted among auto-related industries.

A major New York employment agency specializing in office workers reported renewed softening in recent weeks, with only scattered hiring at financial institutions and virtually no hiring in the legal and publishing industries.

Richmond noted reports from temporary employment agencies were evenlyrnmixed between reports of strengthening and weakening, but withrnincreased optimism

END EXCERPTS FROM BEIGE BOOK

After reading the findings of the Beige Book, we still see no evidence the Federal Reserve will be able to raise short term interest rates in the near future. Although the worst case scenario has seemingly been avoided and stabilization seems to be spreading, there are still several economic uncertainties that will prohibit the FOMC from raising short term interest rates.

Commerical Real Estate is weak, with much room for further contraction. Conditions in the residential housing market have improved, but has stabilization  been a function of  soon to expire government stimulus programs like the first time home buyer tax credit? Credit delinquencies are a reason to be concerned that investors may eventually lose confidence in banks again. Amplifying those worries is a continually contracting labor market…the amount of unemployed Americans collecting jobless benefits combined with a general lack of new job creation does not bode well for consumer spending in the future.

In general, the large amount of uncertainty and unknowns regarding the economic outlook is expected to keep the Federal Reserve defensive of another economic downturn for “an extended period”.

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