Need To Know News

The Federal Reserve’s Current Economic Conditions, the Beige Book, reported weakened economic activity across all twelve Federal Reserve Districts during the survey period that ended on October 6. Several Districts also reported a more pessimistic outlook for future economic activity but this report was pessimistic enough:

• Consumer spending declined in seven Districts, weak and sluggish in two and below plan in two Districts.

• Manufacturing activity slowed in most Districts.

• Credit conditions were characterized as tight in all Districts.

• Labor markets weakened in most Districts.

The only good news was an increase in activity in agriculture and mining and some reduction in inflationary pressures.

Retailers voiced concerns about weak sales, tightening credit availability and the potential for a slow holiday season. Residential real estate and construction activity weakened or remained low in all Districts, and eight Districts reported weaker housing activity. Three Districts, Cleveland, Atlanta, and Kansas City reported some signs of stabilizing in their residential markets. Bank lending was described as stable or lower for both consumers and businesses with credit standards tightening for most real estate loans. Some Districts mentioned customers taking steps to ensure that their bank deposits were secure as reports of bank closings circulated.

Business conditions were also weak. Businesses reported that credit conditions were contributing to a high level of uncertainty. While four Districts reported continued strength in export sales, one reported a weakening in export activity. Four Districts reported weaker capital spending, one reported capital spending as mixed but cautious and two more indicated that investment spending intentions were being curtailed. Only Chicago and Kansas City reported continued spending for heavy machinery. Services industries were also weak in almost all Districts. New York reported a widespread deterioration in its business conditions. Three Districts reported continued strength in health-related services but two Districts reported activity in the health field as weaker. Several Districts reported that several businesses were having difficultires obtaining credit.

The Federal Reserve’s Beige Book indicates the economy slowed further based on reports during the first half of July. Five Districts reported weakening or softening in their overall economies, Chicago and Kansas City characterized growth as sluggish and moderating, St. Louis and San Francisco indicated little growth. Only Cleveland, Minneapolis and Dalls reported slight improvements.

Consumer spending was reported sluggish in nearly all Districts with tax rebate checks boosting sales for a limited range of goods, such as electronics.

Auto sales were uniformly weak with sales particularly poor for trucks and SUVs.

Manufacturing activity declined in many Districts with support mostly coming from export growth.

Services growth continued to be mixed although better than the goods sectors. The growth in health care services and IT industries offsetting some of the weakness in other areas.

Residential real estate markets were weak and declining across most of the Districts with sales weak, inventories increasing, and home prices falling.

Commercial real estate activity was described in much weaker terms than in recent reports. Office market conditions were weak in Richmond and bleak in Washington, DC while the Boston District reported sentiment in the sector as “decidely morose”. Retail space was described as overbuilt in Boston and Chicago and there was a steep decline in commercial construction around San Diego.

Loan activity was reportedly weak in most areas with business loans slightly better than consumer and residential real estate loans. Most Districts reported a further tightening of credit standards, especially for construction and real estate loans.

Several Districts reported deterioration in loan quality with increased delinquencies on consumer, real estate and construction loans. While Dallas was not seeing appreciably poorer loan quality, it was expecting deterioration in coming months.

Cleveland reported that smaller banks were seeing some improvements in their deposits as investors sought safety.

All Districts reported overall price pressures as elevated or increasing with the increases widespread across commodities but especially acute for petroleum-based products. Many Districts reported that manufacturers were planning on passing costs through where possible but with concerns about reduced sales.

Labor markets are seen as unchanged or weaker since the last survey period. Wage pressures were modest with the only exception being for highly specialized skilled workers.

The FED’s Beige Book is out tomorrow at 2:00pm EDT and given reports from regional Fed banks of late, expectations are not particularly high.

In last week’s FOMC minutes members noted that private payroll employment fell at a slower rate than earlier in the year, but also noted that industrial production contracted at a faster pace than in Q1. Members said real consumer spending had picked up “modestly” (stimulus checks commenced at the beginning of May) with exception of car-buying.

Despite the downbeat nature of the minutes, the board did move its 2008 GDP predictions higher. In April the FED predicted 0.2-1.2% growth in real GDP, but in the June minutes it upped the forecast to 1-1.6%.

PCE inflation was also upped from 3.1-3.4% to 3.8-4.2%, but the unemployment central tendency was left at 5.5-5.7%. The Philly Fed’s Plosser said today that he expects unemployment to decline to 5.25% by the end of 2009.

In short, FED governors and regional Fed presidents are expecting higher growth and inflation, and stable unemployment. Tomorrow’s regional report may reveal pockets of emerging strength or at least less downside.

Recall the 11 June Beige Book characterized the economy as “slower,” “soft,” “weak,” “sluggish,” and “nearly steady.” Not exactly inspiring stuff there.