Attached is the full commentary from the latest Beige Book. It appears to be in-line with recent data from the Fed – conditions continue to improve, but there is much work to be done. In other words, the government will remain accommodative:
Reports from the twelve Federal Reserve Districts indicated that while economic activity remains at a low level, conditions have improved modestly further, and those improvements are broader geographically than in the last report. Ten Districts reported some increased activity or improvement in conditions, while the remaining two–Philadelphia and Richmond–reported mixed conditions. The last Beige Book reported eight Districts with increased activity or improving conditions and four Districts showing little change and/or mixed conditions.
Most Districts reported that consumer spending in the recent 2009 holiday season was slightly greater than in 2008, but still far below 2007 levels. Retail inventory levels remain very lean in nearly all Districts. Auto sales held steady or increased slightly since the last Beige Book in most Districts. Reports on tourism were mostly flat or weak, but for two Districts whose ski resorts enjoyed early season snowstorms. Nonfinancial services activity generally improved in Districts that reported on this sector. Of five Districts reporting transportation services, volumes were slightly up or mixed. Manufacturing activity has increased or held steady since the last report in most Districts. Among Districts reporting on near-term expectations, the manufacturing outlook was optimistic, but spending plans remain cautious.
Toward the end of 2009, home sales increased in most Districts, especially for lower-priced homes. Home prices appeared to have changed little since the last Beige Book, and residential construction remained at low levels in most Districts. Commercial real estate was still weak in nearly all Districts with rising vacancy rates and falling rents. Since the last report, loan demand continued to decline or remained weak in most Districts, while credit quality continued to deteriorate. Cold weather at the end of the year adversely affected some late crops and stressed livestock, but above-average yields for early crops were reported by some Districts. Energy-related production has risen moderately since the last Beige Book.
Although some hiring was reported in a few Federal Reserve Districts, labor market conditions remained generally weak with modest wage increases appearing in just a few Districts. Price pressures remained subdued in nearly all Districts, though increases in metals prices were reported and agricultural prices have been mixed.
Consumer Spending and Tourism
Consumer spending in the recent 2009 holiday season was modestly greater than in 2008 for eight Districts, although as retailers in the Philadelphia and San Francisco Districts noted, 2008 sales were so low compared with 2007, that the relatively small 2009 gains did not represent a significant shift in trend. Consumers were variously described as cautious, price sensitive, and focused on necessities, but sometimes willing to spend on discretionary purchases. Kansas City and New York reported holiday sales comparable to prior year sales, while Cleveland and Richmond reported weaker holiday sales in 2009 than in 2008. Entering the holiday period, retail inventories were maintained or lowered further to lean levels in the Atlanta, Boston, Chicago, Cleveland, and New York Districts. Some Chicago retailers reported running out of high-demand items during the holiday season, but inventory levels rose slightly in the Kansas City District.
Auto sales were flat or up slightly for some dealers since the last Beige Book in the Atlanta, Chicago, Cleveland, and Philadelphia Districts. Dealer incentives boosted year-end inventory clearance according to Chicago District contacts. In the Dallas, Minneapolis, New York, and San Francisco Districts auto sales held steady or were mixed across states. The Kansas City and Richmond Districts reported lower auto sales since the last report. Some dealers in the Cleveland and New York Districts cited difficulties securing floor-plan financing. Difficulties securing customer financing was a concern cited by some Kansas City District dealers, while Philadelphia District dealers credited easier financing for supporting their recent sales.
Early-season snowstorms gave ski resorts a big lift in the Richmond and Minneapolis Districts; otherwise travel and tourism reports were mostly flat or weak in these and other Districts. One Minnesota-based travel services firm shut down due to lack of demand, and Richmond’s tourism contacts reported consumers searching for deeply discounted packages and dining out less despite special offers. The New York, Atlanta, and Kansas City Districts also reported flat or weaker tourism. New York City’s Broadway theaters reported weaker attendance this past holiday season than in 2008. Atlanta reported sluggish tourism throughout their District, but expected a boost from hosting upcoming National Football League events, and from strong 2010 cruise line bookings–a result of deep discounting. Kansas City and San Francisco noted sluggish business travel, placing downward pressure on airline passenger volumes, while Dallas reported airline demand recovering and fares stabilizing. The San Francisco District reported greater visitor volumes in Hawaii and Las Vegas, while occupancy rates in Seattle and Southern California were down.
Districts reporting on nonfinancial services generally indicated an upward trend in activity, although in some areas reports were mixed. Boston reported widespread positive activity in advertising, consulting, private equity firms, healthcare, biotechnology, education, and government services. High-tech service firms reported favorable conditions in Kansas City. New York reported a general pickup in activity. Health care providers reported increased demand in the San Francisco District, while professional services, especially advertising and accounting weakened. The Minneapolis District also reported mixed results across sectors, while activity in the Richmond District was generally down. Hiring through staffing firms was reported up in New York, Cleveland, Chicago, and Dallas with office and health care workers in greatest demand. Direct firm hiring was reported up in the St. Louis District, flat in Dallas, flat to down in New York, and down in Richmond.
Among the five Districts reporting on transportation services, activity was mostly up slightly, or mixed. Freight shipping volumes were up slightly in the Atlanta, Cleveland, and Dallas Districts, while Kansas City reported a slight slowdown in activity. The Richmond District’s port activity gained from increased international trade, especially imports of high-end vehicles, but intermodal firms in the Dallas District reported that imports dropped and exports flattened producing no increase in cargo volumes. Dallas also reported continued declines in rail cargo volume.
Manufacturing activity has improved since the last report in six Districts. New York reported a general pickup in activity, broad optimism, and some increase in employment. Production was stable or slightly up in the Cleveland District. Firms in the Cleveland District expect greater export opportunities going forward, but steel firms expect slow growth in overall demand. Manufacturers in the Chicago District cited gains at firms tied to the auto industry and those benefiting from an increase in exports to Asia. Firms in the Boston District also cited Asian exports as well as defense work as sources of their positive demand, but identified weak demand for exports to Europe and for products related to energy sectors and commercial construction. San Francisco reported a modest net improvement in manufacturing activity, with semiconductors strengthening and aircraft and parts stabilizing at moderate levels. Metal fabricators and housing products have also stabilized, but at very low levels.
Three Districts reported mixed results for manufacturing. Food products, furniture, and chemical firms reported slight increases in the Philadelphia District while other manufacturing sectors continued to decline. Dallas reported strength in high-tech and corrugated packaging, seasonal increases in food producers, little change in fabricated metals and petrochemicals, seasonal decreases in aircraft components, and weaknesses in emergency vehicles and construction-related manufacturing. The Minneapolis District reported manufacturing activity up in Minnesota, but down in the Dakotas based on a recent survey of new orders.
Manufacturing activity was weak in the other Districts. Richmond reported widespread weakness across shipments, new orders, and employment within its manufacturing sector and Atlanta saw orders and production drop back after an increase in November. The St. Louis District reported a continued decline in activity, persistent weakness in employment, and plant closings, on net.
Manufacturers’ expectations for the near future as reported from the Boston, Chicago, Cleveland, Kansas City, New York, and Philadelphia Districts were all optimistic, although Kansas City firms were less optimistic than the last report. Capital spending plans remained more cautious. Only Boston and Philadelphia reported that firms were planning to increase capital spending in the current year. Cleveland, Chicago, and Kansas City reported expectations of continued modest spending.
Real Estate and Construction
Homes sales increased toward the end of 2009 in most Federal Reserve Districts, except San Francisco, where demand for housing has been steady, and Kansas City, where residential real estate activity has eased since the last Beige Book. In New York, Richmond, and Atlanta, residential real estate activity was described as mixed across areas of the District. In the Atlanta District, existing home sales increased, but new home sales decreased. In all Districts, sales of lower-priced homes tended to increase proportionately more than sales of higher-priced homes, due at least in part to the first-time buyer federal tax credit, according to real estate contacts. In several Districts real estate contacts reported that the original expiration date for the credit boosted sales in November and led to a more than usual slowdown in sales in December. However, some contacts noted that the extension of the credit into 2010 could give an added impetus to the expected seasonal sales upturn this spring. Residential construction activity remained at low levels in most Districts, although home building was reported to have increased in the Chicago and Minneapolis Districts. Home prices appeared to have changed little since the last Beige Book, overall. Boston, Philadelphia, and Cleveland reported declines in home prices since the last Beige Book. Richmond reported nearly steady prices. Dallas reported some firming in prices.
Nonresidential real estate conditions remained soft in nearly all Districts. New York, Philadelphia, Kansas City, and San Francisco reported further weakening in demand for commercial and industrial space. Boston received mixed reports on sales and leasing activity from commercial real estate contacts in the District, and Minneapolis reported some increases in sales of commercial buildings. Richmond reported that sales of nonresidential properties remained slow, but that leasing of office and retail space has picked up. Vacancy rates were rising and rents were declining in most Districts. Several Districts reported that landlords were focused on tenant retention and that slack demand was allowing tenants to negotiate lease extensions at low rents and with favorable allowances. San Francisco reported that lower rents appeared to be supporting an upturn in leasing in some parts of that District, although vacancy rates continued to rise. Nonresidential construction activity was generally weak in all Districts, although St. Louis reported some gains in construction of education facilities and Cleveland reported a recent increase in nonresidential contracting.
Banking and Finance
Loan demand continued to decline or remained weak in most Districts. St. Louis, Kansas City, Dallas, and San Francisco noted general declines or soft loan demand. New York reported declining demand for all types of loans except residential mortgages for which demand has been steady. Philadelphia reported continuing declines for all categories of credit. Cleveland noted declining demand for business loans and underutilization of commercial credit lines. Richmond reported that commercial and industrial loan demand was steady to slightly up since the last Beige Book but still down year-to-year. Chicago noted low utilization of commercial credit lines but an uptick in financing of mergers and acquisitions. Other recent increases were reported for mortgage refinancing in the Atlanta District and auto loans in the Chicago District. San Francisco noted a small improvement in venture capital financing and initial public offerings.
A number of Districts reported that credit quality continued to deteriorate. Financial institutions in the New York District reported ongoing increases in delinquencies for all types of loans. Banks in the Philadelphia District reported that delinquencies and defaults continued to rise for all types of loans, although less sharply than at the time of the previous Beige Book. Cleveland received reports of steady consumer credit quality but high and rising commercial loan delinquencies. Kansas City noted year-over-year declines in credit quality among financial institutions in the District, and Dallas and San Francisco reported continued deterioration at financial institutions in their Districts.
Agriculture and Natural Resources
Federal Reserve District Banks reporting on agricultural conditions generally indicated that cold weather at the turn of the year had adversely affected crops and stressed livestock. Atlanta noted damage to citrus crops from the cold, and Chicago and Minneapolis reported that winter storms halted corn harvesting, and impeded tillage and fertilizer application. However, Dallas reported that rain improved soil conditions after a dry period in that District. Corn and soybean crop yields before the onset of cold weather and storms were described as above average in the Chicago and Kansas City Districts. Kansas City also reported that the winter wheat crop was progressing normally. San Francisco reported an increase in sales of agricultural products, with a boost from a rise in demand from foreign countries. Agricultural prices have been mixed. Grain and soybean prices were mostly on the rise, according to reports from Chicago and Kansas City. Chicago also reported increased prices for milk and hogs, but a decline in cattle prices.
Production of energy-related materials has risen moderately since the last Beige Book. Atlanta reported that oil production has continued to increase. Minneapolis reported an increase in oil and gas exploration, and Kansas City and Dallas reported increases in drilling. San Francisco noted an increase in extraction of natural gas but a continued low rate of oil extraction. In contrast to generally rising oil and gas production, coal production was reported to have declined by Cleveland and St. Louis, and falling iron mining activity was reported by Minneapolis.
Employment, Wages, and Prices
Labor market conditions remained soft in most Federal Reserve Districts, although New York reported a modest pickup in hiring and St. Louis reported that several service-sector firms in that District recently announced plans to hire new workers. In the Richmond District, temporary employment agencies gave mixed reports, but some noted increased demand for administrative and sales workers, laborers, and warehousing and distribution workers. Wage pressures remained subdued in most Federal Reserve Districts, and Atlanta noted continued wage freezes at some employers in that District. However, Boston reported some modest pay increases, and Minneapolis indicated that wages in that District have been level or rising moderately.
Price pressures remained subdued in nearly all Federal Reserve Districts, although increases in metals prices were noted in Boston, Cleveland, Minneapolis, Dallas, and San Francisco. Raw materials prices, other than metals, were reported to be mostly steady, although firms in the New York, Philadelphia, and Chicago Districts noted some increases in the cost of the inputs they use. Agricultural commodity prices were reported on the increase by Chicago, Kansas City, and Dallas. Most Districts reported that retail prices have been steady.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
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