Here are some highlights.
Most Banks reported that the recent developments in financial markets had led to tighter lending standards for residential mortgages, which was having a noticeable effect on housing activity, and several noted that the reduction in credit availability added to uncertainty about when the housing market might turn around. While several Banks noted that commercial real estate markets had also experienced somewhat tighter credit conditions, a number commented that credit availability and credit quality remained good for most consumer and business borrowers. Outside of real estate, reports that the turmoil in financial markets had affected economic activity during the survey period were limited.
The emboldened sentence is very important. In Bernanke's last big policy speech, he said he was looking for any signs the housing market was spreading beyond the housing market. Here is the hey sentence from his speech:
It is not the responsibility of the Federal Reserve--nor would it be appropriate--to protect lenders and investors from the consequences of their financial decisions. But developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy.
Putting these two sentences together and the possibility of a Fed rate cut diminishes.
Here's the summary paragraph from the beginning of the document:
Retail sales were generally positive, with increases characterized as modest to moderate. However, several Districts described motor vehicle and furniture sales as slow. Manufacturing activity expanded across most Districts, with reports of softening demand for building materials and autos. The weakness in the housing market deepened across most Districts, with sales weak or declining and prices reported to be falling or flat. Most Districts reported a continuing contraction in the residential mortgage market. Commercial real estate activity was generally stable to expanding. Demand for business loans held steady or weakened, while consumer lending was mixed. Agricultural conditions varied widely across Districts, with several reporting damage to crops and pastures as a result of excessive heat and drought conditions. Activity in the energy and mining sectors remained positive in all of the Districts reporting on these sectors. Nearly every District reported at least modest increases in employment during the recent survey period. Most Districts characterized their wage increases as moderate or steady. Wage pressures were intense only in isolated professions in short supply. And most Districts reported little change in overall price pressures.
Let's take these one at a time:
Retail sales were generally positive, with increases characterized as modest to moderate. However, several Districts described motor vehicle and furniture sales as slow.
According to the latest GDP report personal consumption expenditures increased 1.4% in the second quarter. This figure was revised .1% lower. However, the latest monthly income statistics from the BEA showed a fairly good increase. In other words, a new trend of expanding personal consumption expenditures may be emerging but we need more data.
Although this month's auto sales were a decent surprise, overall auto sales have been declining for most of the year. This is a big cause for concern. As for furniture sales, the decrease shouldn't be a surprise considering the housing market is a mess and will be for sometime.
Manufacturing activity expanded across most Districts, with reports of softening demand for building materials and autos.
This has been a bright spot in the economy. Exports are doing well thanks to an expanding global economy and cheap dollar.
The weakness in the housing market deepened across most Districts, with sales weak or declining and prices reported to be falling or flat. Most Districts reported a continuing contraction in the residential mortgage market. Commercial real estate activity was generally stable to expanding. Demand for business loans held steady or weakened, while consumer lending was mixed.
Residential housing has the following problem: massive supply + constricting loan situation = falling prices. Don't expect this to change anytime soon. As for commercial, the growth in spending has been solid for the last few quarters, although I have to wonder when the problems in the residential market start to bleed over into the commercial market (or if they will).
Nearly every District reported at least modest increases in employment during the recent survey period. Most Districts characterized their wage increases as moderate or steady. Wage pressures were intense only in isolated professions in short supply. And most Districts reported little change in overall price pressures.
Employment is a huge wild card right now. First, although the official employment numbers show a very low unemployment rate, that does not jibe with "moderate to steady" wage increases. In addition, the labor participation rate is still low for this part in the economic cycle. The fed noted this situation in passing later in the report:
Though some Districts described employment condition as tight, most reported that wage increases were moderate or steady. Wage pressures were intense only in isolated professions in short supply.
I'm expect employment to get weaker. I've written about this before. The short version is construction, financial services and retail employment are all vulnerable right now.
As for prices,
Most Districts reported little change in overall price pressures.
This may give the Fed some wiggle room. Remember, the Fed has consistently stated inflation was their number one priority for the last 6 months or so. Yet that concern is completely absent from their general overview of the economy in this report.
Short version, this report shows an economy that is in fair shape. There are strengths (manufacturing) but some glaring weaknesses (auto sales and housing). The employment situation is a conundrum.
