Friday, October 17, 2008

Beige Book Highlights

You know you are a total economics geek when you get excited about the Federal Reserve issuing the latest Beige Book. This is a compilation of anecdotal reports from all the Federal Reserve districts. It is released about every six weeks and is a great source of information on the economy. Let's take a look at the latest one and see what it says about various parts of the US economy.

Consumer spending was softer in nearly all Districts. Retail sales were reported to have weakened or declined in Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Minneapolis, and Kansas City; Dallas and San Francisco cited weak or sluggish sales; and Boston and New York indicated that sales were mixed and moderately below plan sales, respectively. Several Districts noted a reduction in discretionary spending by consumers and lower sales on big-ticket items. Several also reported increased activity at discount stores as consumers became more price conscious and shifted purchases toward less-expensive brands.

None of this information is good especially when 70% of GDP growth comes from consumer spending. This chart shows retail sales have been slowing for awhile now:

In addition, the year over year rate of change is now negative:

Also note the consumers are shopping down -- that is, more people are going to discount places to save money. While I am all for this activity it does indicate more cost cutting on the part of consumers.

Manufacturing activity moved lower in most Districts, and contacts expressed heightened concern about the economic outlook. Several Districts noted that credit conditions were contributing to a high level of uncertainty on the part of contacts. Declines in manufacturing activity of varying degrees were reported in Boston, New York, Cleveland, Richmond, Chicago, St. Louis, Kansas City, San Francisco, and Dallas. Atlanta reported that production remained at a low level, while Minneapolis described conditions as mixed and Philadelphia noted a slight increase in activity.

These numbers have been helped a great deal by the weaker dollar which has helped exports. However with Europe and Asia slowing this won't be the case for much longer.

The latest industrial production numbers were disproportionately impacted by two hurricanes and a strike at Boeing. Without these events the number would have been zero, so keep that in mind when you're looking at the chart. But, the longer-term trend is not good. We're clearly making less and less stuff right now.

In addition, we're using less of our productive capacity as well.

Residential real estate and construction activity weakened or remained low in all Districts. Housing activity was reported to have moved lower in Boston, New York, Philadelphia, Chicago, St. Louis, Minneapolis, Dallas, and San Francisco. While still slow, residential markets showed some signs of stabilizing in Cleveland, Atlanta, and Kansas City. Several Districts noted continuing downward price pressures and an increasing supply of homes for sale due to rising foreclosures. However, the inventory of unsold homes was reported to have declined in areas of the Boston and Atlanta Districts as well as in Philadelphia and Cleveland.

I have a hard time believing any real estate markets are stabilizing right now -- especially when the Federal Reserve failed to see the housing bubble forming. Bottom line, inventory is still sky high, credit is tightening and confidence is at multi-decade lows. My hope is that is a few more months we'll have an idea of when this will end. Here are some excerpts from a recent NY Times article that deserve mentioning:

One reliable proxy of housing values — the ratio of home prices to rents — indicates that in many cities prices are still too high relative to historical norms.


The price-to-rent ratio, which provides one measure of how much of a premium home buyers place on owning rather than renting, spiked across the country earlier this decade.

It increased the most on the coasts and somewhat less in the middle of the country.’s calculations show that while it remains elevated in many places, the ratio has fallen sharply to more normal levels in places like Sacramento, Dallas and Riverside, Calif.


As of June, 2.8 percent of homes previously occupied by an owner were vacant. Nearly 1 in 10 rentals was without a tenant. Both numbers are near their highest levels since 1956, the earliest year for which the Census Bureau has such data.


At the same time, Ms. Pestana said, her clients who are looking to buy are having a harder time lining up financing. One of her clients recently had to give up on a home after the lender that had offered a pre-approved loan changed its mind — a frequent occurrence, according to real estate agents and mortgage brokers.

“I am working harder than I have ever had to work to get a deal together and keep it together,” said Ms. Pestana, who has been a real estate agent for seven years.

The Beige Book does not have a section on employment. So I'll add the following charts:

The year over year rate of change in employment has been dropping for the last two years.

The unemployment rate has been increasing since the beginning of 2007.

Simply put, the economy is in terrible shape.