Thursday, June 11, 2009

Beige Book, Pt. II

Yesterday the Fed released the Beige Book. The general tone of the report was negative/down. However, there were some signs of improvement as well.

Reports from the twelve Federal Reserve District Banks indicate that economic conditions remained weak or deteriorated further during the period from mid-April through May. However, five of the Districts noted that the downward trend is showing signs of moderating. Further, contacts from several Districts said that their expectations have improved, though they do not see a substantial increase in economic activity through the end of the year.

Let's take a look at the various districts lead paragraphs to see where the signs of improvement lie:


Most First District business contacts report ongoing declines in sales or orders from a year earlier. Aside from biopharmaceuticals, manufacturers say business continues to drop off and they are cutting capital spending, employment or hours, and compensation. Software and information technology services firms are also seeing revenues fall from a year ago, as are staffing firms. However, a few manufacturers and staffing firms cite some stabilization or positive signs recently. Residential and commercial real estate markets remain in the doldrums, with declines in prices and sales (or rents and occupancy) continuing into March and April. Retailers are the exception, with a majority of respondents reporting modest sales increases from a year ago. Manufacturers say input costs are roughly flat, while their selling prices are flat to down. Retailers' and software firms' prices are holding steady, while temp firms' bill rates and pay rates are declining. "Uncertain" continues to be the operative word regarding the outlook, although contacts in several sectors see more reason for optimism now than six weeks or three months ago.

New York:

The Second District's economy has shown signs of stabilizing since the last report, though some sectors continued to weaken. The labor market remains exceptionally slack and has yet to show signs of leveling off. Manufacturing sector contacts indicate that activity has generally stabilized and express increasingly widespread optimism about the near-term outlook. Retailers indicate that sales improved somewhat in May and were roughly on plan but still down moderately from a year earlier. Consumer confidence rose noticeably in April and May, rebounding from a record low. However, tourism activity in New York City showed further signs of softening since the last report. Commercial real estate markets have been mixed since the last report, with Manhattan's market continuing to weaken, but most surrounding markets slack but stable. Housing markets appear to be stabilizing in much of the District but continued to weaken in New York City. Finally, bankers again report increased demand for home mortgages but steady to somewhat weaker demand in other loan categories; they also report further tightening in credit standards and continued moderate increases in delinquency rates across all segments.

Overall, the New York report is pretty good, indicating things are normalizing.


Economic activity in the Third District continued at a slow rate in May. Manufacturers, on balance, reported declines in shipments and new orders. Retailers gave mixed reports, noting gains in sales during the month at discount stores but weakening sales at stores selling higher-priced merchandise. Motor vehicle dealers indicated that sales remained sluggish. Bank loan volume has been level in recent weeks, and credit quality has continued to deteriorate. Residential real estate sales showed a slight seasonal gain in May but remained below the level of a year ago. Nonresidential real estate investment and construction activity continued to be slow. Service-sector activity has been generally slow in recent weeks. Business firms in the region reported level or falling input costs and output prices in May.

The outlook in the Third District improved slightly in May. Although contacts do not foresee substantial increases in activity in the near term, more now believe the decline in economic activity might be near a bottom. Manufacturers forecast a rise in shipments and orders during the next six months. Retailers expect sales to gain strength slowly, but auto dealers expect sales to remain slow for the rest of the year. Bankers anticipate little growth in lending. Residential real estate agents and home builders believe market conditions might be stabilizing, but they do not expect sales to move up solidly until next year. Contacts in nonresidential real estate expect leasing and purchase activity to remain weak during the balance of the year but perhaps move up somewhat during the fourth quarter. Service-sector firms expect activity to be slow during the next few months, at least.

Philly is a hopeful report -- we hope things get better and think they will. But we don't have any solid signals of late.


Economic activity in the Fourth District weakened somewhat since mid-April. Reports from factories show an appreciable decline in production and new orders. Residential construction remains weak, while commercial and industrial building decreased. Commercial and residential builders reported that project financing is very difficult to obtain. On balance, sales by District retailers were stable. New motor vehicle sales slowed, while purchases of used vehicles showed a modest improvement. Coal production fell substantially, with little change noted in oil and gas output. Freight transport volume remains at low levels. Refinancing applications for residential mortgages remain very strong, though other types of consumer lending were characterized as stable. Commercial and industrial lending activity is mixed. Core deposits grew strongly.

Employment declines were seen in manufacturing, commercial construction, and energy. Staffing firms reported a falloff in job openings. Given the weak labor market, wage pressures are contained. For the most part, input and product prices were stable or declining. Capital spending has been frozen or trimmed back to mainly critical maintenance projects.

I don't expect Cleveland to get better anytime soon -- even after the recovery starts full force. The reason is Detroit and the car markets problems. So long as that problem is out there, this region will be in bad shape.


Although economic activity in the Fifth District remained sluggish in recent weeks, some encouraging trends are beginning to emerge. District manufacturers reported a rise in demand as new orders and shipments grew. Contacts at District ports observed weak conditions, but noted signs of potential improvement. Residential lending activity picked up as contacts noted an increase in purchase loans, while residential real estate agents also reported an overall uptick in sales activity. Commercial real estate contacts observed a modest increase in leasing activity, although vacancy rates inched up in most markets and reports of rent declines and concessions were common. Nonetheless, demand for commercial loans remained weak with some continued deterioration in credit quality. Retail revenues--including big-ticket sales--generally declined since our last report, as did revenues at services firms. Retail price growth slowed, according to contacts, while prices at services firms declined. Temporary employment activity was weak, although some agents expected improvement in the next few months.

The main positives here are a pick-up in residential real estate activity and manufacturing orders.


Sixth District business contacts reported that economic activity continued to contract in late April and May, although the pace of decline had moderated in some industries and most noted that their outlook had improved. Information from retailers was consistent with sluggish consumer spending, but sales were largely in line with modest expectations. Most auto dealers noted further declines in sales, while tourism-related spending slowed further in late spring. Real estate contacts suggested that ongoing weakness in home sales had moderated in several areas and inventories of unsold single-family homes were trending down. However, most commercial construction reports remained negative as vacancy rates continued to rise. Fewer manufacturers cited reduced production and orders than in the previous report, although overall activity remained quite weak. Banking contacts remarked that general business and consumer loan demand was soft. Labor market conditions continued to be weak, although fewer firms reported layoffs than earlier in the year. Price pressures remained relatively stable throughout the District.

Note that again real estate is moderating. Manufacturing is declining at a slower rate and lay-offs were declining.


Overall, economic activity in the Seventh District weakened in April and May. Consumer spending decreased and the pace of business spending slowed. Construction activity continued to be weak, although residential real estate conditions showed some improvement. Both manufacturing activity and labor market conditions deteriorated further. Credit conditions improved, but remained tight for some firms. Downward pressure on prices and wages diminished. Wet weather delayed planting of both corn and soybeans in the District.

Chicago's proximity to Detroit and the industrial mid-west is a problem and will be for the foreseeable future.

St. Louis:

The economy of the Eighth District has weakened further since our previous report. Activity in the manufacturing and service sectors declined further. Retail and auto sales in April and the first half of May were down from a year ago. Residential and commercial real estate markets continue to be weak. Overall lending at a sample of large District banks decreased moderately during the first quarter of 2009.


The contraction in the Ninth District economy moderated since the last report. Modest decreases in activity occurred in the consumer spending, services, residential construction and real estate, agriculture and manufacturing sectors. More substantial drops in activity were noted in commercial construction and real estate, and in the energy and mining sectors. Spring tourism activity was mixed, and residential real estate saw more activity. Labor markets continued to weaken, and wage increases were modest. Price increases remained subdued.

Again -- there is talk of moderation and better results in real estate.

Kansas City:

The Tenth District economy declined at a slower pace in April and May with firmer expectations of improvement going forward. Consumer spending was weak and was expected to remain soft. An uptick in manufacturing orders helped stabilize expectations for future production. Residential real estate activity strengthened with stronger sales and increased building permits. In contrast, commercial real estate market conditions deteriorated, and energy activity declined further. Crop conditions held steady while livestock producers cut herds. Bankers reported a rise in deposits and stable loan demand with no erosion in loan quality. Consumer price and wage pressures remained low. Producer prices declined at a slower pace with some firms noting that higher commodity prices boosted material and fuel costs.

Activity declined at a "slower pace"; an "uptick" in manufacturing; baking conditions are getting better as well.


Economic conditions in the Eleventh District remained weak from mid-April to late May, but there were increased reports of stabilization. Contacts in several industries said demand had improved slightly or had firmed since the last survey. Many characterized current conditions as bouncing along the bottom. While outlooks were slightly more optimistic than in past surveys, most contacts said they remain extremely cautious and do not expect any sustained improvement in the near term. Labor market conditions remain soft as firms continue to implement hiring freezes in the face of uncertainty.

Like Philly, this is an expectations report; we think things are going to get better but we're still "bouncing along the bottom".

San Francisco:

Economic activity in the Twelfth District slowed further on net during the survey period of mid-April through the end of May, although the reports again pointed to signs of stabilization or improvement in some sectors. Upward price pressures remained modest overall, and upward wage pressures were largely absent. Retail sales continued to be anemic, and demand softened further for service providers. Manufacturing activity generally remained at extremely low levels or eased further, although conditions continued to improve for makers of information technology products. Demand held largely steady for agricultural producers and remained somewhat weak for providers of natural resources. Home sales continued to firm in many areas, but construction activity stayed stuck at low levels, and demand for commercial real estate continued to deteriorate. Loan demand weakened further on net and credit availability remained tight.

So -- what is the general conclusion? We're still in a bad place economically, but there are signs things are stabilizing along the bottom.