Comments on the Beige Book

Last week, the Fed released the Beige Book.  This is one of my favorite economic releases, as it gives us near real-time data on the condition of the US economy.  Let's look at some of the data points.

Consumer spending expanded in most Districts, but several Districts reported mixed or lower activity among non-auto retailers. Sales strengthened in the Philadelphia and Richmond Districts, and retail sales were higher than a year ago in the Boston, St. Louis, and Minneapolis Districts. San Francisco reported modest growth in sales, Dallas noted flat to slightly higher sales activity, and New York said retail sales were strong in January but slowed in February primarily due to weather. The Chicago District said consumer spending increased at a slower rate, while Cleveland and Atlanta noted mixed sales activity. Kansas City said retail sales decreased since the previous survey period and were expected to remain flat in the months ahead. Many District contacts commented on the expired payroll tax holiday and the Affordable Care Act as having restrained sales growth. Many Districts noted rising gasoline prices and fiscal policy as having a negative effect on consumer sales, and contacts in the Boston, New York, and Minneapolis Districts said severe weather depressed sales somewhat. Contacts in several Districts reported a shift in sales activity from local malls to the Internet and indicated deep discounting among retailers was becoming increasingly common. San Francisco noted somewhat soft sales for traditional retail grocers, whose competition has increased from discount and online retailers.  

Most Districts reporting on auto sales noted solid or strong increases in sales, with the exception of mixed activity in the St. Louis District and a seasonal slowdown in the Dallas District.

A few observations:

• It's interesting that autos are still selling, and that non-auto retailers are taking the hit from the expiration of the payroll tax holiday.  As the average age of the US car fleet has increased, replacing cars has become an increasing priority.
• There are several mentions of weather related activity impacting sales.  Remember that this winter has seen several heavy storms hit the northeast, which would impact consumer behavior.  This could also mean that we might see a bump in this activity in the coming months as the storms push certain purchases forward.
• There are several macro-level events that are hitting sales: the expiration of the payroll tax holiday and fiscal uncertainty.  There is also talk of the effect of the ACA's implementation on sales.  I am less certain about the effects of this, as the impact would mostly be felt by employers rather than consumers.  Rising gas prices are also slowing sales somewhat.
• The increased use of discounting tells us that retailers are having to pull customers into the stores with various ploys.  This adds further detail to the story of weakening consumer spending.

Nonfinancial services activity continued to grow at a modest pace since the previous Beige Book. St. Louis and San Francisco reported strong demand for technology, logistics, marketing and legal services. Logistics services were also an area of growth in the Philadelphia District, but growth was modest due to firms' concerns about possible federal spending cuts. High-tech services increased in the Kansas City District, but growth was lackluster in the Boston District due in part to weak demand from Europe and Japan. Staffing services firms in the Boston and New York Districts saw improved conditions, but activity was mixed in the Dallas District. Boston, New York, Philadelphia, and Kansas City services contacts continued to be optimistic about growth in the coming months and in the second half of 2013. 

Manufacturing conditions improved in nearly all Districts, but the increases were generally modest. Boston, New York, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis and San Francisco reported some increases in factory activity, but the majority noted that the pace of recovery was slow. Conditions were mixed in the Philadelphia and Dallas Districts, and manufacturing activity in the Kansas City District weakened. Contacts in the Cleveland, Richmond, Chicago, and Kansas City Districts cited concerns over government regulation and fiscal uncertainty as a reason for slow growth. 

Some observations:

• Both service sector and manufacturing growth are classified as "modest."  This characterization is below the latest ISM service reading of 56 and probably a bit lower that the latest ISM manufacturing reading of 54.2.   However, if you think about economic data as existing in a range, than the anecdotal reports and ISM tell us that both sectors are expanding -- they are just doing so moderately.
• Headwinds are reported from
• the Japanese slowdown
• The European slowdown and 
• Cuts to federal spending.  
• I'm less certain about the effects of "uncertainty" as the future is always uncertain.
• Staffing reports were mixed, with two highlighting increased demand but a three more highlighting weak demand.

Residential real estate activity continued to strengthen in most Districts, although the pace of growth varied. Contacts in the Boston, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco Districts noted strong growth in home sales, while New York and Chicago reported slight improvements. A realtor in the Richmond District indicated that low interest rates continued to motivate home buyers, and potential buyers in the Philadelphia District expressed greater confidence, including entry-level purchasers who had been increasingly opting to rent since mid-summer. Contacts in the Cleveland and Atlanta Districts said sales were higher than a year ago. Home construction increased in most Districts, with the exception of the Kansas City District where it was reported as unchanged. Several Districts noted ongoing strength in multifamily construction, although contacts in the Atlanta and Cleveland Districts mentioned continued financing difficulties for builders. Home prices edged higher in the majority of Districts, with lower inventories generally cited as the primary cause. Richmond and Atlanta Realtors observed multiple offers on many homes. Philadelphia real estate contacts continued to report low-end home prices as firm or rising slightly, while high-end home prices were still falling. Inventories declined in nearly all Districts, with Realtors in several Districts concerned about the impact on future sales volume. 

Some observations:

• Anyone doubting the housing story isn't paying attention.  
• Low interest rates are driving buyers into the market.  
• Prices are rising indicating higher demand than supply.  
• Low inventory in the new home market is leading to an increasing in building.  
• If there is a part of the economy that has the potential to have the biggest positive impact this year, this is it.

Labor market conditions generally improved, although several Districts reported restrained hiring. Many Districts reported a rise in temporary employees, while staffing contacts in the Boston District noted an increase in the placement of permanent and temporary-to- permanent workers. Auto dealers in the Cleveland and Kansas City Districts mentioned plans to hire more workers, and Dallas noted robust hiring activity for experienced corporate, energy, and intellectual property lawyers. Positions in the manufacturing industry increased in the New York, Richmond, and Chicago Districts, although several Chicago manufacturers expressed plans to either invest in more productive capital or adjust the hours of existing employees prior to hiring new workers. St. Louis noted weakness in healthcare services and information technology positions, and Cleveland reported reduced hiring plans from commercial builders and coal operators. Employers in several Districts cited the unknown effects of the Affordable Care Act as reasons for planned layoffs and reluctance to hire more staff. Wage pressures were minimal in most Districts, but contacts reported some upward pressure for several skilled positions as a result of higher demand. Some Districts indicated a shortage of skilled workers such as engineers, truck drivers, software developers, and technical jobs, and Atlanta noted a lack of compliance specialists due to heavier regulations in the healthcare industry.  

Some observations:

• This is the one area of data where I can see the ACA having an effect.  The regulation writing process was stalled until the Supreme Court decision on the act.  Now there is a huge game of catch-up.  The rules are going to be complicated.  Plus -- as this report also notes -- there is a lack of compliance specialists in the ACA and its implementation, so finding someone to guide you through the process is difficult.
• This is the first report that I can remember where there was talk of any upward wage pressure.  Given that overall unemployment rate is still high, I doubt that this will be a broad-based occurrence.  However, the latest employment data did report a decent sized month to month increase in wages.
• The rise in temporary workers is a very good sign, as this is a leading indicator of employment in general.
  

General conclusions:

• I saw one news story (I can't remember where) that said this particular report used the word moderate or moderately over 40 times.  The point made is clear: the economy is growing although at a slow pace.  This is the same pace we've seen over the last year or so.
• Both the manufacturing and service sector are growing.   Both this report and the latest ISM/Markit surveys indicates the growth rate is high enough above the 50 level to indicate growth could shift into an above trend rate with the right impetus.
• Auto sales are still going strong.  This is very important because it indicates that consumers are willing to take on long term debt. This would not be occurring if there was more concern about the future than hope.
• Housing is still the best underlying story of the economy right now, and presents the best possibility of pulling the US into a higher rate of growth.
• The comments regarding employment are consistent with the most recent prints of the BLS data: monthly growth a bit above population growth.  There is also some better news on the wages front, as we're starting to see some upward pressure on wages.
• As we've noted before, there are several important headwinds:
• The slowdown in Europe is depressing export orders.
• The fiscal situation in Washington is slowing federal purchases and orders.
• The ACA -- while cited for non-employment bases slowing -- is probably only have a real effect on employment.
• The payroll tax hike is hitting non-auto retail sales.