Monday, June 13, 2011

Beige Book, Part I: Consumer Spending

Last week, the Fed released the Beige Book. This week, I'm going to take an in-depth look at the data presented, as it is the closest thing we get to "real time" broad-based information. I think this information is especially important considering the recent slow-down in economic activity.

Let's start with consumer spending. Here is the overall analysis:

Consumer spending was generally described as steady to up modestly since the last report, with most Districts indicating small increases from a year ago. Non-auto retail sales were indicated to be expanding steadily in the Philadelphia, Cleveland, Minneapolis, Kansas City and Dallas Districts, while sales were characterized as stable or decelerating in the New York, Atlanta, Chicago, St. Louis and San Francisco Districts. Sales were reported to have declined in the Richmond District, and Boston described sales as mixed but generally down from a year earlier. Retail inventories were generally said to be at satisfactory levels, though St. Louis characterized inventory levels as being on the high side. A number of Districts noted that a combination of unfavorable weather and high fuel and food prices have weighed on consumer spending in recent weeks. Cleveland and San Francisco noted increased spending on discretionary items, and Philadelphia indicated that some luxury goods retailers fared relatively well. On the other hand, Chicago reported a decline in discretionary spending.

Most Districts reporting on vehicle sales indicated that they have been steady to stronger since the last report, specifically Richmond, Chicago, St. Louis, Kansas City, Dallas and San Francisco. In addition, Atlanta noted firm demand for automobiles. On the other hand, some softening in car sales was noted in the northeastern Districts of New York, Philadelphia and Cleveland. Many Districts indicated that supply disruptions, primarily from Japan, have contributed to lean inventories, which have impeded auto sales somewhat. There has also been widespread tightening in the market for used cars, reflecting both strong demand and a shortage of inventory. Shifts in consumer demand toward smaller, more fuel efficient cars were noted in the Philadelphia, Cleveland, and Chicago Districts, while St. Louis mentioned a shift from higher-end to lower-end models.

Notice the overall trend is positive. While there is talk of a slowdown, there is no talk of a stop or retreat. There is talk of deceleration in five districts, but only talk of a drop in one (Richmond). The above paragraph mentions two events hurting sales: weather patterns and the Japan supply disruption. The district notes below will add a third problem: rising food and gas prices.

The car market is interesting. First, note again the overall trend is positive with only three districts reporting a deceleration in sales. There is also talk of a firming used car market (meaning people are hanging onto their cars longer, decreasing supply and thereby increasing prices) and a move towards smaller, energy-efficient cars.

Let's look at the individual districts.

Boston:First District retailers report mixed sales results for the period from late March through mid May, with comparable same-store sales ranging from low double-digit decreases to low single-digit increases. A few contacted retailers mention decreases in demand, and all express concern about the negative impact of rising fuel prices on their own costs, especially shipping, and on consumers' shopping habits.

NY: Retail sales have held steady since the last report and are running modestly above comparable 2010 levels. Sales were somewhat ahead of plan, despite unseasonably cool and wet weather, which likely had a small negative effect on spending. Two contacts--a major retail chain and a large mall in upstate New York--report that sales weakened in the first half of May, after a robust April. Inventories are reported to be in good shape. Selling prices have been steady overall, though some contacts describe the pricing environment as more promotional than a year ago. One major retail chain indicates that prices have been stable during the first half of the year; yet moderate price increases are planned for the second half of 2011--largely for cotton-based merchandise.

Auto dealers in upstate New York report that sales of new vehicles have cooled somewhat since the first quarter but remain at fairly high levels, up moderately from a year earlier. Some of the slowing in sales is attributed to supply disruptions related to the tsunami in Japan. One local auto dealers' association reports an exceptionally low inventory of used vehicles, which has hampered sales volume and pushed prices up. Retail credit conditions continued to improve, while wholesale credit conditions were mixed.

Philly: Third District retailers generally reported small year-over-year increases in sales in May, although results varied by store type. Discount stores and some luxury goods retailers posted better increases than mid-price retailers and department stores. Retailers said sales of spring apparel have been held back by cool, rainy weather. Several merchants said that high gasoline prices were deterring shopping trips and constraining consumers' discretionary buying. Looking ahead, store executives expect just slow growth in sales. One merchant's comment expressed the general opinion: "The consumer is responding to value. Only confidence in the job situation will prompt broader buying."

Third District auto dealers generally reported that sales slowed in May from the pace set from January through April. Some dealers said they were facing supply constraints resulting from the interruption of Japanese vehicle and parts production, and some dealers said demand has slowed as consumers reconsider model preferences in response to higher gasoline prices. Dealers are uncertain of the future course of sales; most said the sales rate going forward will be more sensitive to gasoline prices and consumer confidence than it had been earlier in the year.

Cleveland: Reports from retailers indicate that sales for the period from early April through mid-May rose in the low to mid-single digits and were generally on or ahead of plan. However, some of the increase was attributed to the rise in gasoline and food prices. Transactions were mostly higher relative to year-ago levels. Many of our contacts noted that rising sales included discretionary items. Looking forward, retailers are cautiously optimistic about third-quarter sales. We continue to hear about rising vendor prices, although they were mainly limited to food- and fuel-related products. Retailers passed through some of the increases to consumers. Reports on profit margins were mixed, with declines taken primarily by grocers. Capital outlays remain on plan and are slightly higher than year-ago levels. No change in payrolls is expected at existing stores.

Auto dealers reported that new-vehicle sales showed a slight downturn during April and early May. March sales were given a big boost due to regional auto shows. On a year-over-year basis, vehicle purchases increased for almost all of our contacts. Demand for smaller, fuel-efficient cars continues to rise, while inventories were characterized as somewhat low by most dealers and may be hurting sales. Dealers are cautious in their outlook due to high gas prices and concern over the availability of vehicles with a Japanese nameplate. Demand for used cars is fairly strong, especially those that are fuel efficient. However, scarce inventory is contributing to rising prices. Credit availability and pricing have improved, and the use of leasing as a credit alternative is growing. Automakers are now putting in place timetables for dealers to complete reimaging and expansion of their facilities. The only roadblock from the dealers' perspective is the ability to obtain financing. Most auto dealers are beginning to hire on a selective basis.

Richmond: Retail sales generally slowed since our last report. Several firms attributed the slowdown to higher gasoline prices. A central Virginia retailer noted that, even though consumer confidence was good in the area, buying behavior was "tentative, as customers' needs were superseding their wants," driving stores to compete aggressively on price. Apparel and general merchandise retailers reported soft sales, and a large bookseller in central North Carolina stated that sales had weakened over the last month. In contrast, a store manager at a big box discount store in Virginia Beach said sales had improved in the last month and that the store was hiring again. Most auto dealers that we contacted cited flat-to-stronger sales, despite scattered reports of inventory or parts shortages caused by the Japanese crisis. Grocery sales remained solid, and several contacts reported passing through price increases to their customers. A number of surveyed wholesalers reported faster revenue growth in recent weeks. Durable goods wholesalers generally noted a pick-up in revenues despite the reported ongoing slump in retailers' big-ticket sales. Retail prices edged up, and wages were little changed.

Atlanta: Most District merchants signaled a deceleration in sales in April and May after moderate increases earlier in the year. Retailers said that periodic adverse weather conditions and high gasoline prices combined to dampen sales across the District. Contacts reported that they continued to manage inventories tightly. The outlook among District retailers remained optimistic. Auto dealers noted both declining inventories and firm demand.

Chicago: Consumer spending increased at a slower rate than during the previous reporting period. Retailers reported that sales were mostly flat. Higher food and energy prices caused consumers to make fewer shopping trips and purchase fewer discretionary items. Auto sales edged up, as higher demand for passenger cars offset a slight decline in sales of trucks and SUVs. Auto dealers reported that their inventory levels of small passenger cars were starting to come under pressure due to higher than anticipated demand for fuel efficient vehicles and production disruptions related to the situation in Japan. Dealers of Japanese vehicles expect that supply problems will continue to affect their inventory levels for the remainder of the year. These supply constraints were noted to be causing used car prices to rise, as well as benefitting passenger vehicle sales of the Detroit automakers. Quality improvements were also said to have put the Detroit 3 in a better competitive position.

St. Louis: Contacts reported that retail sales in April and early May were up, on average, over year-earlier levels. About 48 percent of the retailers reported increases in sales, while 36 percent saw decreases and 16 percent saw no changes. Roughly 41 percent of the retailers noted that sales levels were below their expectations, 35 percent reported that sales met expectations, and 24 percent reported that sales were above expectations. About 32 percent of the retailers noted that their inventories were too high, while 20 percent reported that their inventories were too low. The sales outlook for June and July was mostly optimistic: About 60 percent of the retailers expect sales to increase over 2010 levels, while 24 percent expect sales to decrease and 16 percent expect sales to be similar to last year.

Car dealers in the District reported that sales in April and early May were up, on average, compared with last year's sales. About 58 percent of the car dealers surveyed saw increases in sales, while 29 percent saw decreases and 13 percent saw no changes. About 38 percent of the car dealers noted that used car sales had increased relative to new car sales, while 21 percent reported the opposite. Also, about 29 percent of contacts reported an increase in sales of low-end vehicles relative to high-end vehicles, while less than 4 percent reported the opposite. About 57 percent of the car dealers surveyed reported that their inventories were below desired levels, while 9 percent reported that their inventories were too high. The sales outlook for June and July was generally optimistic: About 58 percent of the car dealers expect sales to increase over 2010 levels.

Minneapolis: Consumer spending grew moderately. A major Minneapolis-based retailer reported that same-store sales in March and April increased 2 percent compared with a year earlier. Sales and traffic have generally been higher than a year ago at a Montana mall, but were softer in mid-May. Sales and traffic are about even with a year ago at a South Dakota mall, according to the manager; cool weather seems to have slowed apparel sales. An auto dealers association in North Dakota forecasts a 10 percent increase in vehicle sales for 2011.

KC: Consumer spending continued to grow solidly, and most contacts expected further growth in the months ahead. Retail sales accelerated and nearly all retail contacts reported that sales were above year-ago levels. Sales of apparel and seasonal garden supplies were noted as particularly strong, while a few contacts characterized sales of appliance and some high-end items as weak. Store inventories edged higher, but most stores were satisfied with current stock levels. Auto sales continued to increase, but the pace slowed somewhat from the previous survey. Auto inventories declined further, and several dealers reported additional supply constraints due to the natural disaster in Japan. Restaurant sales were strong, and travel and tourism activity remained favorable. Most restaurant and tourism contacts expected solid activity heading forward.

Dallas: Retail activity increased moderately over the reporting period. Looking at March and April and smoothing out fluctuations due to the Easter holiday, demand has increased in the low- to mid-single digits over the prior year. Some contacts mentioned gasoline prices as a concern but the effects of elevated prices have been limited thus far. Texas continues to perform above the national average, according to one large retailer, and the outlook for 2011 remains positive.

Automobile sales continue to improve, but inventories will likely be thin in coming months due to the effects of the tsunami on Japanese manufacturers supply chains. Contacts expect demand to continue improving at a modest pace throughout 2011.

Frisco: Retail sales rose further on balance. Although consumers' focus on necessities continued, the reports noted a slight shift back toward discretionary spending. Modest improvements in sales were reported for discount chains as well as for traditional department stores, and inventories generally were at or near desired levels given the pace of sales, enabling many retailers to reduce their reliance on promotional activities. For retailers of big-ticket items such as major appliances and furniture, however, sales remained somewhat weak. Similarly, sales were largely flat for grocers. Demand for new automobiles continued to strengthen, although sales growth was restrained somewhat by high fuel prices and shortages of new Japanese-made vehicles associated with the recent natural disaster in that country. The availability of used vehicles tightened further, primarily for imported models, which has propped up their sale prices and trade-in values.

In no order of importance, here are some observations:

-- A number of districts noted that high fuel and foods costs were hurting overall consumer demand

-- There were several mentions of discounters seeing a sales increase. This indicates that consumers are probably feeling pressure from high prices

-- Odd/bad weather was mentioned in several districts as a reason for slower sales

-- Several districts mentioned that auto financing was loosening up

-- Several districts noted that a change in car model preference was taking place, as consumers look for more fuel efficient cars to deal with high gas prices

-- The phrase from Richmond seems to sum up consumers attitude the best: "buying behavior was "tentative, as customers' needs were superseding their wants,"