January 12th, 2011
Econintersect:Considering that the recession ended a year and a half ago, a Federal Reserve publication with opinion on current economic conditions should not sound like the recession ended yesterday.
Yet the Beige Book (a report is published eight times per year) with anecdotal information for each Federal Reserve District on current economic conditions uses generally luke warm words throughout. Follow up:
The summary section of the January 2011 Beige Book:
Reports from the twelve Federal Reserve Districts suggest that economic activity continued to expand moderately from November through December. Conditions were said to be improving in the Boston, New York, Philadelphia, and Richmond Districts. Activity increased modestly to moderately in the Cleveland, Atlanta, Chicago, St. Louis, Kansas City, and Dallas Districts. The economy of the Minneapolis District "continued its moderate recovery," while that of the San Francisco District "firmed further" in the reporting period leading up to the close of 2010. Conditions were generally said to be better in Districts' manufacturing, retail, and nonfinancial services sectors than in financial services or real estate.
Contacts in the manufacturing sector in all Districts reported that activity continued to recover, with the Richmond and Chicago Districts citing especially solid gains in orders. However, the Boston, Atlanta, and Dallas Districts noted that business remained weak for manufacturers selling into the construction sector. Retailers in all Districts indicated that sales appeared to be higher in this holiday season than in 2009 and, in some cases, better than expectations. Nonfinancial service-sector contacts in the Boston, New York, Philadelphia, Richmond, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco Districts cited demand increases ranging from slight to "relatively strong." Transportation services were more mixed, with the Cleveland, Atlanta, and Kansas City Districts noting stable to slowing shipping volumes. Financial conditions were mixed across the Districts reporting on it, with overall loan demand slowly improving in Philadelphia and Richmond and weaker in St. Louis and Dallas. The Atlanta, Minneapolis, Kansas City, Dallas, and San Francisco Districts cited increased activity in the energy sector, while energy production in the Cleveland District was stable.
Residential real estate markets remained weak across all Districts. Commercial construction was described as subdued or slow, while commercial leasing activity reportedly increased in the Richmond, Chicago, Minneapolis, and Kansas City Districts.
Most District reports cited comments by both retailers and manufacturers that costs were rising, but indicated that competitive pressures had led to only modest pass-through into final prices. Labor markets appeared to be firming somewhat in most Districts, as some modest hiring beyond replacement was said to have occurred and/or was planned in a variety of sectors. At the same time, however, upward pressure on wages was reportedly very limited.
Most Districts indicated that business contacts were positive about the outlook, although still generally cautious. The Dallas District noted modest increases in optimism and positive outlooks across a range of sectors, Chicago stated that contacts were cautiously optimistic about the 2011 outlook, and New York cited widespread optimism about the near-term outlook; The St. Louis, Minneapolis, Kansas City, and San Francisco Districts all pointed to planned increases in hiring by their contacts as evidence of expected strengthening in business activity in 2011. Contacts in the Philadelphia District foresaw "improving economic conditions in 2011, but … not strong growth."
The manufacturing sector continued to recover across all Districts. Contacts in the Richmond, Chicago, and St. Louis Districts identified a strong flow of new orders. Respondents in the Chicago District pointed to pent-up demand for both light and heavy motor vehicles, attributed to an aging fleet, as a key driver of activity in the manufacturing sector. The Cleveland District described orders as above expectations and respondents in the New York District noted that orders had picked up since the prior report. Overall, demand was generally characterized as stable and steady, and no District made mention of lingering fears of a double-dip recession, in contrast to the summer reporting periods. Capacity utilization continued to trend higher and is approaching normal rates for some contacts in the Cleveland and San Francisco Districts, while production in high-tech manufacturing was reportedly at high capacity in Dallas; some manufacturers in the St. Louis and Minneapolis Districts said they have or will soon expand capacity. Production levels increased in the Cleveland, Atlanta, Chicago, and Kansas City Districts. On the negative side, the Philadelphia District characterized the flow of new orders as "erratic," while the Boston, Atlanta, and Dallas Districts identified construction-related manufacturers as continuing to show considerable weakness, and makers of wood products in the St. Louis and San Francisco Districts reported very soft demand.
The Boston, Cleveland, and San Francisco Districts reported concerns about input prices, particularly of commodities; manufacturers in the Boston, Cleveland, and Richmond Districts indicated they had experienced lengthening lead times, shortages, or other difficulty obtaining supplies of some inputs. Only St. Louis mentioned firms with substantial investment plans for 2011. Boston, Cleveland, Chicago, St. Louis, and Kansas City reported that some factories had plans to increase employment, although these hiring plans were typically characterized as modest. The Philadelphia, Cleveland, Chicago, Kansas City, Dallas, and San Francisco Districts described the 2011 manufacturing outlook as optimistic.
Consumer Spending and Tourism
Retail spending showed improvement across all Districts, with most retailers reporting sales growth consistent with or ahead of plan for the recent 2010 holiday season. Boston, Richmond, Atlanta, Chicago, and Kansas City observed consumers positively reacting to promotions and discounting, although Philadelphia and San Francisco reported that retailers relied less heavily on discounting. Inclement weather, including the late December blizzard, had some impact on sales in the New York and Philadelphia Districts. New York , Cleveland, and Chicago cited increased consumer confidence.
Automobile sales were either steady or up in eight Districts during the reporting period, while New York stated that auto sales were "mixed but generally at favorable levels" and Kansas City noted limited auto sales but expected future improvement from additional incentives. Philadelphia, Cleveland, and Dallas indicated that vehicle inventories were at appropriate levels for the current sales rate. Cleveland reported an increase in leasing activity, while the effect of rising gasoline prices on sales of less fuel-efficient models was a concern cited by some dealers in Philadelphia.
Tourism was characterized as positive or improved in the Richmond, Atlanta, Minneapolis, Kansas City, and San Francisco Districts, while New York described tourist activity as brisk. Contacts from the Richmond, Kansas City, and Minneapolis Districts observed a strong start to the winter ski season, although unfavorable weather conditions at the end of December led to deteriorating conditions for winter activities in some areas of the Minneapolis District. New York City's Broadway theaters reported increased attendance and revenue compared with the 2009 holiday season. Occupancy rose in the Atlanta and San Francisco Districts' major hotel markets. Room rates continued to run ahead of comparable 2009 levels in the New York and the Kansas City Districts, although rates have fallen in Kansas City since the last survey. Atlanta and San Francisco noted rising business travel.
Activity was said to be steady to increasing among Districts reporting on nonfinancial services. Providers of information technology services saw increases in sales in the Kansas City and San Francisco Districts. Advertising and consulting contacts in the Boston District reported significant growth in demand. In the Dallas District, legal firms noted an uptick in demand for services, while accounting firms reported seasonal slowness. Reports from the healthcare sector were mixed; St. Louis and Minneapolis reported ongoing increases in demand for healthcare workers, while San Francisco indicated a slight weakening in demand for healthcare services and Richmond reported little change. Demand for staffing services remained on an upward trend, with increases reported by New York, Philadelphia, Richmond, and Chicago. In addition, an employment-agency contact in the New York District observed increased demand for employees in the legal and financial services sectors, while the Dallas District noted strong, steady demand for workers in the professional, technical, healthcare, and finance fields. Reports from the transportation services sector were mixed, with increased demand reported by trucking firms and airports in the Richmond District, and slower overall activity in the Kansas City District. Freight companies in the Cleveland District noted stable volumes over the past six weeks, and contacts in the Atlanta District reported moderating freight volumes after significant increases in earlier 2010 reporting periods.
Real Estate and Construction
Activity in residential real estate and new home construction remained slow across all Districts. A majority of the Districts, including Boston, New York, Cleveland, Atlanta, Chicago, Minneapolis, Dallas, and San Francisco characterized local housing markets as weak and sluggish with little change from the previous reporting period. Kansas City noted further weakening, while Richmond received reports of both flat activity and further declines. The St. Louis District saw additional declines in existing home sales, but also cited increased new home construction permits. All Districts attributed slumping activity to concerns about the pace of economic recovery, especially in employment, while the Philadelphia, Atlanta, and Chicago Districts mentioned difficulty obtaining credit as another constraint on demand. High levels of existing home inventories continued to damp the pace of new home construction in most Districts reporting on construction, although Boston, Richmond, Dallas, and San Francisco mentioned pick-ups in multifamily construction within their Districts. Home prices generally declined or held steady in the New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Kansas City, Minneapolis, and San Francisco Districts; the New York, Atlanta, Chicago, and San Francisco Districts mentioned distressed properties placing downward pressure on prices. Boston reported rising median home prices across most states in the District, but contacts attributed those increases to relatively higher sales of more expensive properties rather than a general upward movement in home prices. Outlooks for residential real estate in the coming year were mixed, with contacts in most Districts described as expecting continued weak conditions.
Commercial real estate markets displayed mixed results across the Districts again this reporting period, as leasing markets exhibited increasing signs of recovery and nonresidential construction remained weak. Leasing activity increased modestly in the Richmond, Chicago, Minneapolis, and Kansas City Districts and showed tentative improvement in the Dallas District. Vacancy rates, while quite high across the country, fell marginally in the Kansas City District and in New York City's office market. Leasing market fundamentals held roughly steady in the Boston, Philadelphia, and San Francisco Districts. Commercial construction activity was described as very limited across most Districts, with the bulk of new activity coming from projects related to healthcare, public infrastructure, and multifamily housing. Contacts in most Districts expected modest improvements in commercial leasing in 2011, although the outlook for construction was mixed and some Districts noted rising costs as a concern.
Banking and Financial Services
Reports on credit activity were mixed across Federal Reserve Districts. Overall, loan demand was reported as stable in San Francisco, mixed in New York, steady to slightly softer in Kansas City, weaker in St. Louis and Dallas, and slowly improving in Philadelphia and Richmond. Demand for consumer loans declined in the New York, Cleveland, St. Louis, Kansas City, and San Francisco Districts. By contrast, consumer lending increased in the Dallas District, and exceeded expectations in the Chicago District. Bankers in Philadelphia, Cleveland, and Richmond anticipate consumer lending to expand in 2011. Demand for commercial and industrial loans was flat in New York, Kansas City, and San Francisco. Lenders in the New York, Cleveland, Minneapolis, Kansas City, and San Francisco Districts noted a drop in residential mortgage refinancing owing to the recent rise in interest rates, whereas Richmond reported strong demand for home refinancing. The Cleveland and Richmond Districts observed a pick-up in auto lending. Demand for residential real estate loans eased in New York and Kansas City, remained weak in Cleveland and Dallas, but increased in the Richmond District. Real estate lending declined in the St. Louis District. Lending in the commercial mortgage category increased in New York, was unchanged in Kansas City, and was weak in Dallas, with the exception of multifamily. Most Districts reporting on credit quality described it as improving, while bankers in the Cleveland District said that quality remained stable or edged up slightly. Reports on credit standards were mixed in New York, while standards were said to have eased somewhat in Atlanta, remained restrictive in San Francisco, and held steady in Kansas City. Delinquency rates were flat or trending down in Cleveland, while delinquency rates in the New York District rose for commercial mortgages, decreased in the consumer lending category, and remained unchanged for all other loans. Total deposits rose in the Cleveland and St. Louis Districts and were stable in the Kansas City District.
Agriculture and Natural Resources
Unfavorable weather conditions damped agricultural production in some areas. The Dallas District reported that drought negatively affected range conditions by adding to costs of feeding livestock, while Atlanta cited the challenges prolonged drought presented to fruit growers. The Kansas City District indicated that dry weather could affect winter wheat development. Large snow falls hampered some ranchers in the Minneapolis District. However, agricultural demand generally improved among reporting Districts, and output prices rose, especially for corn, soybeans, wheat, cattle, and cotton.
The Kansas City, Dallas, and San Francisco Districts reported increased drilling activity. Cleveland cited fairly stable oil production, while the Atlanta District experienced the highest level of oil production in more than six years during the fourth quarter of 2010. Prices for crude oil and natural gas either stayed steady or slightly increased in the Cleveland, Minneapolis, Kansas City, and Dallas Districts. Cleveland reported steady coal production and prices, while the St. Louis District saw coal production increase.
Prices and Labor Markets
Most District reports mentioned increasing prevalence of cost pressures but only modest pass-through into final prices because of competitive pressures. Philadelphia and San Francisco noted somewhat reduced discounting in the retail sector during the holiday selling season, while New York, Minneapolis, and Dallas indicated retail prices were stable, Richmond said retail price increases had slowed, and Chicago and Kansas City cited discounting or depressed retail margins. For both retailers and manufacturers, increases in selling prices, if occurring, were said to be selective. Specific markets or products identified as experiencing high or rising prices included various food products, steel and other metals, building materials, textiles, chemicals, and petroleum-related products. Many Districts mentioned concerns among business contacts that petroleum-related prices, already above year-earlier levels, will continue rising in 2011. The Philadelphia and Kansas City reports indicated that manufacturing firms planned to attempt more price increases in 2011, while some manufacturers in the Boston District were uncertain their price increases would stick and the Chicago report projected only "limited and gradual" pass-through.
Labor markets in most Districts appear to be firming somewhat, but with virtually no upward pressure on wages. All District reports indicated that employment levels are rising in at least some sectors, generally by modest amounts; however, some employers in the New York, St. Louis, and Minneapolis Districts also mentioned job cuts. Staffing firms in the New York, Philadelphia, Cleveland, Richmond, Chicago, and Dallas Districts gave positive reports; Cleveland, Richmond, and Atlanta said some firms were raising work hours instead of or in addition to hiring. The Boston, New York, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, and San Francisco Districts indicated that business contacts planned to continue or increase their pace of hiring in 2011. Some employers in the Boston, Atlanta, and San Francisco Districts expressed concern about added costs for healthcare; the Boston, Cleveland, and Chicago Districts noted selected skill shortages in some sectors. Overall wage pressures remained subdued; the Philadelphia District reported "mostly steady wages," Cleveland said "wage pressures are contained," Chicago indicated "wage pressures remained moderate," Minneapolis and Kansas City stated wage increases or wage pressure "remained subdued," and the Dallas and San Francisco reports described wage pressures as "minimal" or "largely absent."