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posted on 13 April 2016

April 2016 Beige Book: Reading Between The Lines - The Economy Improved A Little.

Written by Steven Hansen

The consolidated economic report from the 12 Federal Reserve Districts (Beige Book) shows the economy "continued to expand in late February and March, though the pace of growth varied across Districts". The previous report said "that economic activity expanded in most Districts since the previous Beige Book report". My interpretation is that the Fed is saying the rate of economic expansion has improved since the last report.

Please see the end of this post for words the Federal Reserve uses when the economy is entering a recession. The Beige Book completely missed the 2001 recession, and was late in seeing the Great Recession.

This report is based on information collected on or before 07 April 2016. The summary for this 13 April 2016 release reads as follows:

Reports from the twelve Federal Reserve Districts suggest that national economic activity continued to expand in late February and March, though the pace of growth varied across Districts. Most Districts said that economic growth was in the modest to moderate range and that contacts expected growth would remain in that range going forward. Consumer spending increased modestly in most Districts and reports on tourism were mostly positive. Labor market conditions continued to strengthen and business spending generally expanded across most Districts. Demand for nonfinancial services grew moderately overall. Manufacturing activity increased in most Districts. Construction and real estate activity also expanded. Credit conditions improved, on net, in most Districts. Low prices weighed on energy and mining output as well as prospects for agricultural producers. Overall, prices increased modestly across the majority of Districts, and input cost pressures continued to ease.

Consumer Spending and Tourism
Consumer spending in most Districts increased modestly in late February and March, and retailers generally remained optimistic about the outlook for growth over the remainder of the year. Several Districts cited the continuation of generous discounts and promotions, favorable credit conditions, and low gasoline prices as factors supporting a steady pace of growth in consumer spending. However, contacts in the Chicago District again expressed disappointment that low gas prices and improving labor markets were not providing more of a boost to consumer spending. The Kansas City, Philadelphia, Richmond, and San Francisco Districts reported increases in spending on nondurable goods and services, while some Districts noted higher sales in select categories of durable goods, such as furniture. Auto sales remained strong in several Districts, and the Cleveland, Chicago, and New York Districts reported that leasing activity increased.

Reports on tourism were mostly positive across the Districts, and contacts were largely optimistic about near term prospects. Business and leisure travel remained strong in Atlanta, while business travel was up in Boston and leisure travel was up in Chicago and Richmond. Hoteliers in the Richmond District reported both a strong close to the winter season and a strong start to the spring season. In addition, ski resorts in the Kansas City District reported robust activity. In contrast, contacts in the Atlanta, Boston, Minneapolis, and New York Districts noted fewer international visitors.

Hiring and Business Spending
Labor market conditions continued to strengthen in late February and March. Most Districts again reported job gains, with only Cleveland indicating a decline in overall employment. Service industry employment rose in Boston, New York, Philadelphia, Richmond, St. Louis, and Dallas. Retail payrolls expanded in Richmond, but declined in Dallas. Growth in employment at financial firms was subdued in New York and employment declined in Cleveland. Manufacturing payrolls rose in Boston, Richmond, and Atlanta, but fell in Philadelphia and Cleveland. Energy companies continued to reduce their workforces, with reports of layoffs coming from Cleveland, Atlanta, St. Louis, Minneapolis, and Dallas. Several Districts indicated that contacts had difficulty filling certain positions in a number of low- and high-skilled occupations. Notably, contacts reported difficulty finding quality retail workers (Boston), low-skilled manufacturing workers (Boston and Chicago), construction workers (Cleveland, Richmond, Atlanta, and San Francisco) and skilled professionals in occupations such as information technology, accounting, engineering, and customer service (Richmond and Atlanta).

Business spending generally expanded across most Districts. Districts reporting on inventories indicated that they generally were in line with sales. Retailers in Boston, New York, and Chicago said that inventories for most items were at desirable levels, though contacts in New York, Chicago, and Dallas noted that the mild weather resulted in excess stocks of winter-related items. Manufacturers in Boston and Chicago said inventories were comfortable, while manufacturers in Atlanta said they were somewhat elevated. Capital spending increased on balance in most Districts, with scattered reports of spending for capacity expansion. Retailers in Boston and San Francisco were spending for replacement, and some contacts in Boston were aggressively expanding capacity. Manufacturers in several Districts reported increases in capital outlays (Boston, Cleveland, Chicago, St. Louis, and Minneapolis). Capital spending remained modest for manufacturers in San Francisco and for refiners in Dallas, and declined further for manufacturers in Kansas City. Outlays for oil and gas extraction were mixed. Contacts in Cleveland reported ongoing expansion (though at a slower pace), while there was little growth in Atlanta and Dallas, and declines in Kansas City. District reports mentioned a variety of other sectors where capital investment had expanded: tourism (Philadelphia and Atlanta), construction and finance (Cleveland), professional, high-tech, and wholesale trade (Kansas City), and pharmaceuticals (San Francisco). In contrast, capital spending by transportation contacts declined in Cleveland and Kansas City.

Nonfinancial Services
Growth in demand for nonfinancial services picked up to a moderate rate and contacts expected this pace of growth to continue. Several Districts reported increases in demand for professional and business services. Contacts in the Boston, Kansas City, and Minneapolis Districts reported moderate increases in demand for information technology, architecture, or legal services and the Boston District reported some growth in demand for consulting. Activity in the health care sector grew at a solid pace in a number of Districts. Contacts in the San Francisco District reported robust demand for health care services (resulting in capacity shortages at some facilities) and contacts in the Richmond District reported a late surge in demand for healthcare services because of a flu and norovirus outbreak. Results were also mostly positive for staffing firms. Transportation activity rose moderately, with several Districts reporting increases in freight volumes. Port contacts in the Richmond District cited record import volumes in February that moderated in March, as well as a modest rise in exports in part because of stronger shipments of agricultural and forest products. San Francisco noted an increase in cargo volumes. Kansas City indicated that transportation and wholesale trade activity had increased sharply, and the Atlanta and Richmond Districts cited notable increases in truck tonnage. In contrast, the Atlanta and Dallas Districts each reported additional decreases in rail cargo, and contacts in the Cleveland and Dallas Districts said that ongoing softness in the energy and steel sectors continued to weigh on freight volumes.

Manufacturing activity increased in most Districts in late February and March. Contacts described the overall pace of growth as moderate in Richmond and Chicago, while growth was more modest in Philadelphia, St. Louis, and San Francisco. Only Cleveland and Kansas City reported declines in activity. By industry, district reports indicated that the strongest performers were autos (Cleveland, Richmond, Chicago, and Dallas), aerospace (Philadelphia, Cleveland, and Chicago), and computers and electronics (Boston and Dallas). There also were solid gains in construction materials (Philadelphia, Cleveland, and Chicago), food processing (Richmond and Dallas), defense (Chicago), and pharmaceuticals (San Francisco). Results were mixed for producers of paper products, metals, and chemicals. Demand was weak according to plastics manufacturers in Richmond and Kansas City. Demand for steel changed little according to contacts in Cleveland and Chicago, but declined in Kansas City. Several Districts reported weak overall demand for heavy machinery, with Chicago and Minneapolis noting softer demand for agricultural and mining machinery than for construction machinery. Suppliers for the oil and gas industry consistently reported weak demand (Philadelphia, Cleveland, Richmond, Chicago, St. Louis, and Dallas), and some contacts in Chicago and Dallas indicated they were trying to adjust their product offerings toward other industries. Expectations for future manufacturing growth were mixed. In general, contacts' outlooks were optimistic in Boston, Philadelphia, Cleveland, and Richmond, but pessimistic in Atlanta, Minneapolis, and Dallas.

Construction and Real Estate
Construction and real estate activity generally expanded in late February and March, and contacts across Districts maintained a positive outlook for the rest of the year. Residential real estate activity strengthened, on balance, with robust growth in San Francisco, Cleveland, and Boston, but more mixed reports from Dallas, Kansas City, and Atlanta. Several Districts credited a mild winter for stronger home sales, and the pace of home price increases picked up in a number of Districts. Multi-family construction remained strong in most Districts. Chicago, Cleveland, and St. Louis also noted some improvement in demand for single-family home construction, and a contact in San Francisco reported backlogs of more than six months for new single-family units. Commercial real estate activity generally increased, with leasing activity and rents rising in many Districts: particularly strong leasing was noted in retailing in Chicago and in the industrial sector in Dallas. Vacancy rates either moved lower or were unchanged in most Districts. Most Districts reporting on nonresidential construction said that demand increased. Contacts in Boston said the education, health care, hospitality, retail, and office sectors all contributed to its recent construction boom. Nonresidential contractors in Cleveland cited broad-based demand, with particular strength in education and healthcare projects, where several builders expressed concern about their capacity to take on additional projects. In contrast, Chicago noted continued weak demand for industrial construction, and Philadelphia reported fewer starts of new nonresidential projects.

Banking and Finance
Credit conditions improved, on net, in most Districts, with the exception of Dallas where contacts indicated that the lending outlook remained cautious. Overall, the lending environment remained competitive. Contacts in Richmond said that competition continued to intensify with reports of compression on net interest margins along with an ongoing trend toward bank consolidation. San Francisco said vigorous competition for borrowers was holding down profit margins for some institutions. Boston described the commercial real estate environment as particularly competitive. Business lending grew across several Districts. Commercial and industrial loan demand continued to increase in New York, Philadelphia, St. Louis, and Cleveland. A majority of Districts also noted continued growth in lending for commercial real estate, though Cleveland indicated that the pace of growth had slowed. For consumer lending, New York, Cleveland, and San Francisco all reported increased demand for residential mortgages, while Dallas indicated that growth in mortgage loan volumes had slowed. San Francisco also reported strong growth for revolving credit, and Chicago indicated that credit card utilization rates increased. The Chicago and Philadelphia Districts also cited a pickup in auto loan demand. Reports on changes in credit quality were mixed. Philadelphia and Atlanta noted improvements in credit quality, and Cleveland, New York and Dallas reported that delinquency rates remain low. In contrast, contacts in Dallas said that loan quality continued to mildly deteriorate because of ongoing stress in the energy sector, while contacts in Atlanta said that financial institutions in areas dependent on energy faced continued risk, with some adding to loan loss reserves.

Agriculture and Natural Resources
Agricultural conditions were mixed across the Districts. Contacts in Chicago, St. Louis, Minneapolis, Kansas City, and Dallas reported poor prospects for agricultural profitability because product prices remained low and input costs remained relatively high. Contacts across Districts noted that compared with a year ago, prices were lower for cotton, corn, soybeans, wheat, hay, rice, cattle, chickens, eggs, hogs, and milk. However, contacts also reported some relief in input costs since the previous period, with lower costs for diesel, fertilizer, and farmland rents. That said, costs for chemicals went up and seed costs remained elevated. There were typical seasonal increases in fieldwork in Richmond and Chicago. Earlier flooding made fieldwork more difficult in parts of the Richmond and Atlanta Districts, but harm from flooding in St. Louis was limited. San Francisco reported improved agricultural activity as ample rains enhanced growing conditions and reduced the impacts of the ongoing drought in California. Contacts in Dallas said beef production was higher than a year ago. The elevated dollar held back agricultural exports according to contacts in San Francisco.

Natural resource reports ranged from mixed to negative across Districts. Oil and gas production continued to fall in Atlanta, Kansas City, and Dallas, though contacts in some Districts reported signs that the declines were close to an end. Contacts in Cleveland and Atlanta noted that natural gas prices were under pressure because the warm winter left inventories elevated. Cleveland and Dallas reported that persistently low energy prices were hurting the financial positions of energy firms. Coal output declined in Richmond and St. Louis. In contrast, some idled iron mines in Minneapolis reported plans to reopen soon. San Francisco contacts reported solid domestic timber demand but those in Minneapolis indicated that the warm winter slowed logging activity.

Prices and Wages
Retail prices increased modestly across the majority of the Districts while input cost pressures continued to decline in late February and March, driven importantly by low energy prices. Transportation costs fell, as freight companies passed lower fuel costs through to shipping rates. The Cleveland District reported that diesel fuel surcharges have been largely eliminated. Residential construction contacts in the Philadelphia and Cleveland Districts reported that low energy prices have significantly reduced costs for petroleum-based materials such as shingles. Contacts in San Francisco said that lower fuel prices have improved airline profit margins. Several District reports indicated that contacts generally expect energy and raw material prices to remain at low levels, though a manufacturer in the Minneapolis District expected steel prices to increase later this year.

Wages increased in all but one District (Atlanta), and several Districts reported signs of a pickup in wage growth over the last survey period. New York, St. Louis, Minneapolis, and San Francisco reported moderate wage growth, while wage pressures were characterized as mild in Chicago, mostly contained in Kansas City, and stable in Atlanta. The strongest wage pressures were for occupations where labor shortages are pressing and turnover is elevated. Contacts in the Boston, Cleveland, and St. Louis Districts cited sizeable wage increases for workers in fields such as information technology services and skilled construction and manufacturing trades. In addition, some firms in Philadelphia indicated that they had raised their starting wages in order to attract higher quality workers, and Chicago noted an increase in the number of contacts who raised wages for low-skilled entry-level workers.

Click the "source" hyperlink below to read the full report.

The Beige Book is a summary of current economic conditions:

Commonly known as the Beige Book, this report is published eight times per year. Each Federal Reserve Bank gathers anecdotal information on current economic conditions in its District through reports from Bank and Branch directors and interviews with key business contacts, economists, market experts, and other sources. The Beige Book summarizes this information by District and sector. An overall summary of the twelve district reports is prepared by a designated Federal Reserve Bank on a rotating basis.

Fed's Words When Economy is entering a Recession

For the recession starting December 2007, here is the lead up summary words from the Beige Books:

  • 28Nov2007 - "expanding"
  • 16Jan2008 - "increasing moderately"
  • 05Mar2008 - "growth slowed"
  • 16Apr2008 - "weakened"

For the March 2001 recession which ended in November 2001, here are the Beige Book summary words:

  • 17Jan2001 - "economic growth slowed"
  • 07Mar2001 - "sluggish to modest economic growth"
  • 02May2001 - "slow pace of economic activity"
  • 13Jun2001 - "little changed or decelerating"
  • 08Aug2001 - "slow growth or lateral movement"
  • 19Sep2001 - "sluggish"
  • 24Oct2001 - "weak economic activity"
  • 28Nov2001 - "remained soft"
  • 16Jan2002 - "remained weak"

Source: Federal Reserve

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