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posted on 01 June 2016

June 2016 Beige Book: Reading Between The Lines - The Economy Might Have Improved A Little.

Written by Steven Hansen

The consolidated economic report from the 12 Federal Reserve Districts (Beige Book) shows "modest economic growth since the last Beige Book report". The previous report said "continued to expand in late February and March, though the pace of growth varied across Districts". My interpretation is that the Fed is saying the rate of economic expansion has marginally improved since the last report - but it still is not something to write home about.

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 23 May 2016. The summary for this 01 June 2016 release reads as follows:

Information received from the 12 Federal Reserve Districts mostly described modest economic growth since the last Beige Book report. Economic activity in April through mid-May increased at a moderate pace in the San Francisco District, while modest growth was reported by Philadelphia, Cleveland, Atlanta, Chicago, St. Louis, and Minneapolis. Chicago noted that the pace of growth slowed, as did Kansas City. Dallas reported that economic activity grew marginally, while New York characterized activity as generally flat since the last report. Several Districts noted that contacts had generally optimistic outlooks, with firms expecting growth either to continue at its current pace or to increase.

Consumer spending was up modestly on balance in many Districts, though contacts in the Boston, Cleveland, Minneapolis, and Dallas Districts reported mixed or flat activity, and New York reported weakened sales. Many Districts reported modest growth in nonfinancial services. Manufacturing activity was mixed across Districts. Construction and real estate activity generally expanded since the last report, and the overall outlook among contacts in these industries remained positive. Overall loan demand was up moderately in all but one of the Districts that reported it, and many Districts reported steady to good credit availability. Crop conditions were promising in many Districts, but low commodity prices continued to put pressure on agricultural incomes. The energy sector remained weak. Employment grew modestly since the last report, but tight labor markets were widely noted; wages grew modestly, and price pressure grew slightly in most Districts.

Consumer Spending and Tourism
Consumer spending and tourism activity was up modestly in many Districts, though contacts in the Boston, Cleveland, Minneapolis, and Dallas Districts reported mixed or flat activity. With respect to retail sales, only the New York District reported weakened sales in April and early May. The Boston, New York, and Philadelphia Districts indicated that cool spring weather dampened sales relative to the same time last year. Retailers across many Districts reported increased competition from online sales, citing a shift in consumer preferences away from in-store shopping. Luxury and premium product sales were notably subdued in the Richmond, Kansas City, and San Francisco Districts since the last report. The tourism and hospitality sectors saw mixed activity in New York and Minneapolis, while Philadelphia, Kansas City, and San Francisco experienced improved activity. Contacts in the Atlanta, Richmond, and St. Louis Districts indicated that hotel and hospitality bookings were higher than a year earlier.

Among Districts that reported new and used auto sales activity, sales were steady in April and May, with the exception of Philadelphia, Atlanta, and Kansas City, where a slight decline was reported. Dealers in the Chicago District reported a rise in new and used light vehicle sales. But overall, truck and large vehicle sales outpaced auto sales across many Districts. In Cleveland, motor vehicle sales grew 1 percent over a year ago, with light trucks and SUVs dominating purchases. Dealers in the Richmond District reported that light truck sales were especially strong. Luxury vehicle sales were mixed; Cleveland reported weakened demand, whereas Chicago reported a shift upward in demand. Philadelphia, St. Louis, and Dallas reported an optimistic outlook for annual auto sales in 2016, due mostly to low gas prices.

Nonfinancial Services
Since the previous report, many Districts, including New York, Richmond, St. Louis, and Minneapolis, reported modest growth across many nonfinancial services, whereas San Francisco indicated that growth was moderate. Philadelphia indicated no significant change in the modest pace of growth since the last report, characterizing the services economy as "disappointingly stable," according to a contact. New York contacts noted a steady rise in activity in April and early May. The Minneapolis, Kansas, and Dallas Districts reported an expansion in the technology and professional services sectors. Minneapolis and Dallas also reported expansion in the health care sector. Boston District contacts in the staffing services sector characterized activity as strong. In contrast, contacts in the Cleveland District reported that transportation services declined, with railroad activity down by as much as 35 percent from the same time last year. The Kansas City District also reported declines in transportation-related activity and capital spending. The Richmond District characterized transportation services, such as trucking and airport activity (both passenger and cargo), as "uneven" and "flat to slightly stronger." Contacts in both the Richmond and St. Louis Districts reported optimism for the coming months for some nonfinancial services sectors.

Manufacturing activity was mixed across Districts in April through mid-May. Richmond reported that activity increased on balance, and Atlanta noted that it remained strong. Reports indicated a modest increase in manufacturing output in Cleveland, Chicago, and Minneapolis, and the manufacturing sector in Dallas grew slightly. Activity was flat in San Francisco and fell in New York, Philadelphia, St. Louis, and Kansas City. The outlook for manufacturing improved since the last report in Philadelphia, Cleveland, Atlanta, and Kansas City; outlooks in Boston and St. Louis were also positive.

District reports portrayed mixed growth across industries within manufacturing. Cleveland, Richmond, Chicago, and Minneapolis noted increased demand for construction materials or equipment, but Dallas reported that among construction-related manufacturers, demand was mixed over the reporting period and slightly down from a year earlier. Metal manufacturers in the Richmond District indicated that new orders had risen, Chicago reported growth in steel demand, and producers in Cleveland were encouraged by an increase in domestic steel prices but reported little change in demand. San Francisco noted that steel producers benefited from reduced overseas competition, but contacts reported somewhat weak demand for other manufactured metals. Philadelphia and Dallas also cited weakness in primary metals. Boston, Philadelphia, Cleveland, Chicago, and Dallas reported weakness tied to reduced demand from the energy sector.

Construction and Real Estate
Construction and real estate activity generally expanded since the last report, and the overall outlook among contacts remained positive. Commercial construction activity increased in Philadelphia, Richmond, and Minneapolis. Strong project pipelines were reported in Cleveland, and some contractors in Atlanta noted one- to two-year backlogs. An uptick in industrial construction was cited in St. Louis, while activity was varied across markets in Boston. Residential construction increased in most Districts but was mixed in Richmond and Dallas, where some markets saw a decline in single-family construction. In Chicago, a slight increase in residential construction was concentrated in single-family and suburban markets. St. Louis contacts reported an uptick in residential construction, and many contacts expected a similar increase next quarter. Multifamily construction continued to grow in many Districts, including New York, St. Louis, and Dallas, but a slowing was noted in Atlanta. In San Francisco, construction of multifamily units continued to outpace single-family units. In Boston, apartment construction remained very active, but related lending slowed among smaller banks.

Commercial real estate activity increased in most Districts that reported. Absorption of space increased in Atlanta and Kansas City, while Dallas reported healthy demand for office space. A decline in vacancy rates and a rise in rents were noted in Chicago and Minneapolis. Contacts in San Francisco said demand for commercial real estate expanded further, particularly in urban areas with robust technology and health care industries. Residential real estate activity increased moderately across most Districts. Home sales were strong in Boston, Cleveland, Kansas City, and San Francisco. Residential sales were positive but somewhat lower in other Districts. Sales for entry-level and other lower-priced homes were particularly strong, according to Chicago and Dallas contacts. Lower inventories of homes were reported by contacts in New York, Cleveland, Atlanta, St. Louis, and Minneapolis and have led to bidding wars in the Richmond District and constrained home sales in Philadelphia. Home prices were reported higher overall; Cleveland contacts said that home prices rose 3 percent year over year. In Philadelphia, home prices were mixed across markets and price categories.

Banking and Finance
Overall loan demand was up moderately in all Districts that reported, with the exception of Dallas. Commercial and industrial loans were up in Philadelphia, St. Louis, and Kansas City. Contacts in the Atlanta District indicated that there was strong loan demand, except for the energy industry. In the Chicago District, business loan demand changed little from the previous report. Residential mortgage lending was up in the New York, Richmond, St. Louis, and San Francisco Districts. The Dallas District reported that overall lending was mixed, whereas the Philadelphia District reported that mortgages and home equity loans were down since the prior reporting period. Bankers in the Philadelphia, Cleveland, and Dallas Districts reported seeing increased activity in auto lending. The St. Louis and San Francisco Districts reported improved credit quality. Contacts in the New York and Cleveland Districts reported lower delinquency rates on the consumer side. Banking contacts from the Atlanta District indicated an optimistic outlook for the remainder of the year.

Agriculture and Natural Resources
Crop conditions were promising in many Districts, but low commodity prices continued to put pressure on agricultural incomes. Favorable weather got the growing season off to a solid start in St. Louis and Minneapolis and improved production prospects in Dallas. However, wet, cool weather in the Chicago District put planting behind the pace of last spring, and rain delayed planting and harvesting of some crops in parts of the Richmond District. In contrast, parts of the Atlanta District were experiencing abnormally dry to moderate drought conditions. Though prices for some commodities such as soybeans and hogs have increased recently from their low points, most crop and animal product prices remained below their year-earlier levels. Chicago, St. Louis, and Kansas City noted that prices were below profitable levels for some producers.

The energy sector remained weak since the previous Beige Book. Oil drilling continued to decrease in Minneapolis, Kansas City, and Dallas. While natural gas drilling was little changed over this reporting period in Cleveland, demand was rising and output in that District remained at historic highs; natural gas extraction increased in Richmond since the previous report. Coal production was unchanged in Richmond, but fell in St. Louis and Kansas City. Contacts in Cleveland and Dallas expressed optimism that prices for natural gas and oil, respectively, may have bottomed out.

Employment, Wages, and Prices
Employment grew modestly since the last report, but tight labor markets were widely noted in most Districts. Demand for labor rose moderately in Richmond, and contacts noted continued difficulty finding workers in numerous occupations. In Boston, staffing industry contacts observed robust labor demand, particularly for specialized workers in high-skill fields. Contacts in Atlanta and Richmond said high-skill workers in high-demand fields continued to be hard to find, and low-skill jobs were also becoming harder to fill. In St. Louis, contacts that reported having trouble filling job vacancies primarily cited few applicants or candidates lacking the necessary skills. In New York, employment grew modestly, and manufacturing and services firms planned to add jobs in the months ahead. Soft labor markets were reported in energy sectors in Cleveland, Atlanta, Minneapolis, Kansas City, and Dallas.

Wages grew modestly since the last report, with increases concentrated in areas of labor tightness. Higher wages were reported for entry-level and lower-skill positions in Richmond and Atlanta. In San Francisco, minimum wage increases pushed up wages for low-skilled workers, with diminishing effects up the pay scale. Atlanta, St. Louis, and San Francisco reported wage pressure for certain high-skilled employees. In New York, a sizable share of service-sector contacts reported higher wages. In St. Louis, more than two-thirds of hiring managers reported increasing wages and salaries by more than they had in the past few years to retain employees and attract new ones. However, in Kansas City, contacts in several industries reported only slight increases in wages and expected similar increases going forward. Wage pressure was minimal in the Dallas District, due in part to compensation at energy services firms that was steady to lower for staff that have been retained.

Price pressure grew slightly in most Districts. Multiple Districts noted small price increases in building materials, including concrete and steel. Contacts in Cleveland reported higher construction prices to cover rising worker costs resulting from tight labor markets. The majority of contacts in Philadelphia reported no significant change in input costs or customer prices. In New York, contacts in manufacturing and services cited little change in selling prices but moderate upward pressure in costs. In Kansas City, retail prices rose moderately and were expected to increase further. In San Francisco, growing competition from expanding online retailers held down price growth for most retail grocery products; apparel contacts there also reported significant price discounting. The outlook for prices was moderate; survey respondents in Philadelphia and Atlanta expected inflation of about 2 percent over the coming year.

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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