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posted on 08 September 2016

September 2016 Beige Book: Reading Between The Lines - The Rate Of Economic Expansion Declines

Written by Steven Hansen

The consolidated economic report from the 12 Federal Reserve Districts (Beige Book) stated that the economy expanded at "a "modest" or "moderate" pace of overall growth". The previous report stated the economy "continued to expand at a modest pace across most regions from mid-May through the end of June"". Is the Fed is saying the rate of economic expansion improved from the previous period?

Analyst Opinion of this month's Beige Book

Yah gotta admire the Fed for putting out a document with a lot a detail - but makes no effort to quantify the results. Last month saw one district with no change in activity - and the rest accelerating. This month two districts see little change in activity, and two are seeing decelerating growth. My take is that this current period has worse growth.

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 29 August 2016. The summary for this release:

Reports from the twelve Federal Reserve Districts suggest that national economic activity continued to expand at a modest pace on balance during the reporting period of July through late August. Most Districts reported a "modest" or "moderate" pace of overall growth. However, Kansas City and New York reported no change in activity, and Philadelphia and Richmond noted that, while still expanding, activity slowed from the previous period. Contacts across the twelve Districts generally expect moderate economic growth in coming months. Overall consumer spending was little changed in most Districts, and auto sales declined somewhat but remained at high levels. Tourism activity was flat from the previous report but above year-earlier levels. Sales of nonfinancial services gained further momentum. Manufacturing activity rose slightly in most Districts. Activity in residential real estate markets grew at a moderate pace, but the pace of sales was constrained in a few Districts by shortages of available homes. Commercial real estate activity expanded further. Demand for business and consumer credit varied across Districts but appeared to expand at a moderate pace overall, with stable credit quality. Agricultural conditions were mixed, with price declines largely offsetting growing volumes. Overall demand for energy-related products and services weakened.

Labor market conditions remained tight in most Districts, with moderate payroll growth noted in general. Upward wage pressures increased further and were moderate on balance, with more rapid gains reported for workers with selected specialized skill sets. Price increases remained slight overall.

Consumer Spending and Tourism
Retail sales volumes appeared little changed since the prior reporting period, although the Boston, Cleveland, and San Francisco Districts suggested modest gains on balance. Respondents in Boston reported a pickup in retail sales due in part to increased customer traffic, while contacts in the Philadelphia District reported that decreased foot traffic did not reduce sales volumes. Retail sales declined in the Dallas and Kansas City Districts, and Chicago reported that consumer spending "slowed notably." Sales "softened" according to Richmond and Atlanta, but contacts in the latter District expect the usual seasonal boost in sales during the Labor Day weekend. Inventory levels were in line with retailer expectations in the Boston, Dallas, and San Francisco Districts, but higher than desired in the Chicago District.

The pace of auto sales declined somewhat but remained at high levels in general. The Atlanta, Chicago, New York, Cleveland, and San Francisco Districts all noted a slowdown or reduction in sales, with New York pointing to a reduction in dealer incentives as a factor. Only Dallas reported strong growth in auto sales. Vehicle sales in the Philadelphia District were unchanged from last period, and contacts reported narrower profit margins. Inventory levels varied across Districts, with dealers in St. Louis reporting an elevated level, while dealers in Richmond kept inventories of new vehicles tight.

Tourism activity was mostly flat relative to the prior reporting period, although the reports suggested that it was above year-earlier levels. Contacts in Chicago reported that the tourism industry continued to perform well, and demand for air travel in the San Francisco District remained strong. Demand for hotel rooms ticked down in Dallas, St. Louis, and New York. The elevated dollar did not slow international arrivals in Boston but did slow tourism activity in Minneapolis and San Francisco. Contacts in the Atlanta District also observed fewer international arrivals relative to the previous reporting period and were monitoring the potential impact of the Zika virus on international travel.

Nonfinancial Services
The pace of demand growth for nonfinancial services picked up slightly from the prior reporting period, and contacts generally expect moderate growth to continue in the sector. Only the New York District reported a broad decline in demand for services. Contacts in Richmond reported that demand for health-care services remained strong, particularly for outpatient care. Demand for restaurant services increased in Dallas and Kansas City. Activity in the information technology industry expanded in Minneapolis and St. Louis, and contacts in the Kansas City District expect moderate growth in that sector to continue over the coming months. Freight volumes picked up in Philadelphia, Richmond, and San Francisco but declined in Cleveland, Dallas, and St. Louis. Staffing services businesses in most Districts reported a moderate increase in activity, with Boston contacts reporting revenue increases of 3 to 30 percent over last year. By contrast Philadelphia reported slower growth in staffing demand since the prior reporting period. Transportation firms in the Atlanta District reported mixed results, with contacts in the rail industry reporting no change in volumes, but port contacts noting a year-over-year increase in shipping volumes.

Manufacturing
Activity in the manufacturing sector was flat to slightly up in general, with Chicago in particular reporting a moderate pace of growth. Activity in technology manufacturing was up modestly in Dallas, but contacts in San Francisco noted that production of semiconductors was flat and that capacity remained somewhat underutilized. Several transportation equipment and industrial machinery manufacturers reported plans to expand facilities in the St. Louis District. Pharmaceutical manufacturers in the San Francisco District reported that sales continued at a strong pace despite increased regulatory burdens and negative media coverage around industry pricing decisions. Weakness in the oil and gas extraction sector combined with competitive foreign supply to depress demand and production of steel products in several Districts. In contrast, contacts in the Chicago District noted that demand for steel was steady and declining imports have helped domestic producers gain market share. Manufacturers in Richmond are optimistic about growth prospects, and contacts in Philadelphia expect growth to pick up over the next six months.

Real Estate and Construction
Activity in residential real estate markets expanded further in most Districts. Growth in residential construction activity was moderate across many Districts but robust in San Francisco, where contacts reported that contractors are bumping up against capacity constraints for new projects. In Minneapolis, strong growth in the construction of single-family units was offset somewhat by a slowdown in the construction of multifamily units. Contacts in Dallas reported that demand for low- to mid-priced homes remained strong, while demand for higher priced homes softened in Dallas and New York, and was flat in Chicago. By contrast, sales in Cleveland were equally skewed toward the entry-level and high-end segments of the market. Boston, Richmond, Philadelphia, and St. Louis noted that home sales slowed in some areas of their Districts due to shortages of available units. Recent house price appreciation was reported to be modest in general. Contacts in several Districts were optimistic about future growth prospects, except in Kansas City, where respondents expect further declines in sales and inventories in the months ahead.

Commercial real estate activity expanded further in most Districts. Construction and sales rose only slightly in Boston, Kansas City, and St. Louis but grew at a faster clip in Cleveland and Dallas. In the Atlanta District, construction activity expanded moderately, but contractors reported tight supply conditions, with construction backlogs of one to two years. Contacts in Richmond and New York noted strong growth in industrial construction, and vacancy rates for industrial space fell to 10-year lows in the latter District. Commercial leasing activity strengthened in New York, Richmond, and San Francisco, but grew at a softer pace in Philadelphia, where contacts described the market as in a "lull, not a retreat." Vacancy rates on commercial properties increased along with completions in the Kansas City District. Commercial rents edged up in various Districts, including in Dallas and San Francisco. Contacts in several Districts cited only modest expectations for sales and construction activity moving forward, due in part to economic uncertainty surrounding the November elections.

Banking and Finance
Demand for business and consumer credit varied widely but grew at moderate pace overall. Bankers in San Francisco reported strong demand for loans, while demand for loans in Dallas remained soft. Commercial and industrial lending activity slowed in some Districts, but Philadelphia reported that most loan categories grew at a faster pace than in the previous report. Small to medium-sized banks in the New York District noted strong demand across all loan categories. According to the Dallas and Kansas City Districts, some oil and gas companies reported challenges obtaining credit.

Credit quality remained favorable for most Districts. However, contacts in the Richmond District noted that credit quality deteriorated slightly. Bankers in the St. Louis District reported that creditworthiness was largely unchanged for most loan applicants but declined somewhat for commercial and industrial lending. Contacts in the Atlanta District noted a drop in delinquencies and charge-offs. In the San Francisco District, financial institutions in states with a legal marijuana industry reported increased operational costs related to regulatory constraints.

Agriculture and Natural Resources
Agricultural producers faced mixed conditions during the reporting period, as contacts in many Districts reported that lower prices pushed down revenue despite growth in volumes. In the Chicago District, already low expectations for farm incomes deteriorated further, as the potential for a record national harvest pushed down crop prices further. Above-average water availability translated into record yields for almonds and walnuts in the San Francisco District. Contacts in several Districts reported strong yields for corn and soybeans. Severe flooding in parts of the Atlanta District lowered harvests somewhat, but cotton production is expected to expand relative to last year. Excess inventories of selected crops contributed to weak pricing trends. Growth in the price of agricultural products was flat to declining in many Districts, and contacts in Chicago reported that ample supplies of wheat, dairy, and some meat products resulted in price declines. In contrast, dairy producers in the Dallas District benefited from a price rally over the past six weeks. In Kansas City, bankers reported that, while agricultural loan delinquencies remained low, requests for loan extensions increased and loan repayment rates weakened.

Overall, demand for energy-related products and services continued to decline, albeit with some signs of stabilization. Oil extraction activity fell further, and contacts in the Atlanta District noted that inventories remained near historical highs despite a recent drawdown. In contrast, contacts in the Kansas City District reported an uptick in the number of active oil and gas drilling rigs in response to an anticipated increase in oil prices. Demand for natural gas varied across Districts. In the Cleveland District, demand increased as the utility and power generation sectors continue to migrate from coal-fired plants to using natural gas. Contacts in Atlanta reported that the supply of natural gas remained elevated and demand declined further. Coal production declined further in St. Louis. More generally, coal prices fell further, while the prices of oil and natural gas were flat to slightly up. Contacts in the Minneapolis District reported a slight uptick in mining activity, and noted that an idled iron ore mine resumed production and broke ground on an expansion. Contacts in Dallas remained optimistic for modestly improving conditions in the energy sector through the end of the year and into 2017.

Employment, Wages, and Prices
Employment expanded at moderate pace since the previous report. Conditions in the labor market remained tight in the Boston, Chicago, New York, San Francisco, St. Louis, and Minneapolis Districts. In Boston, contacts reported an unusually high number of job openings, and in the Richmond District turnover rates increased for entry-level positions. Employment gains were only modest in Cleveland, and contacts in Philadelphia reported an increase in part-time employees and longer workweeks along with a reduction in full-time hires. In many Districts, businesses reported trouble filling job vacancies for high-skilled positions, especially those aimed at technology specialists, engineers, and selected construction workers. Overall, employment declined in the carbon extraction industry; however, contacts in the Atlanta District reported an uptick in hiring at petrochemical refining companies.

Wage growth ranged from flat to strong across the Districts, but most reported that wage pressures remained fairly modest. Contacts in Minneapolis reported moderate wage pressures, while contacts in St. Louis and San Francisco reported strong wage growth. On balance, wage pressures increased for highly skilled workers in many Districts, and contacts in San Francisco reported continued strong wage growth for technology specialists. In Cleveland, wage pressures were most evident in the construction and retail sectors. In Philadelphia, wage pressures were modest, but contacts reported upward pressure to employee benefit expenses from rising health-care costs. In general, expectations of wage growth for the coming months were modest.

Overall price inflation was modest. The Boston, Chicago, Cleveland, and Dallas reports suggested that prices were largely unchanged from the previous period. St. Louis reported modest price pressures. Businesses in the Atlanta and Kansas City Districts reported slight increases in input prices, while reports on selling prices were mixed. The prices of finished goods rose at a somewhat slower pace in Richmond, compared with the previous reporting period. Contacts in several Districts expect prices to increase modestly in the coming months, and manufacturers in Philadelphia are expecting smaller price increases than nonmanufacturers.

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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