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posted on 19 October 2016

October 2016 Beige Book: Reading Between The Lines - The Rate Of Economic Expansion Marginally Improved

Written by Steven Hansen

The consolidated economic report from the 12 Federal Reserve Districts (Beige Book) stated "outlooks were mostly positive, with growth expected to continue at a slight to moderate pace in several Districts.". The previous report stated the economy expanded at "a "modest" or "moderate" pace of overall growth".

Analyst Opinion of this month's Beige Book

This month the Fed did a better job of trying to quantify what the districts were seeing, and there does appear they believed the economy was doing marginally better. As this is a survey which runs ahead of hard data - we will wait and see. The beige book has not been very predictive of economic direction for the last year, but even a stopped clock is right twice a day.

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 October 2016. The summary for this release:

Reports from the twelve Federal Reserve Districts suggest national economic activity continued to expand during the reporting period from late August to early October. Most Districts indicated a modest or moderate pace of expansion; however, the New York District reported no change in overall activity. Compared with the previous report, the pace of growth improved in the St. Louis, Kansas City, and Dallas Districts. Outlooks were mostly positive, with growth expected to continue at a slight to moderate pace in several Districts.

Labor market conditions remained tight, with modest employment and wage growth noted over the reporting period. Most Districts characterized input costs and/or output prices as fairly flat, but prices increased slightly on net.

Manufacturing activity was mixed, and the strong dollar continued to dampen exports of manufactured goods according to a few District reports. Most regions saw an uptick in retail spending, and outlooks were for modest growth in the months ahead. Reports on auto sales and tourism varied across Districts. Demand for nonfinancial services generally increased, and staffing firms noted steady or higher demand. Port traffic and e-commerce-related activity rose in Districts that commented on it, but reports on other transportation services mostly indicated weakness. Residential construction and real estate activity expanded further, although low home inventories continued to constrain sales in a few Districts. Home price appreciation continued at a modest pace in general, and commercial real estate activity and construction improved since the last report. Demand for business and consumer loans increased, aside from some seasonal slowing, and credit quality remained strong or improved. Agricultural conditions were mixed, as low commodity prices pressured farm revenues despite generally strong crop yields. There were signs of stabilization in the oil and natural gas sector, while reports of coal production were mixed.

Employment, Wages, and Prices
Employment expanded at a modest pace over the reporting period. Reports of hiring were strongest in the Richmond, Chicago, St. Louis, and San Francisco Districts. Layoffs in the manufacturing sector were noted in the New York, Philadelphia, Cleveland, and Richmond Districts. The Dallas District reported that energy-sector layoffs had abated, and manufacturing employment was stable following payroll reductions in recent months. Labor market conditions remained tight across most Districts. While reports of labor shortages varied across skill levels and industries, there were multiple mentions of difficulty hiring in manufacturing, hospitality, health care, truck transportation, and sales. The Richmond, Dallas, and San Francisco Districts noted a lack of construction workers, with some contacts noting these shortages were constraining construction activity.

Wage growth held fairly steady at modest levels, although some Districts reported rising pressure for certain sectors. The Philadelphia District cited more upward wage pressure for some skilled jobs, while the St. Louis and San Francisco Districts said pressure intensified for some entry-level positions. These increases were often driven by a shortage of available workers. The competitive labor market also caused retail and tourism contacts in the Boston District to raise wages and prompted employers in the New York District to be increasingly willing to negotiate compensation, according to an employment agency. Also, some small business owners in the San Francisco District reported the need to reinstate previously dropped health care benefits to attract applicants.

Overall price growth was mild. Most Districts reported flat input costs, although a slight increase was noted by firms in the Kansas City and Dallas Districts, and among manufacturing firms in the Richmond and Minneapolis Districts. Most Districts noted little change in selling prices over the reporting period, although there were scattered reports of price movements in certain sectors. Manufacturers in the Cleveland and Kansas City Districts reported declines in finished goods prices. Retailers in the Richmond and Kansas City Districts said selling prices edged up, while select retail chains in the Cleveland District were incrementally reducing shelf prices. Grocery contacts in the Chicago and Minneapolis Districts reported deflationary pressure on food prices, especially meat and dairy. Restaurants in the Cleveland and Kansas City Districts raised menu prices, and the San Francisco District cited modest increases in prices in the broader hospitality sector.

Reports on the manufacturing sector were quite varied across Districts. The Boston, Philadelphia, Chicago, Kansas City, and Dallas Districts noted increased factory activity, while activity declined in the Richmond and Atlanta Districts and was steady to weaker in the New York District. The remaining Districts cited flat or mixed activity. Capital expenditures were also mixed. Spending cutbacks accelerated in the Cleveland District, and future spending plans lowered in the Philadelphia District but rose to the highest level in more than a year in the Kansas City District. Outlooks were generally positive, although the strong dollar continued to depress exports of manufactured goods in some Districts.

Looking across the manufacturing sector, transportation manufacturing was a bright spot with strong growth reported in the Chicago and Dallas Districts, and the Cleveland District reported elevated activity for motor vehicle and aerospace suppliers. Growth in fabricated metals manufacturing was also a common trend, seen in the Philadelphia, Kansas City, and San Francisco Districts. For steel, demand fell in the Cleveland District and production weakened in the San Francisco District, where contacts noted that the elevated dollar, strong global production, and weak economic growth held back exports. There were several reports of continued weakness in the oil and gas sector still hurting demand for energy-related machinery and/or metal products in the Boston, Chicago, St. Louis, and Dallas Districts.

Consumer Spending and Tourism
Overall consumer spending was mixed this reporting period. The near-term outlook in the Boston, Philadelphia, Richmond, Atlanta, and St. Louis Districts was for modest growth, while contacts in the Cleveland and Kansas City Districts anticipated mostly flat sales. A majority of reporting Districts noted that retail sales increased this reporting period, although unseasonably warm weather impacted sales of cold-weather apparel in the New York and Cleveland Districts, and the strength of the dollar reduced spending by international customers in the Boston, Atlanta, and Dallas Districts. Reports on automobile sales were mixed. Declining sales were noted by the Kansas City and Dallas Districts, while increased sales were noted by the Atlanta, St. Louis, Minneapolis, and San Francisco Districts. Tourism activity was mixed across the nation according to reporting Districts. The New York and Kansas City Districts mentioned that tourism activity slowed this reporting period, while the Richmond District noted steady activity, and the Atlanta and Chicago Districts said activity increased.

Nonfinancial Services
Demand for nonfinancial services generally expanded since the previous report. However, the New York District cited flat to declining activity, and Philadelphia's report noted that the pace of expansion slowed slightly from the previous period. Activity in healthcare services expanded in reporting Districts, and demand for high-tech or information technology services increased, according to reports from the Minneapolis and Kansas City Districts. Sales at restaurants slowed further in the San Francisco District, and business was flat to down among leisure and hospitality firms, according to the Dallas report. Service providers in the Dallas District noted an optimistic outlook, and professional and high-tech services contacts in the Kansas City District reported favorable capital spending plans.

Staffing services demand grew at about the same pace or improved slightly since the prior report. Demand for staffing services strengthened in the New York and Dallas Districts, particularly in the Dallas-Fort Worth metroplex, and continued to expand at a modest pace in the Philadelphia and Cleveland Districts. A large employment agency in the New York District said hiring was brisk and broad-based, while a staffing firm in the Chicago District reported flat activity.

Demand for transportation services and freight activity declined on net, partly reflecting weak exports, excess capacity, and lower shipments of energy-related products. Transportation service firms cited slight declines in overall activity in the Cleveland, Richmond, Atlanta, Chicago, and Dallas Districts, while activity in the St. Louis District was characterized as mixed. Rail traffic was weak in reporting Districts, and air cargo volumes fell according to the Atlanta District's report. By contrast, transportation firms in the Kansas City District saw moderate growth in sales, and contacts in the Cleveland, Atlanta, and San Francisco Districts reported increases in online retail or e-commerce related activity. Port traffic rose in the Richmond and Atlanta Districts, and evacuations were underway as hurricane Matthew approached, according to Richmond's report.

Construction and Real Estate
Residential real estate activity expanded in most Districts since the prior report, and contacts in a few Districts expressed optimism about future growth. Homes sales fell markedly in the Kansas City District, while slight to moderate gains were reported by most of the other Districts. Demand for lower-priced homes was solid in Districts that commented on it, while sales of higher-priced homes slowed in the New York, Chicago, and Dallas Districts, and in Alaska according to San Francisco's report. Home inventories were generally reported to be low or declining and were restraining sales growth according to the Boston, Philadelphia, and Minneapolis Districts. Home prices continued to rise at a modest pace across much of the country, which contacts in some Districts attributed to tight inventories and labor constraints. Growth in residential construction was generally flat to up during the reporting period, with particular strength noted in the San Francisco District. However, construction activity dipped slightly in the Richmond District partly due to lot shortages.

Reports on multifamily activity varied but were positive on net. Strength in the apartment market was noted by the Dallas District (excluding the Houston metro area), while activity was mixed in the New York District. Growth in multifamily construction was positive in the Boston and Atlanta Districts but was mixed in the Richmond District and slowed further according to New York's report.

Commercial real estate leasing activity generally improved, and outlooks were mostly optimistic, although contacts in a few Districts expressed concern about economic uncertainty surrounding the upcoming presidential elections. Commercial rents were flat to up, and vacancy rates were generally low and/or declined in reporting Districts, except in the Houston metro area where office vacancies increased further. Sales of commercial properties were characterized as robust in the Chicago, Minneapolis, and San Francisco Districts but softened in the greater Boston area. Commercial construction increased on net, with contacts in the Cleveland and Atlanta Districts reporting increased or high backlogs. Shortages of skilled labor remained a constraint on construction activity in some Districts, such as Cleveland and San Francisco.

Banking and Finance
Overall loan demand increased, although there were some scattered reports of seasonal softening in some categories of lending. Reports on residential lending were mixed, ranging from some seasonal slowing to growing. Commercial and industrial lending increased overall, although the Cleveland District noted lending is at a slower pace than desired and the New York District reported steady demand. Competition for borrowers remained strong across a number of reporting Districts. Loan quality remained strong or improved in the Philadelphia, Cleveland, Dallas, and San Francisco Districts, and the New York and San Francisco Districts said delinquency rates remained low or declined since the last report. Credit standards were mostly unchanged this reporting period. Deposits grew slightly across most reporting Districts, although the Kansas City District cited stable deposit levels.

Agriculture and Natural Resources
Agricultural producers faced mixed conditions during the reporting period, as several Districts reported strong production for crops yet noted that low commodity prices continued to put pressure on farm incomes. Thanks to favorable growing conditions, record crops were expected for corn and soybeans in several Districts. The San Francisco District noted that yields of pistachios, almonds, and walnuts were expected to reach record levels this year. Above-average rainfall over the last several weeks slowed fieldwork in the Chicago and Minneapolis Districts, and hampered the cotton crop in some parts of the Dallas District. Contacts said that persistently weak farm income continued to reduce borrower liquidity in the Kansas City District, and farmers in the Dallas District were concerned about their ability to get adequate financing for next year.

Signs of stabilization in the oil and gas sector continued, while coal production was up in the Cleveland and Richmond Districts but down in the St. Louis District. The Cleveland, Minneapolis, Kansas City, and Dallas Districts reported an increase in drilling and/or exploration activity. However, demand for oilfield services remained depressed in most of the Dallas District, despite the rise in the rig count. Energy contacts in the Atlanta District said that the drawdown of crude oil inventories continued. Natural gas extraction in the Richmond District was unchanged over the reporting period. The consensus among energy contacts in the Kansas City and Dallas Districts was continued optimism, with the majority of contacts in the Dallas District saying they expect 2017 to be a better year than 2016.

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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