Fed Beige Book: Economy Continues to Buck Fear-Based Forecasts, Albeit Slowly

Continued fretting over the potential for a double-dip recession again belies the facts presented by the Federal Reserve. The Fed's latest Beige Book roundup of economic conditions illustrates reason for optimism...though certainly not enough to fuel widespread cork-popping heading into 2010's swan song days.

The Dec. 1 edition of the Beige Book, the last to be released in 2010, found Fed contacts reporting improved economic conditions as well as optimism, cautious as it may be. The Fed noted overall improvements in 10 of the 12 reporting districts with the strongest overall gains found in the New York, Richmond, Chicago, Minneapolis and Kansas City regions. Manufacturing, as has been the case throughout a year defined by a tepid recovery, continued to carry most of the water, so to speak. The Fed notes in Beige Book. Agriculture fair well, too, on aggregate. And there's even some newfound optimism for the first time in a while in the areas of credit standards and commercial real estate.

First District - Boston
Fed contacts in the district reported widespread sales growth and remained upbeat about short-term activity levels. A few producers have even returned to pre-economic collapse levels of sales, though some contacts question whether 2011 can best levels seen this year. Modest improvements were found in the commercial real estate market, fueled by increases in leasing activity in Boston and, to a lesser extent, Providence.

Second District - New York
Commercial real estate continued to struggle to find its footing, Fed contacts noted. Most reported stagnation or small losses in office markets again this period. Meanwhile, New York remains one of few still reporting widespread tightening of credit standards.

Third District - Philadelphia
The district reported overall manufacturing growth in shipments and new orders, though Fed contacts characterize conditions as "uneven" and dependent largely on the industry in question. Bankers in greater Philadelphia are nervous that the economic recovery "will come too slowly to reverse deteriorating financial conditions among some local firms." There has been little change of note in vacancy rates or prices, and stagnant conditions are expected throughout next year.

Fourth District - Cleveland
Manufacturing orders rose or held stable for most in late October and November. Most are finding faster growth opportunities by exporting products, again led by the auto and heavy equipment industries. Commercial real estate activity in the district is relegated almost exclusively to industrial projects, and some reported more work at this time last year. Commercial loan demand held firm on the backs of energy-, healthcare- and manufacturing-related companies. Overall credit quality also was stable in most markets in the eastern portion of the Midwest.

Fifth District - Richmond
Manufacturing's slight downturn last period was short lived as activity ramped up again, noticeably with packaging and automotive parts suppliers. Commercial loan demand has started to rise for the first time in a while, and financing of new commercial equipment picked up in areas including South Carolina. Still, commercial real estate was characterized as "generally week." An increase in the multifamily/condominium housing sub-sector is expected in Baltimore even as rents and occupancy levels are seen as low in most of the district. Those in agriculture fetched higher prices for commodities, but could face lower yield issues later.

Sixth District - Atlanta
Already hurting commercial real estate levels worsened again in the over-supplied district. Nearly every key market continues to struggle with elevated vacancy rates. Credit among small businesses reportedly improved, yet they're still having trouble getting favorable loan packages from banks, Fed contacts said. The region's oil production industry along the Gulf of Mexico continued to operate at levels well below pre-Hurricane Katrina levels. And, unlike many districts, manufacturing was not able to carry the district to an overall gain thanks to what most considered a "flat" six weeks.

Seventh District - Chicago
The pace of manufacturing activity and optimism kept up its recent momentum. This is especially true for the fabricated metals, automotive, heavy equipment and aerospace industries. Even recently soft steel production is widely expected to get a January bump. Credit conditions improved, though core business loan demand remained somewhat stymied. An early and sizeable crop harvest has Fed contacts in agriculture riding high, notably in Michigan and Wisconsin. Commercial real estate contacts noticed a small uptick in industrial projects.

Eighth District - St. Louis
The word in St. Louis, at least from the manufacturing sector is encouraging: "expansion" New plants and expansion are expected in the boating, sanitary paper, primary metal, auto parts and textile industries, said Fed contacts. Those are more than offsetting plans to contract in areas such as wire, air conditioner and container production. Commercial real estate, as usual, was very mixed with vacancy rates varying widely by industry, with large variations even within specific markets. Credit quality and demand for business remained largely unchanged. Agriculture contacts reported an early completion of corn, soybean, sorghum and cotton harvests and also fretted about a reduction in the level of adequate topsoil moisture going forward.

Ninth District - Minneapolis
Commercial development permits surged in Fargo, ND and Sioux Falls, SD; but they plummeted in the district's key market (Minneapolis/St.Paul). Worse yet, in the latter, office and industrial vacancies hovered near record levels. Manufacturing, like in most areas, was up, though the Fed did not highlight any particular industry in the region. Thanks to ideal weather, agriculture contacts saw large and early harvests, not to mention very solid prices.

Tenth District - Kansas City
After a summer setback, the region posted a second consecutive growth period over the last six weeks. The strongest gains, which occurred later in the period, were found in the food, fabricated metal and electronics production areas. Little change was seen in vacancy rates and rents, though Fed contacts reported optimism for improvements in those areas during the early portion of 2011. Common to several regions, an early corn and soybean harvests were considered positive and lucrative. Credit quality and business loan demand were largely unchanged, and neither is expected to make a significant move during the next six months.

Eleventh District - Dallas
District 11 is one of just two with mostly negative news in the area of manufacturing. Many industries saw declines or unexpected stagnation in November. Aircraft parts and petrochemicals industries were among few with positive news. Agriculture also diverged from the positives out of most districts as producers complained of low rainfall and poor topsoil moistures. Cotton prices hit a record high though. Commercial real estate, however, did get a sizable bump in optimism on increased office leasing, though tight credit conditions continue to stymie new development.

Twelfth District - San Francisco
Manufacturing gained again from mid-October through mid-November, especially for producers of commercial aircrafts/parts, semiconductors and technology products. Poor overseas crop yields drastically boosted demand for products from the district, Fed contacts said. Commercial real estate activity remained unchanged at anemic levels. Businesses, however, appear more ready than previously this year to test the waters on capital projects, financial contacts told the Fed.

Brian Shappell, NACM staff writer

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