The latest edition of the Fed’s Beige Book report could not be more aptly named. This is the collection of reports that comes from the 12 districts that encompass the U.S. Each one assesses economic activity that takes place in its region. The collective analysis gives some clues to what is happening in the economy as a whole.
Although the report’s beige cover is the inspiration behind its name, the current edition also could be referred to as beige because the data itself is almost bland. Nothing in it suggests that the economy is in real distress, but there also is nothing suggesting the economy is on the verge of catching fire either. It has been described as a report outlining moderate growth.
This is the last version to be released prior to the Fed’s December meeting, and some had hoped that it would have provided definitive proof of the economy’s state—one way or the other. It really doesn’t; although given the comments by the Fed chair, it would seem that only a really negative report would have had much impact on the proposed rate hike.
The latest comments from Janet Yellen suggest an intention to hike rates unless there is some major and compelling reason not to. For the past year, the majority of those watching the Fed have indicated a small bias toward raising rates as the economy has been doing reasonably well. Nothing, however, suggests the economy is robust so when issues surface, the Fed backs off. The December rate hike looks more secure given that nothing suggests a major concern even though the most recent releases of data have been less than encouraging. The reports from the 12 Fed districts have not altered this perception as they have been mildly positive.
It is always a challenge to make assumptions about the economy’s strength. The United States has a massive and complex economy with each state having a GDP similar to a country. General statements made about the nation can apply in some states but not in others—at least not to the same degree.
Overall, four or five sectors have seen improvement, albeit not at a breakneck pace. Consumer spending has picked up in most of the districts, and this is certainly good news given the importance of the consumer to the overall pace of economic growth in the U.S. These reports are encouraging, but there is some contrast within the reports coming from the retail community. Thus far, the holiday spending season is slow despite improved consumer confidence surveys. Dissecting the data a bit shows that consumers are mostly spending on new cars and not on some of the more traditional products of the season such as clothing, toys and jewelry.
The reports also show some growth in housing and commercial construction, although variations between parts of the country exist. The fastest growth has been in multi-family housing and senior living facilities. The commercial sector has seen diverse growth depending on the part of the country, but most of the expansion has been in health care, warehouse and distribution facilities. The market for general office space has been sluggish, and there has been relatively little demand for new retail. For the past few years, the slowest sector for construction has been public. And although infrastructure needs to be addressed, there is no money. That may be about to change as against all odds, Congress has passed a five-year plan to spend $300 billion on repairing the national infrastructure. This is far short of the one trillion dollars that most assert is needed to bring things back to respectability, but it is a start.
An increase has been reported in loan demand, and that is certainly a good sign. The Fed has been frustrated in its attempts to bolster the economy through lower interest rates as few companies have been asking for money; therefore banks have not been lending. There is now some sign that lending is making something of a comeback; that is backed up by the fact that applications for credit have been somewhat stronger according to the Credit Managers’ Index. There has also been some tightening on the labor front. The U-3 unemployment rate is now at 5%, and in many parts of the country, labor shortages exist. The problem is that this labor shortage is due more to a lack of needed skills than the pool of available workers.
The two most negative observations coming from the Beige Book are by now pretty familiar. The impact of the export decline has been severe and is only expected to get worse. The stronger dollar has been a big part of this decline, but the fact is that many of the countries the U.S. sells to are in financial distress and would be unlikely to buy much from the U.S. even if the dollar were weaker. The energy sector continues to be very weak, and that has affected many parts of the U.S.—even those that have not been directly engaged in the oil and gas business. The manufacturers that supplied the sector are all over the U.S. and have missed the business they once had. The farm sector has been affected this year by a whole variety of issues. The good harvest drove prices in general down, but some sectors of the country received too much rain and that affected yields. The problems were not severe enough to drive the commodity prices up—only select states had problems
- Chris Kuehl, Ph.D., NACM economist and co-founder of Armada Corporate Intelligence