The Federal Reserve’s Beige Book, a compilation of mostly anecdotal information from the 12 Federal Reserve districts, was generally more upbeat than most recent Beige books have been. Thus is a continuing trend where each Beige Book seems just a bit more upbeat than the last one. Overall, it paints a picture of an economy that is slowly starting to pick up steam but still faces a long uphill climb to get back to where it was before the Great Recession started.
“…[E]conomic activity continued to expand moderately from November through December. Conditions were said to be improving in the Boston, New York, Philadelphia and Richmond Districts. Activity increased modestly to moderately in the Cleveland, Atlanta, Chicago, St. Louis, Kansas City and Dallas Districts. The economy of the Minneapolis District ‘continued its moderate recovery,’ while that of the San Francisco District ‘firmed further’ in the reporting period leading up to the close of 2010.
“Conditions were generally said to be better in Districts’ manufacturing, retail and nonfinancial services sectors than in financial services or real estate. Contacts in the manufacturing sector in all Districts reported that activity continued to recover…Retailers in all Districts indicated that sales appeared to be higher in this holiday season than in 2009 and, in some cases, better than expectations.
“The manufacturing sector continued to recover across all Districts…Overall, demand was generally characterized as stable and steady, and no District made mention of lingering fears of a double-dip recession, in contrast to the summer reporting periods. Capacity utilization continued to trend higher and is approaching normal rates for some contacts in the Cleveland and San Francisco Districts, while production in high-tech manufacturing was reportedly at high capacity in Dallas; some manufacturers in the St. Louis and Minneapolis Districts said they have or will soon expand capacity.”
However, there continue to be major weak spots in the economy, most notably in the housing and Real Estate area.
“Residential real estate markets remained weak across all Districts. Commercial construction was described as subdued or slow.
“…[T]he Boston, Atlanta and Dallas Districts identified construction-related manufacturers as continuing to show considerable weakness, and makers of wood products in the St. Louis and San Francisco Districts reported very soft demand.”
Bad weather hurt the agricultural economy, but that is not that unusual given the time of year. Strong prices mean that the agricultural sector is doing very well.
“Unfavorable weather conditions damped agricultural production in some areas. The Dallas District reported that drought negatively affected range conditions by adding to costs of feeding livestock, while Atlanta cited the challenges prolonged drought presented to fruit growers. The Kansas City District indicated that dry weather could affect winter wheat development. Large snow falls hampered some ranchers in the Minneapolis District. However, agricultural demand generally improved among reporting Districts, and output prices rose, especially for corn, soybeans, wheat, cattle, and cotton.”
While one cannot see it in the reported financial results of major companies, which have been reporting much improved net margins, there were complaints about rising input costs that could not be passed on. Labor costs seem to be well controlled. The lack of ability to pass on costs is worth keeping an eye on as net margin expansion has been responsible for the vast bulk of recent earnings growth.
“Most District reports cited comments by both retailers and manufacturers that costs were rising, but indicated that competitive pressures had led to only modest pass-through into final prices. Labor markets appeared to be firming somewhat in most Districts, as some modest hiring beyond replacement was said to have occurred and/or was planned in a variety of sectors. At the same time, however, upward pressure on wages was reportedly very limited.”
We are also starting to get some traction on the employment front, but not enough that workers are able to share in the economic growth.
“Labor markets in most Districts appear to be firming somewhat, but with virtually no upward pressure on wages. All District reports indicated that employment levels are rising in at least some sectors, generally by modest amounts…
“Overall wage pressures remained subdued; the Philadelphia District reported ‘mostly steady wages,’ Cleveland said ‘wage pressures are contained,’ Chicago indicated ‘wage pressures remained moderate,’ Minneapolis and Kansas City stated wage increases or wage pressure ‘remained subdued,’ and the Dallas and San Francisco reports described wage pressures as ‘minimal’ or ‘largely absent.'”
While it is clear that we are not yet out of the woods, and I worry that the combined forces of further declines in housing prices, and fiscal austerity could derail the recovery, this is a very encouraging report.
Zacks Investment Research
