The Federal Reserve issued the Beige Book this week. It confirms a continued slowdown in the economy. Consider the opening paragraph:
Reports from the twelve Federal Reserve Districts indicated that economic activity continued to expand at a modest pace, though some Districts noted mixed or weakening activity. The St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco Districts all reported either modest or slight expansion. Atlanta said activity continued to expand at a very subdued pace, while Cleveland reported slow growth and New York indicated growth remained sluggish. Economic activity expanded more slowly in the Chicago District and slowed in the Richmond District. Business activity in the Boston and Philadelphia Districts was characterised as mixed, with Philadelphia adding that activity was somewhat weaker overall. Several Districts also indicated that recent stock market volatility and increased economic uncertainty had led many contacts to downgrade or become more cautious about their near-term outlooks.
Expansion is occurring at a “modest pace;” activity is “mixed or weakening;” growth is “slow.” None of the adjectives used to describe economic activity are positive; they all indicate the economy is limping along, probably at just above 0% growth. Also note that increased economic uncertainty was now creeping into overall perception. This explains the big drop we’ve seen in overall consumer sentiment over the last few months and also highlights the impact of the budget debate on the populace. In short, the summation is extremely concerning.
Overall consumer spending increased slightly in most Districts, but non-auto retail sales were flat or down in some Districts. Hurricane Irene evacuations also produced widespread retail disruptions in late August in the New York District, where activity had been close to or above plan in July before slowing somewhat in early August. The Minneapolis and Kansas City Districts reported moderate increases in non-auto retail sales during the survey period, and sales in the San Francisco District were mixed but up slightly overall. Retail sales were up single-digits from a year ago in the Cleveland and Dallas Districts, although Dallas reported no growth in sales since the previous survey period. Retailers in the Chicago District reported strong back to school sales, while Atlanta said growth slowed in retail sales. The Boston and Philadelphia Districts said sales were flat to down but with sizable variation across stores, while sales mostly weakened in the Richmond and St. Louis Districts. Sales of apparel and luxury items were characterised as strong in several Districts. The Boston, Chicago, Kansas City, and San Francisco Districts all noted sluggish sales of big ticket household items such as furniture and appliances, and contacts in several Districts thought that heightened consumer anxiety was weighing on sales. Contacts in some Districts continued to indicate profit margins were being squeezed by rising input costs, although grocers in the Cleveland District were passing cost increases through to customers.
Like the macro summation, consumer spending is weakening or in one case (Dallas) not growing at all. Increases are “modest” or “up slightly.” Big ticket items sold “sluggishly” indicating consumers don’t want to spend a lot of money right now probably due to the heightened anxiety among consumers regarding the overall economic outlook. There is little positive in the above paragraph and much to be concerned with. Considering that consumer spending is 70% of US GDP, this is not welcome news.
Most Districts reporting on auto sales noted increases in activity, despite lingering supply disruptions for some Japanese nameplates. The Kansas City and Cleveland Districts reportedespecially strong sales of fuel-efficient cars, while luxury vehicles sold well in the Minneapolis District. High demand for used cars was reported in several Districts. The New York and Philadelphia Districts reported somewhat softer auto sales in July, attributed in part to continued supply disruptions, although sales firmed somewhat in August. Tight vehicle supplies were noted in some Districts, and the San Francisco District noted ongoing shortages of Japanese nameplates. Auto contacts in the Dallas District believed the supply issues from Japanese manufacturers should be resolved by the end of September. Auto dealers in several Districts were optimistic about future sales, although contacts in the Philadelphia District said uncertainty clouded the outlook. The Cleveland District noted some easing in auto credit restrictions, and New York said both retail and wholesale auto credit conditions were good.
Auto sales are a paradoxical bright spot. My guess is three things are happening. First, many people have been holding onto cars longer, so they are now is a position where they literally have to get a new car. Secondly, there is the pent-up demand effect caused by the Japanese caused slowdown earlier this year. Third, it appears the people are now economizing their cars, switching to more fuel efficient cars at the expense of gas guzzlers, anticipating this will save money in the long-run.
Nonfinancial services activity edged higher in most Districts, although Minneapolis and Dallas characterised growth as flat or steady, and New York said conditions deteriorated.Richmond, St. Louis, and San Francisco reported generally solid demand for health-care services, although Richmond noted lower occupancies at senior care facilities due to difficulties among potential residents in selling their homes. Software and information technology firms in the Boston District reported mixed activity since July but expected to return to previous strong growth patterns by late 2011. The San Francisco District reportedexpanded sales for technology service providers due to heightened demand for software, e-books, and mobile applications. In contrast, an information technology contact in the Minneapolis District noted a decline in sales as a result of reduced demand from the government and financial services sectors.
As services make up the larger portion of the US economy, the above news was also good, as it indicates services are picking up some of the slack caused by the drop in manufacturing. Only two districts reported flat or steady sales and only one showed deteriorating conditions overall. The above information is consistent withthe latest ISM report, which showed services as expanding slightly, but not aggressively.
Manufacturing conditions were mixed across the country, but the pace of activity slowed in many Districts. The New York, Philadelphia, and Richmond Districts reported declining activity overall, and contacts in the Boston and Dallas Districts noted slowing demand from European customers. Cleveland said factory production was stable, and manufacturing activity in the Atlanta and Chicago Districts grew at a slower pace. Minneapolis, Kansas City, and San Francisco reported slight expansions, and St. Louis said activity continued to increase and that several manufacturers planned to open plants and expand operations in the near future. Most manufacturing contacts were less optimistic than in the previous survey; however, future capital spending plans were solid in a few Districts.
This is consistent with two events. First, an overall US slowdown, as evidenced by the downward revision to GDP over the last few months. Second is the overall economic slowdown across the world, where we’ve seen developing countries (such as China, India and Brazil) engage in a tightening policy to slow inflationary growth in their respective countries.
Overall, the report shows an economy that probably has just enough activity to keep growth positive — but just barely. Between big tickets auto sales and services we have positive growth, and it appears consumers are spending just enough. However, manufacturing’s slowdown is a concern, as this was a primary growth driver over the last two years. In addition, services are picking up some of the slack, but they are also just above stall speed.
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