BEIGE BOOK: Economy Expands At ‘Modest to Moderate’ Pace

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Economic activity in the U.S. expanded at a modest to moderate rate, the Federal Reserve announced in its Beige Book report this afternoon.

Of its 12 districts, seven reported moderate growth in the November and December period, while two — New York and Chicago — reported a “pickup in the pace of growth.”

“Demand generally strengthened further for nonfinancial services. Providers of professional and business services such as consulting, advertising, engineering, and legal services expanded their activities according to Boston, Richmond, St. Louis, and Minneapolis,” according to the Fed’s Beige Book.

Consumer spending grew in nearly all districts, as holiday sales bolstered the season. Residential and commercial real estate, which remained weak, saw some signs of improvement.

Full announcement:


Contact reports from the twelve Federal Reserve Districts suggest that national economic activity expanded at a modest to moderate pace during the reporting period of late November through the end of December. Seven Districts characterised growth as modest; of the remaining five, New York and Chicago noted a pickup in the pace of growth, Dallas and San Francisco reported moderate growth, and Richmond indicated that activity flattened or improved slightly. Compared with prior summaries, the reports on balance suggest ongoing improvement in economic conditions in recent months, with most Districts highlighting more favourable conditions than identified in reports from the late spring through early fall.

Consumer spending picked up in most Districts, reflecting significant gains in holiday retail sales compared with last year’s season, and activity in the travel and tourism sector expanded in most areas. Demand strengthened further for nonfinancial services, including professional and transportation services. Manufacturing activity generally continued to expand, although the pace of growth has slowed for selected subsectors such as technology products. Agricultural producers and extractors of natural resources reported generally robust conditions. Activity stayed sluggish in residential real estate markets, and conditions in commercial real estate markets remained somewhat soft overall but showed signs of ongoing improvement in several Districts. Reports from financial institutions generally indicated a slight uptick in loan demand by businesses, along with improvements in overall credit quality.

Upward price pressures and price increases remained quite limited for most categories of final goods and services, as the effects of prior increases in the costs of selected inputs have eased. Upward wage pressures were modest overall, although a few Districts noted substantial compensation increases for workers with specialised skills in selected sectors and regions.

Consumer Spending and Tourism
Reports on consumer spending were favourable in general. Most Districts reported that holiday retail sales were up noticeably over last year’s season, with New York and Dallas describing sales as “brisk” and “robust,” respectively. Consumer spending and confidence generally were characterised as firmer than in recent reporting periods, although Kansas City reported that spending softened. Items identified as the strongest holiday sellers by various Districts included consumer electronics and jewelry, and Chicago noted that luxury items in general sold well during the holiday season. By contrast, many Districts reported weak sales and excess inventories of warm clothing, due to unusually mild weather. Retail inventories more broadly were reported to be at or near desired levels, consistent with retailers’ sales expectations. Boston, New York, and Minneapolis noted exceptional growth in Internet sales for selected items. Sales of new automobiles continued to pick up in most Districts. Among the more favourable reports, Atlanta noted that the pace of auto sales in November and December was “the strongest in over two years,” and strong demand and sales were reported as well by New York, Philadelphia, Cleveland, and Minneapolis.

Reports from most Districts pointed to solid gains or high levels of travel and tourist activity, with pickups evident in both the business and leisure segments. Tourism activity was reported to be above the levels from twelve months earlier by Boston, New York, Richmond, and Atlanta, and Boston contacts expect double-digit growth in hotel revenues in 2012. By contrast, Minneapolis reported that tourist activity was down because limited snowfall has stymied outdoor activities such as skiing and snowmobiling, while Kansas City reported a decline because winter storms hampered some tourist activity. Business travel activity also has expanded of late and is above levels from twelve months earlier, according to Atlanta and San Francisco.

Nonfinancial Services
Demand generally strengthened further for nonfinancial services. Providers of professional and business services such as consulting, advertising, engineering, and legal services expanded their activities according to Boston, Richmond, St. Louis, and Minneapolis. Sales of technology services to businesses and consumers grew further, according to Minneapolis, Kansas City, and San Francisco, although the pace of growth slowed from earlier in 2011. Providers of temporary staffing services saw strong and rising demand in the Philadelphia, Cleveland, and Richmond Districts but below-average seasonal hiring in the Chicago and Dallas Districts. Reports from the health-care sector generally pointed to growth as well, with Cleveland, Atlanta, Chicago, and St. Louis highlighting construction activity and bank lending aimed at health-care providers. The exception to growing demand for health-care services was San Francisco, which reported an ongoing decline in hospital admissions. Demand for shipping and transportation services generally expanded. New York and Atlanta reported a significant increase in shipping tonnage by truck, and Dallas noted a broad-based increase in shipments by rail. Atlanta reported that port activity was up over twelve months earlier due to “notable strength in exports,” while Richmond reported a decline in port activity that was largely attributed to reduced imports. Air travel was above year-ago levels in the Atlanta District but unchanged over the past six weeks in the Dallas District.

Manufacturing activity expanded in most Districts, generally continuing its steady overall expansion or, in the case of Atlanta, reversing a slowdown in prior periods. For the sector as a whole, further growth or improved conditions were reported by almost all Districts, except for Cleveland, Richmond, and Dallas, which reported that activity was largely stable or mixed, and Kansas City, which noted a slight decline. The strongest reports came from subsectors such as heavy equipment manufacturing and steel, for which demand has been boosted by robust growth in the energy, agricultural, and auto manufacturing sectors. Reports from Cleveland, Richmond, Atlanta, Chicago, and St. Louis confirmed vibrant activity for auto manufacturers, primarily for domestic makes. By contrast, demand remained somewhat weak for firms in housing-related subsectors, such as a door manufacturer in the Richmond District, furniture manufacturers there and in the St. Louis and San Francisco Districts, and makers of lumber and wood products in the San Francisco District. Demand for computers and related electronic components rose further, according to Kansas City, Dallas, and San Francisco. However, the pace of growth has slowed significantly from earlier in 2011, and Boston noted declining sales of semiconductors, mainly due to weaker demand from Asia. According to Dallas and San Francisco, aircraft makers saw further demand increases. Those Districts also noted weak domestic demand for refined petroleum products that was largely or completely offset by robust foreign demand. Demand grew smartly for food producers in the Philadelphia and Dallas Districts, but in the Kansas City District food processing was one of the weakest performers within the manufacturing sector. Export sales of assorted manufactured products generally performed well according to Atlanta and Chicago, although slower economic growth in China and Europe held back sales for some manufacturers.

Cleveland reported that capacity utilization remained below normal in most subsectors, with the notable exception of steel producers, who were operating at or near normal levels. Similarly, Chicago noted that some auto suppliers appear to be approaching capacity constraints, which may limit further production increases in the near term. Atlanta reported that recent flooding in Thailand was likely to exert modest restraint on auto production. Ongoing capital investments and increases in capacity were reported for various manufacturing concerns in the St. Louis and Minneapolis Districts and for an auto producer in the Richmond District.

Real Estate and Construction
Activity in residential real estate markets largely held steady at very low levels, with the exception of further increases in the construction of multifamily residences. The pace of single-family home sales remained quite sluggish throughout the country, although the Dallas District reported a modest increase over the prior reporting period. Some Districts, such as Boston and Atlanta, noted that home sales exceeded levels from twelve months earlier, but mainly because the earlier levels reflected a substantial drop following the expiration of the homebuyers’ tax credit in mid-2010. Prices were largely stable on a short-term basis in most areas but in many instances were below their levels from twelve months earlier. Extensive inventories of distressed properties were reported to be a source of price restraint in the Boston, Richmond, Chicago, and San Francisco Districts. Construction of single-family homes remained at depressed levels in most areas and fell further in some, such as the Philadelphia, St. Louis, Minneapolis, and Kansas City Districts. However, Cleveland reported that activity improved during the past couple of months. In contrast to the soft market for single-family residences, the market for rental units tightened in some areas such as the New York and Richmond Districts, and construction of multifamily residences rose in the Boston, Philadelphia, Chicago, Kansas City, and Dallas Districts.

Demand for nonresidential real estate remained somewhat soft overall but improved in a number of Districts. Vacancy rates and other indicators in markets for office space were largely unchanged in the major metropolitan markets in the Boston, Philadelphia, Cleveland, Richmond, and St. Louis Districts. By contrast, New York reported that demand for office space “picked up in late 2011,” causing vacancy rates to edge down and asking rents to rise. Minneapolis, Kansas City, Dallas, San Francisco, Atlanta, and Chicago all reported stronger demand for commercial real estate compared with earlier in 2011, and the latter two Districts also noted a pickup in nonresidential construction activity. Cleveland and Chicago reported that the strongest demand and most extensive construction activity has been for industrial and health-care facilities, while Minneapolis highlighted growing demand for industrial space and San Francisco stressed growing demand emanating from the information technology sector.

Banking and Finance
Lending activity edged up overall, primarily due to increased loan demand by businesses. Most Districts that commented on lending activity indicated little or no change in overall loan demand, but the remaining Districts identified increases rather than decreases. New York reported a pronounced increase in demand for commercial mortgages, and Cleveland also noted increased demand in this category. Both Dallas and San Francisco noted a slight uptick in commercial and industrial lending. Consumer lending was largely flat compared with the prior reporting period, although auto loans rose in Cleveland. New York, Philadelphia, and Cleveland reported demand growth or continued strength for refinancing of residential mortgages.

Lending standards were largely unchanged across all lending categories. However, New York reported slight tightening for commercial and industrial loans. Moreover, a few reports highlighted that small businesses continued to struggle with credit access through banks. In the Atlanta District, some small businesses have turned to nonbank institutions for financing, and in the Chicago District some manufacturers have been financing loans to their suppliers from retained earnings. Credit quality improved in many Districts: New York reported a decline in delinquency rates for all loan categories, while Philadelphia, Richmond, Kansas City, Dallas, and San Francisco all reported general improvement in loan quality.

Agriculture and Natural Resources
Demand for agricultural products was strong during the reporting period, but growing conditions and input prices were mixed. Farm income and profits were reported to be at very high levels by Chicago and Kansas City, enabling many farmers to repay loans and expand their operations, and San Francisco reported further sales growth for a variety of agricultural products. Rising foreign demand was noted as a source of strength for livestock sales in the Atlanta and Dallas Districts and for dairy and meat products in the Chicago District. Growing conditions were somewhat mixed across areas. Farmers and livestock producers in the Atlanta and Dallas Districts have been struggling with ongoing droughts, which have required costly responses such as supplemental feeding of livestock. While timely rains eased drought conditions somewhat in the Dallas and Kansas City Districts, wheat farmers in the latter are hoping for more protective snow cover for the winter crop’s dormancy period. In addition, high or rising prices for some inputs were noted by Chicago and Kansas City, tempering farmers’ profit expectations for the coming year.

Demand and extraction activity rose further for producers of natural resource products. Energy extraction has been on the upswing. Atlanta reported that companies have been expanding their workforces and increasing their production capacity and exploration plans in the Gulf of Mexico. Minneapolis and Kansas City reported that oil and gas exploration and extraction activity were well above their levels from twelve months earlier, and Dallas noted that a high level of activity is expected to resume in early 2012 following a year-end seasonal lull. Minneapolis and San Francisco reported expansion of mining capacity and activity for a range of industrial and precious metals.

Prices and Wages
Upward price pressures and price increases were very limited during the reporting period. Reports from various Districts, including Boston, Atlanta, and Chicago, indicated that upward price pressures from rising commodity and input prices have eased substantially, with Boston noting that “even food prices have ceased rising.” Atlanta reported that firms have limited pricing power in general, and San Francisco pointed to intense supplier competition as a factor holding down prices. Similarly, Kansas City reported a recent uptick in input prices but noted that few manufacturers passed these increases on to the prices of their finished goods.

Wage pressures remained modest overall. The combination of limited permanent hiring in most sectors and numerous active job seekers has continued to keep a lid on general wage increases. However, reports from a few Districts highlighted significant supply constraints and in some cases large compensation increases for workers with specialised skills in selected sectors, including the energy sector in the Dallas District and the technology sector in the San Francisco District. On a related note, Minneapolis reported that employers have increased relocation pay for employees willing to settle in parts of that District where worker availability is limited. Increases in the costs of employee health benefits continued to put significant upward pressure on overall compensation costs, although some employers in the Philadelphia District reported significant rollbacks from past increases.

The report continues with breakdowns for each of the twelve districts.