Beige Book: Producer Prices Up, Housing Weak, Firms Reluctant to Add to Payrolls

The Federal Reserve has released the Beige Book

The Beige Book is a compilation of anecdotal information and data on current economic conditions across the country. The findings are NOT THE VIEWS OF FEDERAL RESERVE OFFICIALS...instead, each Federal Reserve bank interviews key business contacts, economists, market experts, and other sources in their specific district. This report is published eight times a year.

They call it the Beige Book because its Beige.

This edition was prepared at the Federal Reserve Bank of Dallas and is based on information collected on or before October 8, 2010.

Reuters Quick Recap....

RTRS-FED BEIGE BOOK SAYS ECONOMY CONTINUED TO GROW AT A MODEST PACE IN PERIOD TO EARLY OCTOBER
RTRS-FED SAYS MANUFACTURING CONTINUED TO EXPAND IN MOST DISTRICTS
RTRS-FED SAYS CONSUMER SPENDING STEADY TO UP SLIGHTLY, PURCHASES MOSTLY LIMITED TO NECESSITIES
RTRS-FED SAYS HOUSING MARKETS REMAINED WEAK, HOUSE PRICES SEEN STABILIZING, COMMERCIAL REAL ESTATE SUBDUED, CONSTRUCTION WEAK
RTRS-FED SAYS HOME INVENTORIES ELEVATED OR RISING IN MOST DISTRICTS
RTRS-FED SAYS INPUT COSTS, NOTABLY FOR AGRICULTURAL COMMODITIES, METALS, ROSE FURTHER BUT NOT PASSED ON TO CONSUMERS
RTRS-FED SAYS PRICES OF FINAL GOODS, SERVICES MOSTLY STABLE, WAGE PRESSURES MINIMAL
RTRS-FED SAYS DEMAND FOR BUSINESS LOANS WEAK AS FIRMS DELAY CAPITAL SPENDING PLANS OVER ECONOMIC, POLICY UNCERTAINTIES
RTRS-FED SAYS HIRING REMAINED LIMITED AS FIRMS RELUCTANT TO ADD TO PAYROLLS DUE TO ECONOMIC SOFTNESS
RTRS-U.S. economy grew sluggishly in recent weeks-Fed

Below is a summary of the findings provided by the FRBD. I took a new approach in reviewing the report. The positives are in GREEN and the negatives are in RED.  

Reports from the twelve Federal Reserve Districts suggest that, on balance, national economic activity continued to rise, albeit at a modest pace, during the reporting period from September to early October.

Manufacturing
Manufacturing activity continued to expand, and several Districts reported gains in production or new orders across a wide range of industries. The only exceptions were the Philadelphia and Richmond Districts, where activity softened compared with the previous reporting period. Exports boosted manufacturing activity according to contacts in the Cleveland, Chicago, and Kansas City Districts.

Producers of semiconductors and other high-tech equipment saw continued growth in sales in the Boston, Dallas, and San Francisco Districts. Auto production rose strongly in the Cleveland and Chicago Districts.

Metals producers in the Chicago District reported that September sales were the strongest year-to-date, while contacts in the Minneapolis, Dallas, and San Francisco Districts saw only modest gains. Shipments of steel in the Cleveland District continued to be buoyed by demand from energy-related, automotive, and heavy equipment industries. Food processors in the Philadelphia and Dallas Districts noted solid demand for their products, while a few contacts in the St. Louis and Minneapolis Districts reported plans to expand existing operations.

Refiners in the Dallas and San Francisco Districts noted a slowdown in activity and rising inventories. Demand for construction-related products remained weak, and reports on activity in the wood products and furniture manufacturing industries were mixed.  Hiring at manufacturing firms remained sluggish. Inventories were generally light or in line with orders. Future capital spending plans appeared to be limited, except for in the St. Louis District where several manufacturers reported plans to build new plants or expand operations. Manufacturers’ assessments of future factory activity were optimistic in the New York, Philadelphia, Chicago, and Kansas City Districts, where contacts expect business conditions to remain positive or to improve in coming months.

Nonfinancial Services
Activity was stable to modestly increasing for most professional and nonfinancial services. Demand for information technology (IT) services remained solid. IT firms in the San Francisco District noted recent growth was spurred by business investment to enhance production efficiency. In the Minneapolis District firms noted solid demand for IT services from corporate clients.

Accounting activity improved slightly, spurred by merger and acquisition work. Contacts in the Boston and Dallas Districts noted increases in consulting activity since the last report. Healthcare consulting picked up as businesses responded to regulatory changes following healthcare reform. Appraisal and title companies noted continued strength during the reporting period, and there were some reports from architectural firms that activity had picked up.

Demand for transportation services appears to have slowed, although reports were mixed. Freight companies in the Cleveland District noted steady to declining volumes over the past six weeks, and Kansas City’s report said transportation firms saw unexpected weakness. Rail companies in the Atlanta District reported positive, but slower growth of automobile and industrial goods shipments, while port activity in the Richmond District was mixed. Dallas’ report said intermodal and railroad cargo volumes edged up, but growth in international container trade volumes flattened, and small parcel shipping volumes declined in September. San Francisco reported a pickup in demand for trucking services.

Consumer Spending and Tourism
Retail spending was flat to moderately positive in most Districts, with the exception of the Richmond and Atlanta Districts, which noted declining traffic and sales. Contacts in the Kansas City District noted sales were stronger than expected; back-to-school spending boosted sales in the Philadelphia and Dallas Districts. Retail spending grew modestly in the Minneapolis and San Francisco Districts, and was flat in the Cleveland, Chicago, and St. Louis Districts. Retailers said consumers are slowly regaining confidence, but remain price-conscious and were largely limiting purchases to necessities and nondiscretionary items. There were reports, however, of a pickup in sales of moderately priced household goods in the Philadelphia, Dallas, and San Francisco Districts, and gains in apparel sales were reported in the Atlanta and Chicago Districts. Inventories were at desired levels. Looking ahead, retailers in several Districts expected modest sales growth through year-end. In particular, some contacts in New York planned to add more holiday staff than last year.

Most Districts reported that sales of new vehicles held steady or rose during the reporting period. Sales of used vehicles were strong as well. Inventories remained tight, particularly for popular vehicles. Used car prices rose, reflective of solid demand and lean inventories. Respondents’ outlooks were for slight growth in sales through year-end.

Reports from most Districts pointed to continued improvement in travel and tourist activity. The Richmond District reported that tourist activity strengthened, and contacts in San Francisco noted that growth in business travel and convention activity led to rising visitor counts and hotel occupancy rates. Hotel occupancy for popular tourist destinations in the Minneapolis and Kansas City Districts also rose during the reporting period and was above year-ago levels. New York’s report noted that hotel occupancy rates remained high in Manhattan, but October bookings were somewhat weaker than expected. Atlanta noted that tourist activity in some areas was still being affected by the Gulf oil spill, but losses incurred in these areas were offset by increased activity in Northeast Florida, Georgia, and Tennessee and respondents’ outlooks for the remainder of the year were positive. Airline traffic was stable to slightly down according to the Dallas District, but conditions were much better than a year earlier thanks to strength in business travel. Restaurants and food service contacts in the Kansas City and San Francisco Districts also noted slight increases in activity.

Real Estate and Construction
Housing markets remained weak. Most District Beige Book reports suggested overall home sales were sluggish or declining and were below year-ago levels. There were scattered reports of some improvement in sales in a few Districts, however. Philadelphia noted an increase in sales of existing homes, and Richmond, Kansas City, and Dallas reported upticks in sales of higher-priced homes. Sales reports were mixed in the St. Louis and Minneapolis Districts, with increases in some metro areas and declines in others. Home inventories were elevated or rising according to most District reports. Home prices were generally stable since the last report, although Kansas City noted a decrease in prices, and New York and Minneapolis reported declines in some metros. Homebuilders in the Atlanta District reported downward price pressure and expressed concern about rising foreclosures and bank-owned properties coming to market.

Single-family construction activity was at very low levels, but had improved somewhat in the Chicago, St. Louis, and Kansas City Districts. Atlanta reported a softening of construction activity overall, and Minneapolis said single-family building activity was mixed across metros. Builders in the Dallas District said they had pulled back on starts considerably after the run-up earlier in the year.

Respondents’ outlooks suggested sales and construction would remain subdued through year-end. There were some reports that tighter credit standards for buyers and small builders, along with general economic uncertainty, were stalling activity.
Conditions in the commercial real estate sector remained subdued. Reports suggested rental rates continued to decline for most commercial property types. The one exception was the apartment sector, where higher leasing activity led to fewer concessions, most notably in Manhattan. Office, industrial and retail rental markets remained weak, although there were a few reports of slight increases in leasing activity in the Richmond, Chicago and Dallas Districts. Commercial property sales were low overall, but contacts in the Chicago and Dallas Districts said investment demand for distressed commercial properties remained strong. Given lackluster demand for commercial space, nonresidential construction activity was limited to mostly public projects, according to District reports. Industry contacts appeared to believe that the commercial real estate and construction sectors would remain weak for some time.

Banking and Finance
Lending activity was stable at low levels across most Districts, but there were some reports that demand picked up slightly. The Richmond and Dallas District reports noted increased lending activity, and Chicago said credit conditions continued to improve in the District. Reports from Richmond and Dallas suggested that competition for quality loans had picked up. Some contacts noted there was pressure to price loans slightly more aggressively.

Demand for commercial and industrial loans remained weak as businesses continued to postpone capital spending plans because of economic and public policy uncertainties. However, merger and acquisition lending picked up in a few Districts. Commercial real estate lending remained subdued and loan standards were still tight.

On the consumer side, lending was sluggish, but there were scattered reports of improvement. Contacts in the Cleveland and Dallas Districts reported growth in auto loans. Residential mortgage lending and refinancing activity increased in several Districts, and San Francisco reported an increase in demand for nonconforming mortgage loans.

Credit quality changed little on balance. New York reported a decrease in delinquency rates on consumer loans, however, and overall quality improved in the Philadelphia and Richmond Districts, according to reports.

Agriculture and Natural Resources
Agricultural conditions were mostly favorable. Fall harvest was generally ahead of its normal pace, and above-average yields were expected in most reporting Districts. There were a few exceptions, however. Widespread rains flooded farmland and delayed harvests in the Minneapolis District while dry weather affected some crops in the Atlanta and St. Louis Districts. Unfavorable weather conditions and resulting crop losses abroad continued to boost export demand for U.S. agricultural products. Commodity prices strengthened further, boosting optimism among producers in the Dallas District and spurring higher cropland values and capital spending on agricultural equipment in the Kansas City District. Additionally, corn producers in the Chicago District were holding on to recently harvested corn in hope of even higher prices.

The energy sector continued to expand, with activity rising further in the Atlanta, Minneapolis, Kansas City, Dallas, and San Francisco Districts. The Minneapolis District reported that mines were operating near capacity, and coal production was robust in the Cleveland and Kansas City Districts. Firms in the Dallas District noted strong domestic land-based drilling and a pickup in overseas demand had offset losses resulting from the moratorium in the Gulf of Mexico. The Cleveland and Kansas City Districts reported that strong activity had prompted hiring and an increase in capital spending at some energy firms. Respondents’ outlooks were mostly positive, although low natural gas prices had dampened the outlook for producers in the Cleveland and Dallas Districts.

Prices and Wages
Input costs rose slightly, but prices of final goods and services were stable across Districts. Upward pressures on agricultural commodities and industrial metals prices were reported by several Districts. In addition, shipping costs increased in the Philadelphia, Atlanta, and Dallas Districts, and retailers in the Philadelphia and Chicago Districts reported higher wholesale prices. Pass-through of rising input costs to final prices remained limited although there were scattered reports of increases. Prices of petrochemicals rose in the Dallas District, and a few manufacturers in the Boston District said recent price increases on some of their products had been successful. Some manufacturers in the Atlanta District noted rising costs of materials and employee benefits would likely be passed on to customers in the near-term, and several manufacturers in the Cleveland District announced plans to raise product prices in an attempt to recover rising costs. In response to rising food costs, food producers in the Dallas District reported plans to raise prices, and menu prices at restaurants rose modestly in the Kansas City District.

Wage pressures remained minimal. Most District reports found little evidence of wage increases in general. There were widespread reports across Districts that firms anticipated increased costs of employee benefits as a result of healthcare reform.
Hiring remained limited, with many firms reluctant to add to permanent payrolls given economic softness. Reports from staffing firms were mixed. Staffing firms in the New York and Dallas Districts noted a slowdown in demand for their services, and contacts in the Cleveland District said new job openings declined. Richmond’s report noted demand for temporary workers picked up slightly since the last report, and staffing contacts in the Philadelphia District said clients were adding positions as workloads increased. The Atlanta report noted a preference for increasing staff hours and using temporary help rather than hiring additional full-time staff.

You should notice lots of green out there, especially in Manufacturing, the Nonfinancial sector, Consumer Spending, and in Agriculture and Natural Resources (weaker dollar). You should notice mostly red in the Real Estate and Banking Industries as well as in Price and Wage metrics.

Depending on your perspective, some of the "rising prices" comments in the Price and Wage category could be taken positively when combined with optimistic consumer spending outlooks.  I don't see it that way.   Producers are seeing their input costs rise as the dollar weakens. To maintain profitability, producers are planning on trying to pass these higher costs along to consumers.  This is called "cost push inflation".  Unfortunately producers haven't had much success in passing along higher costs to consumers. There are just too many substitutes and competition is intense. Before producers can raise prices  we need to see "demand pull inflation", which occurs when consumer demand outpaces the quantity of goods and services supplied by producers. Job creation is the fastest way to create "demand pull inflation"...either that or through a stabilization in home prices. That would be a big big help!  READ MORE

Plain and Simple: there has been a modest uptick in activity in specific sectors but  the fundamentals of a sustained economic recovery are not present. The question is....

ARE THESE MODEST IMPROVEMENTS IN SPECIFIC SECTORS A STRONG ENOUGH ARGUMENT FOR THE FED TO DELAY QUANTITATIVE EASING UNTIL THE JANUARY FOMC MEETING???

I don't believe so. The bond market wasn't spooked either.  The curve is essentially unchanged after the release.

The REDs  sectors outweigh the GREENS in terms of their role in the recovery. Housing continues to drag price levels lower and the labor market is stagnant at best.  In my opinion, further nonconventional policy efforts are needed to solve this crisis and spark a sustained recovery.  Regardless of my opinion and the messages being sent by the Fed (it's all about communication!) nothing is confirmed and the potential for rates to move up is very high if the Fed chooses to delay QEII or not offer it at all. The devil is in the details. Don't get complacent. Stay Defensive