Beige Book: Housing is Weakest Link. Wage Growth Missing. Margin Squeeze Looms
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. They call it the Beige Book because its Beige. 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. This edition was Prepared at the Federal Reserve Bank of Boston and based on information collected on or before January 3, 2011. (before the December Employment Situation Report was released)
Here is the Reuters Quick Recap...
RTRS-ALL FED DISTRICTS INDICATED EMPLOYMENT LEVELS ARE RISING IN AT LEAST SOME SECTORS, GENERALLY BY MODEST AMOUNTS
RTRS-THREE OF 12 FED DISTRICTS, NEW YORK, ST. LOUIS, MINNEAPOLIS, ALSO MENTIONED JOB CUTS
RTRS-FED SAYS U.S. ECONOMIC ACTIVITY CONTINUED TO EXPAND MODERATELY THROUGH EARLY JANUARY
RTRS-MANUFACTURING SECTOR CONTINUES TO IMPROVE ACROSS ALL FED DISTRICTS
RTRS-RESIDENTIAL REAL ESTATE MARKETS REMAINED WEAK ACROSS ALL FED DISTRICTS
RTRS-RETAIL SPENDING IMPROVED ACROSS ALL DISTRICTS; BANKING AND FINANCIAL SERVICES MIXED
RTRS-MOST FED DISTRICTS INDICATED BUSINESS CONTACTS WERE POSITIVE ABOUT OUTLOOK BUT STILL CAUTIOUS
RTRS-FED SAYS NOT SEEING UPWARD PRESSURE ON WAGES
RTRS-Fed says U.S. economy, jobs outlook improving
Here are some excerpts from the Release...
REAL ESTATE AND CONSTRUCTION
Activity in residential real estate and new home construction remained slow across all Districts. A majority of the Districts, including Boston, New York, Cleveland, Atlanta, Chicago, Minneapolis, Dallas, and San Francisco characterized local housing markets as weak and sluggish with little change from the previous reporting period. Kansas City noted further weakening, while Richmond received reports of both flat activity and further declines. The St. Louis District saw additional declines in existing home sales, but also cited increased new home construction permits.
All Districts attributed slumping activity to concerns about the pace of economic recovery, especially in employment, while the Philadelphia, Atlanta, and Chicago Districts mentioned difficulty obtaining credit as another constraint on demand.
High levels of existing home inventories continued to damp the pace of new home construction in most Districts reporting on construction, although Boston, Richmond, Dallas, and San Francisco mentioned pick-ups in multifamily construction within their Districts.
Home prices generally declined or held steady in the New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Kansas City, Minneapolis, and San Francisco Districts; the New York, Atlanta, Chicago, and San Francisco Districts mentioned distressed properties placing downward pressure on prices. Boston reported rising median home prices across most states in the District, but contacts attributed those increases to relatively higher sales of more expensive properties rather than a general upward movement in home prices.
Outlooks for residential real estate in the coming year were mixed, with contacts in most Districts described as expecting continued weak conditions.
Commercial construction activity was described as very limited across most Districts, with the bulk of new activity coming from projects related to healthcare, public infrastructure, and multifamily housing. Contacts in most Districts expected modest improvements in commercial leasing in 2011, although the outlook for construction was mixed and some Districts noted rising costs as a concern.
BANKING AND FINANCIAL SERVICES
Reports on credit activity were mixed across Federal Reserve Districts. Overall, loan demand was reported as stable in San Francisco, mixed in New York, steady to slightly softer in Kansas City, weaker in St. Louis and Dallas, and slowly improving in Philadelphia and Richmond.
Lenders in the New York, Cleveland, Minneapolis, Kansas City, and San Francisco Districts noted a drop in residential mortgage refinancing owing to the recent rise in interest rates, whereas Richmond reported strong demand for home refinancing. Demand for residential real estate loans eased in New York and Kansas City, remained weak in Cleveland and Dallas, but increased in the Richmond District. Real estate lending declined in the St. Louis District.
Most Districts reporting on credit quality described it as improving, while bankers in the Cleveland District said that quality remained stable or edged up slightly. Reports on credit standards were mixed in New York, while standards were said to have eased somewhat in Atlanta, remained restrictive in San Francisco, and held steady in Kansas City. Delinquency rates were flat or trending down in Cleveland, while delinquency rates in the New York District rose for commercial mortgages, decreased in the consumer lending category, and remained unchanged for all other loans.
PRICES AND LABOR MARKETS
Most District reports mentioned increasing prevalence of cost pressures but only modest pass-through into final prices because of competitive pressures.
Philadelphia and San Francisco noted somewhat reduced discounting in the retail sector during the holiday selling season, while New York, Minneapolis, and Dallas indicated retail prices were stable, Richmond said retail price increases had slowed, and Chicago and Kansas City cited discounting or depressed retail margins.
For both retailers and manufacturers, increases in selling prices, if occurring, were said to be selective. Specific markets or products identified as experiencing high or rising prices included various food products, steel and other metals, building materials, textiles, chemicals, and petroleum-related products. Many Districts mentioned concerns among business contacts that petroleum-related prices, already above year-earlier levels, will continue rising in 2011.
The Philadelphia and Kansas City reports indicated that manufacturing firms planned to attempt more price increases in 2011, while some manufacturers in the Boston District were uncertain their price increases would stick and the Chicago report projected only “limited and gradual” pass-through.
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; however, some employers in the New York, St. Louis, and Minneapolis Districts also mentioned job cuts. Staffing firms in the New York, Philadelphia, Cleveland, Richmond, Chicago, and Dallas Districts gave positive reports; Cleveland, Richmond, and Atlanta said some firms were raising work hours instead of or in addition to hiring.
The Boston, New York, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, and San Francisco Districts indicated that business contacts planned to continue or increase their pace of hiring in 2011. Some employers in the Boston, Atlanta, and San Francisco Districts expressed concern about added costs for healthcare; the Boston, Cleveland, and Chicago Districts noted selected skill shortages in some sectors.
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.”
MANUFACTURING
The manufacturing sector continued to recover across all Districts. Respondents in the Chicago District pointed to pent-up demand for both light and heavy motor vehicles, attributed to an aging fleet, as a key driver of activity in the manufacturing sector. 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. The Boston, Cleveland, and San Francisco Districts reported concerns about input prices, particularly of commodities; manufacturers in the Boston, Cleveland, and Richmond Districts indicated they had experienced lengthening lead times, shortages, or other difficulty obtaining supplies of some inputs.
CONSUMER SPENDING
Retail spending showed improvement across all Districts, with most retailers reporting sales growth consistent with or ahead of plan for the recent 2010 holiday season. Boston, Richmond, Atlanta, Chicago, and Kansas City observed consumers positively reacting to promotions and discounting, although Philadelphia and San Francisco reported that retailers relied less heavily on discounting. Inclement weather, including the late December blizzard, had some impact on sales in the New York and Philadelphia Districts. New York , Cleveland, and Chicago cited increased consumer confidence.
A few things...
PRODUCER MARGIN SQUEEZE STEALS WAGE RATE HIKES: The cost of production inputs continues to rise and while a few districts noted selective attempts to pass these extra costs down to the consumer, the general theme across the country is there is no upward wage pressure and thus not much of a chance consumers are willing to absorb increasing commodity prices. This is a problem. If input costs are rising and consumers are still shopping for bargains, firms are gonna have to make up lost margin somewhere. This does not bode well for employees who are seeking a pay raise. It also does not paint a pretty picture for the non-skilled member of the labor force who are searching for more hours. Last but definitely not least, this does not bode well for demand pull inflation. 2011 looks to be the year of the margin squeeze...for both consumers and producers.
REAL ESTATE MARKET IS WEAKEST LINK: Nothing positive was said about the housing market. Further weakening was cited and home prices are creeping lower under the weight of existing home inventory. To make matters worse, willing borrowers are having trouble qualifying because lending standards have over-tightened and there is no alternate financing mechanism. the GSEs and FHA are the only game in town. I just threw up in my mouth.
JOBS: There were some positives embedded in the report but I don't know if I would describe the labor market outlook as "improving" like Reuters did in their quick recap. Not after reading this excerpt from the Beige Book, "All District reports indicated that employment levels are rising in at least some sectors, generally by modest amounts". I have been very vocal about the choice of perspectives one has on the labor market...it's a two headed monster. Wall Street likes to focus on positive payrolls growth while Main Street experiences the realities a persistently weak Household Survey. I explained the two-headed labor market monster in this post: Two-Headed Labor Market Presents Problem for Bond Investors
Plain and Simple: Housing is the weakest link. Banks are reluctant to lend. Payrolls are growing but not nearly fast enough to speed up the economic recovery. And the manufacturing sector is enjoying a seasonal uptick in consumer spending but soon faces a major margin squeeze (lack of wage growth) that could stall further positive progress.
For every positive there is a negative counterpoint. Everybody seems to be grinding a different axe or taking another angle on the economic recovery. Onlookers attempt to rationalize the market but always end up wrapped in a web of conflicting conclusions. Me included. We have so much on our plate. How could anyone make sense of it all?
The answer is simple, they can't! Uncertainty is abundant. So investors continue to limit their exposure to risk and employ tactical strategery in a manner that maximizes profitability. The market is still chasing the lowest risk, highest yielding assets. It's a trader's world and we're still just living in it.
Dallas Fed President Richard Fisher spoke today and he put a finger in the collective eye of our Congress. I quote, "The Fed has done much ... to provide the bridge financing until the new Congress gets to work restructuring the tax and regulatory incentives American businesses need to confidently expand their payrolls and capital expenditures here at home," Fisher added that his business contacts "all express concern about taxes, regulatory burdens and the lack of understanding in Washington of what incentivizes private-sector job creation." He added "all are stymied by a Congress and an executive branch that have appeared to them to be unaware of, if not outright opposed to, what fires the entrepreneurial spirit."
There you have it. The Fed has done everything it can do. It's up to D.C. to save us now....