US Beige Book Implies a Slight Downgrade to the Economic Outlook

07/28/10 - Today’s beige book report, compiled in preparation for the August 10 FOMC meeting, provided a much more qualified characterization of the recovery among the 12 Fed districts compared to the report prepared in advance of the June 22-23 FOMC. Although the report opened by stating that economic activity continued to grow, the qualifier “on balance” quickly followed. This qualifier reflected that while eight Districts seemingly indicated that economic activity improved, albeit modestly, two Districts indicated steady activity with two Districts, Atlanta and Chicago, indicating the pace of activity had slowed recently. In June, it was indicated that economic activity had improved in all 12 Fed Districts.

The greatest source of weakness seemed to emanate from real estate and construction. On the housing side, it was reported that “nearly all Districts reported sluggish housing markets” although this was in large part due to the expiration of the homebuyer tax credit April 30. The picture was bleaker for the commercial and industrial real estate side of the economy, where markets “continued to struggle in all 12 Fed Districts” and did not reflect any payback from some earlier strength.

Discussion of consumer spending was somewhat more upbeat with reports that “retail sales during the early summer months were generally positive, although in most Districts the increases were modest.” It was noted, however, that necessities tended to be the strong sellers with “big-ticket items” moving more slowly.

The assessment of the manufacturing sector was that activity “in most Districts continued to move up,” although it was the case that activity had slowed or levelled off in six of those Districts. In June, it was stated that manufacturing activity was gradually improving in all 12 Districts.

The characterization of labour markets was that “market conditions improved in several Districts” led by gains in New York, Chicago, Minneapolis, Richmond and Atlanta. Four districts noted “that they continued to rely in temporary staff over permanent hires.” Within the Dallas area, it was noted there were significant layoffs in the energy sector related to the moratorium on deepwater drilling in the gulf region.

With high unemployment persisting, it was reported that “wage pressure remained largely contained” and that “prices of goods and services were relatively stable in most Districts.”

Most districts reported that bank lending standards remained restrictive.

Today’s beige book report implies some easing in the pace of growth. Although some of this deterioration may be attributable to earlier strength in areas such as housing that borrowed from subsequent periods, this was not generally the case. This slowing implies even less progress in terms of reducing a still high unemployment rate. Thus, with inflation likely to remain very low, the central bank is unlikely to be in any rush to start tightening. Our forecast does not have the Fed funds being hiked until the second quarter of 2011.

Information contained in this report has been prepared by the Economics Department of RBC Financial Group based on information obtained from sources considered to be reliable. While every effort has been made to ensure accuracy and completeness, RBC Financial Group makes no such representation or warranty, express or implied. This report is for information purposes only and does not constitute an offer to sell or a solicitation to buy securities.