US Beige Book, Economic Activity “Continued to Expand Moderately” from November to December

Location: Toronto
Author: RBC Financial Group Economics Department
Date: Thursday, January 13, 2011

The Fed’s Summary of Commentary on Current Economic Conditions, the so called ‘Beige Book’, compiled using data collected on or before January 3, 2011 in preparation for the January 26 FOMC meeting, characterized U.S. economic activity as continuing to “expand moderately” during the reporting period. Overall conditions and activity were noted to have improved by some degree in all 12 districts, a step up from the last report in which two Districts cited “mixed” business conditions.

Consumer spending “showed improvement” across all Districts, with retailers indicating that sales were above the levels seen last holiday season and, in some cases, better than expectations.
Manufacturing activity “continued to recover” across all Districts, with several reporting a notable pick up in new orders; overall, demand was characterized as “stable and steady”. In stark contrast to the reports in the summer, no Districts made mention of lingering fears of a double-dip recession.
Activity within housing markets “remained slow” across all Districts, with a majority characterizing local markets as “weak and sluggish” with no changes from the previous reporting period. All Districts cited concerns regarding the pace of economic recovery, particularly in employment, as a cause for the slumping activity. The commercial real estate sector was once again described as “mixed” because leasing activity showed increasing signs of recovery, but construction activity remained “weak”.
Lending activity was “mixed” across Fed Districts, with some stating that overall loan demand was “slowly improving” while others noted it was “weaker” or “slightly softer”. Most Districts reported that credit quality was “improving”.
The report noted that labor markets in most Districts “appear to be firming somewhat”, but that there was “virtually no upward pressure on wages”. All Districts reported that employment levels were rising, but “generally by modest amounts”.
Most Districts indicated that firms were facing increasing cost pressures; however, there was “only modest pass-through into final prices because of competitive pressures”. In general, any increases in selling prices were being done on a selective basis.

Today’s Beige Book provides a slightly more upbeat characterization of the U.S. economy, with businesses indicating that they are cautiously optimistic about the near-term outlook. Unfortunately, however, today’s report indicates that while labour markets are improving, these job gains are generally modest, and prices pressures continue to remain subdued, areas in which the Fed has repeatedly noted that progress of improvement has been “disappointingly slow”. Against this backdrop, we expect that the Fed will not make any changes to its highly accommodative monetary policy stance at its upcoming meeting.

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.

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