Author: RBC Financial Group Economics Department

The Fed’s Summary of Commentary on Current Economic Conditions, otherwise known as the Beige Book, was compiled using data collected on or before May 25, 2012 in preparation for the June 20 Federal Open Market Committee (FOMC) meeting and indicated that economic activity across all 12 Federal Reserve Districts had expanded from early April to late May (seven reported a “moderate pace” and three referred to the pace as “modest”, while one reported steady growth, and another noted that the pace “had slowed slightly”). This assessment is generally in line with the previous report released in April, which referred to the pace of growth as “modest to moderate” and noted that all 12 Fed Districts noted some degree of improvement.

• Consumer spending was characterized as “flat to modestly positive” across the Districts. Business contacts in three Districts reported that sales increased by a more moderate pace than the previous reporting period as the unseasonably warm weather and an earlier Easter holiday had brought activity forward. Other Districts, however, reported that the warm temperatures were continuing to provide a boost to retailers. Overall, outlooks were optimistic, with modest sales growth expected over the near term.
• Manufacturing activity continued to expand across the country, with most Districts reporting gains in production or new orders. Strength was particularly evident in auto and steel manufacturing.
• Residential real estate activity was again noted to have improved since the previous report, with several Districts seeing indications of a recovery in the fragile single-family housing market. The multi-family sector continued to improve and was supported by increased construction activity. As well, commercial real estate conditions improved in most Districts, with some reporting a pick up in commercial construction.
• Lenders in most Districts reported an improvement in loan demand and credit conditions, with banks in New York reporting the “most broad-based increase in loan demand since the mid-1990s.” Credit quality was reported as “solid” while most Districts reported that loan delinquencies continued to decline.
• With respect to labour markets, hiring “was steady or showed a modest increase” in most Districts. There were widespread reports that firms faced difficulty finding highly trained or skilled workers. Overall, upward pressures on wages continued to be “fairly modest.”
• Inflationary pressures remained modest across most Districts and overall cost pressures eased as the price of energy inputs declined.

 

The Beige Book’s anecdotal assessment of the US economy indicates that overall economic activity improved further during the previous two months and economic outlooks remained positive, although respondents were found to be “slightly more guarded in their optimism.” In particular, some respondents expressed concern regarding the effect of a slowdown in Europe and domestic political uncertainty on future business conditions. While these concerns will carry some weight in the Fed’s upcoming policy discussions, the key points of today’s release from a monetary policy perspective were the evidence of declining price pressures and the indication that labour market conditions are seeing only modest improvements. This latter point is likely to be the main driver of policy deliberations as the reported easing in the pace of employment gains in recent months has boosted expectations that the Fed move to provide further policy stimulus at its upcoming meeting in an effort to support the recovery against a highly uncertain global economic backdrop.

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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