U.S. Fed's Beige Book Report: "Economic Activity Expanded at a Measured Pace" since October

The Federal Reserve’s Summary of Commentary on Current Economic Conditions, otherwise known as the Beige Book, compiled using data collected on or before November 14, 2012 in preparation for the December 11 and 12, 2012 Federal Open Market Committee (FOMC) meeting, indicated that economic activity “expanded at a measured pace” since the last report in October. Seven of the 12 Fed Districts reported growth at a modest pace, while two reported a “somewhat stronger pace of activity”. The New York and Philadelphia Districts reported weaker conditions, although this was largely attributed to the effect of Hurricane Sandy, while Boston, which noted limited effects from the storm, reported a slower rate of growth.

• Consumer spending increased at a moderate pace in most Districts, with the regions most affected by Hurricane Sandy noting strong sales growth prior to the storm and business contacts expecting to recoup sales lost to the storm in the coming months as consumers replace destroyed or damaged property. Expectations for the upcoming holiday shopping season were “mostly upbeat”.
• Reports on the manufacturing sector were mixed, although the balance of opinion was that conditions weakened since the previous report as seven Districts noted that activity either slowed or declined. Business contacts in the sector expressed concern about the outlook for next year, due in part to the uncertainty regarding the outcome of the fiscal cliff.
• The residential real estate market continued to improve across most of the country with sales up broadly, prices stable or rising, and demand paring down inventories and supporting new construction activity. As well, construction and commercial real estate activity generally improved during the reporting period, although some contacts reported that expansions were being held back “due to uncertainty”.
• Loan demand was mixed to slightly stronger across the country as higher demand for mortgages and auto loans was largely offset by weaker demand for borrowing from small businesses. Credit quality was deemed to have improved on net, while credit standards were somewhat looser.
• Modest improvements in hiring were reported by most Districts, with more than half seeing an increase in employment. Labour market conditions were generally described as improving modestly against a backdrop of better business conditions. Wage growth, however, remained subdued throughout most of the country as an abundant labour supply constrains upward pressure.
• Inflation was little changed from the modest pace reported in October. Almost every District described price growth as modest, although price pressures related to some construction and crop-related inputs were reported to be rising.

Despite the Hurricane Sandy-related activity disruptions, the anecdotal assessment of economic conditions presented in the Beige Book can be characterized as fairly upbeat, and the improvement noted in labour markets is a welcome change from the stagnant conditions cited in previous reports. With that said, business contacts are reporting that uncertainty and concerns related to the effect of impending fiscal cliff are holding back activity and weighing on the outlook. Although our expectation is that the fiscal cliff will be avoided, some more modest fiscal restraint is likely to emerge in any bipartisan agreement. Given this, and with inflationary pressures remaining subdued, we anticipate that the Fed will maintain its highly stimulative monetary policy stance in an effort to help maintain the modest economic momentum that is currently in place. We continue to believe that the actions taken by the Fed to date will likely prove sufficient to sustain a modest strengthening in growth and generate further improvement in labour market conditions.

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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