U.S. Highlights from the Federal Reserve's Beige Book Report

The Federal Reserve’s Summary of Commentary on Current Economic Conditions, otherwise known as the Beige Book, compiled using data collected on or before April 5, 2013 in preparation for the April 30 and May 1, 2013 Federal Open Market Committee (FOMC) meeting, indicated that economic activity generally expanded at a moderate pace since late February. 10 Federal Reserve Districts indicated growth at a modest or moderate pace while two noted that growth had accelerated slightly since the previous reporting period. This represented an upgrade over the general assessment in the March report in which two Districts characterized growth as slow.

• Most Fed Districts reported increases in retail spending with the sales generally increasing at a modest to moderate pace; however, business contacts in some Districts cited higher gasoline prices, the expiration of the payroll tax cut, and winter weather as factors restraining the pace of growth. Several Districts expect modest sales growth in the near term.
• Manufacturing activity held steady or increased in most Districts in the reporting period, with strength most evident in industries related to residential construction and the auto sector. Numerous Districts, however, reported uncertainty or weakness in military or defence-related sectors.
• Housing market activity continued to improve across the country, and some Districts reported increased momentum since February. Home sales continued to rise in most Districts, and those reporting modest growth cited low home inventories as the main factor restraining sales. The combination of strong demand and tight inventories has led to rising home prices in most Districts. New home construction continued to rise, although one District noted a low supply of building materials had stalled the pace of activity.
• Commercial real estate and construction activity improved in most Districts against declining vacancy rates and rising rents. Several Districts said commercial property investment sales activity increased during the reporting period.
• Loan demand was steady to slightly higher in most Districts, particularly for commercial loans and residential mortgages. Most District banks reported credit conditions remained favourable, and credit quality improved for both business and consumer loans.
• Labour market conditions were unchanged or improved slightly, and reports of hiring were more widespread in several sectors with particularly robust demand for workers tied to the residential construction sector. Some Districts, however, reported restrained hiring due to uncertainty over fiscal policy or healthcare reform. Overall, wage pressures continued to be fairly modest.
• Inflationary pressures remained minimal during the reporting period in the majority of Districts. Several Districts noted increased prices for housing and construction materials, but there were few reports of pass-through.

The minutes from the March 19 and 20, 2013 FOMC meeting indicated that some Committee members viewed the improved outlook (at that time) suggested it would be appropriate to begin scaling back the open-ended asset purchase program this year with some suggesting winding up the program by the end of the year. Since the March FOMC meeting, however, economic indicators have softened. The anecdotal assessment of US economic activity provided by today’s release of the Beige Book, however, appears to somewhat contradict the recent run of lacklustre data, with overall conditions broadly improving. Moreover, business contacts’ outlooks were reported as remaining optimistic across sectors and Districts despite the ongoing uncertainty regarding fiscal policy and healthcare reform. The Fed will likely view that Beige Book as encouraging, but more weight will likely be placed on the quantifiable economic indicators. To that end, we anticipate that despite recent comments about reducing asset purchases, the Fed will maintain the status quo at its upcoming policy meeting, and we continue to expect that the fed funds rate target will remain in the current 0.00% to 0.25% range into 2015.

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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