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 January 4, 2013 in preparation for the January 29 and 30 Federal Open Market Committee (FOMC) meeting, indicated that economic activity expanded in all 12 Fed Districts, with the pace of growth being characterized as either “modest or moderate.” This compares to the previous report released November 28, 2012 in which 10 Districts reported some degree of growth while contacts from the two Districts most affected by Hurricane Sandy (New York and Philadelphia) reported weaker conditions.

• Consumer spending increased in all Fed Districts. The holiday shopping season was reported as being modestly better than the previous year; however, several Districts noted that sales were below expectations. The outlook for future sales is positive, although business contacts expressed concerns that consumers will spend cautiously due to “ongoing fiscal uncertainty” and as such lowered their expectations.
• Reports of manufacturing activity were mixed. Half of the Districts noted that the sector grew during the period since the last report, while the other Districts were split between contracting activity or little to no change. Manufacturers are generally optimistic in terms of their expectations for future activity, although capital spending plans were mixed.
• The real estate sector continues to improve across the country with gains seen in sales, leasing, and construction in both the residential and non-residential space. Prices and rents were noted to have increased broadly while housing inventories have been pared back further.
• Overall loan demand was generally unchanged from the previous reporting period, with growth seen in demand for residential mortgages, auto loans, and commercial real estate loans. Credit standards were largely unchanged, although a couple of Districts noted signs of loosening against a backdrop of generally improving credit quality and declining delinquency rates.
• Labour market conditions were mostly unchanged since the last report. Several Districts reported that hiring was being delayed due to fiscal uncertainties. Wage pressures continue to be characterized as “contained or subdued”. Higher year-end bonuses were reported in New York and Chicago ahead of anticipated tax increases.
• Inflation remains stable, although a few Districts noted that firms were able to pass rising input prices through to consumers.

The Beige Book’s anecdotal assessment of US economic conditions suggests that growth continued at a modest pace to the end of 2012, although the pace of activity was being restrained by the uncertainty surrounding the fiscal cliff. To the extent that the actions taken by lawmakers to avoid the increase in income taxes on the majority of American households removes some of the lingering uncertainty, this suggests that the economy should see an improvement in the pace of expansion for  the coming months. With that said, the pace of growth is not expected to be sufficient enough to bring the unemployment rate below the 6.5% threshold this year or next, thereby meaning that the fed funds rate target will likely remain in its current 0.00% to 0.25% range for the foreseeable future.

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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