Highlights from the U.S. 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 May 24, 2013 in preparation for the June 18 and 19, 2013 Federal Open Market Committee (FOMC) meeting, indicated that economic activity increased at a “modest to moderate pace” since late April in 11 Federal Reserve Districts while one (Dallas) reported stronger growth since the previous reporting period. This compares to the previous iteration of the report in which two Districts characterized growth as having “accelerated slightly” while the other 10 reported a moderate pace of growth.

• Most Fed Districts reported increases in consumer spending, although the gains were characterized as “slight to moderate.” Late winter weather was cited as weighing on retail activity in some Districts, although demand for home furnishings, furniture, and appliances was strong. Vehicle sales increased moderately across the country.
• Manufacturing activity expanded in most Districts during the reporting period, with particular strength once again seen in industries related to residential construction while ongoing growth in auto manufacturing was reported in several Districts. Defence-related sectors saw a further weakening in activity as government sequestration caused orders to be cancelled or delayed.
• Residential real estate and construction activity increased at a “moderate to strong” pace in all Fed Districts. Districts reported higher home prices supported by low inventories of homes available for sale and higher demand. Rental markets remain tight as well. Several Districts noted increases in multi-family projects.
• Activity in the commercial real estate sector expanded at a “modest to moderate” pace in most Districts. Increased demand for commercial leasing is pushing up rents and supporting continued construction activity.
• Bank lending increased modestly since the last reporting period, with strength concentrated in demand for auto loans and residential mortgages. Business loan demand was generally mixed. Credit quality improved on balance, and loan delinquency rates continued to decline.
• Hiring increased “at a measured pace” in several Districts, although others reported generally flat employment levels. Wage pressures remained contained overall, although several Districts noted modest or moderate increases for selected occupations.
• Inflationary pressures continued to be limited, although some increases were noted for input prices, and a few manufacturers raised their prices.

The minutes from the April 30 and May 1, 2013 FOMC meeting indicated that Fed policymakers have seen progress in labour markets conditions since the introduction of the current open-ended asset purchase program last September; and indeed, if the expected continued improvement in employment materializes, then the need for policy to maintain its highly accommodative stance is reduced. The main caveat on this, however, was that “continued progress, more confidence in the outlook, or diminished risks” would be required before a slowing in asset purchases would be required. To that end, today’s release of the Beige Book indicated that while business contacts hold generally positive outlooks, expectations remain cautious in an environment of ongoing uncertainty and persistent risks. Accordingly, we view it as unlikely that the Fed will began to taper its asset purchases in the next few meetings, with such action instead being more likely to occur toward the end of this year as evidence of a sustained reacceleration of growth becomes more concrete.

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.

To subscribe or visit go to:  http://www.riskcenter.com

http://riskcenter.com/articles/story/view_story?story=99915452