U.S. Beige Book Report Continues to Show Modest to Moderate Economic Growth

The Federal Reserve’s Beige Book report, compiled using data collected on or before October 6 in preparation for the October 28/29 Federal Open Market Committee (FOMC) meeting, indicated that overall economic activity continued to expand at a “modest to moderate” pace since the last report. Six of the 12 Federal Reserve Districts reported that growth continued at a “moderate” pace, unchanged from the previous report, while five reported a “modest” rate of expansion. One district indicated a “mixed picture” of economic conditions. These assessments of economic conditions are relatively unchanged from the last report and most districts remained generally optimistic about future activity.

• The assessment of labour market conditions once again remained relatively unchanged from the previous report, with most districts characterizing hiring trends as continuing at “about the same pace” compared to the “relatively unchanged” description noted previously. Once again, contacts in almost all districts reported difficulty finding qualified workers for certain positions.
• Most Fed districts reported that consumer spending continued to grow, though the gains were characterized once again as “slight to moderate”. Seven districts reported “moderate” growth with some noting that retail contacts were running more promotions than usual. Auto sales varied across districts, although they were generally positive as lower gas prices spurred increased sales of larger vehicles in three districts. Half of the districts reported a more sanguine outlook for retail sales with two districts in particular expecting that “sales during the upcoming holiday season would be up slightly from a year earlier”.
• Manufacturing activity was mixed across the country, although more districts reported an expansion in activity relative to the previous report. Manufacturing activity increased in most districts since September although it stalled in one district and was weaker in another relative to “the past few reports”. Expansion was reported “across a broad range of products”, with particular strength in demand for steel as well as from the energy sector. In contrast, slower food manufacturing activity was reported in three districts and held steady in another. Contacts in a number of districts were positive about the outlook for manufacturing.
• Housing market activity was also mixed with some districts reporting “only slight growth” or sluggish activity in residential home construction and others noting that new construction continued to expand. Home sales and prices continued to rise in one district on account of lower inventory levels from a year ago while one district saw a decline in home sales and another reported that sales were stable since the last report. Market conditions varied across regions, with three districts noting high levels of multi-family construction projects and sluggish single-family starts while another saw single-family construction starts reach their highest level so far this year.
• Non-residential real estate activity grew in most of the districts with three reporting increased construction in both commercial and industrial activity and only one district reporting a decline in commercial activity. Contacts reported that commercial vacancy rates declined in one district and commercial real estate fundamentals are “either holding steady or improving” in another.
• Overall loan demand improved through the September-to-October period with a number of districts reporting an increase in loan volumes. Auto loans rose strongly in one district while overall consumer lending increased in three others. Demand for business credit expanded since the previous report with commercial lending increasing across several districts. Demand for consumer refinancing was not as strong as some districts reported unchanged or negligible demand while another reported an outright decline. Credit standards were little changed since the last report in most districts while loan quality improved and delinquency rates generally held steady or declined.
• Activity in non-financial services advanced since the previous report with districts reporting stronger activity in several industries. Half of the districts experienced increased staffing requests although one reported that improving labour market conditions were contributing to the challenge of finding qualified workers.
• Most districts characterized wage pressures as being “modest” compared to “slight to modest” in the previous report. Several noted that intensifying wage pressures were evident within particular skilled industries and occupations, notably in construction and manufacturing. Overall price pressures “remained subdued” with little to no change or modest increases in price levels. Districts noted that “several” commodity prices fell since the previous report, although cattle, hog and dairy prices remained elevated.

The Beige Book’s anecdotal assessment of economic conditions in the US indicates that an expansion in activity across most sectors was sustained heading into the final quarter of the year. Importantly, the recent risk-off tone across financial markets reflecting concerns about an appreciating US currency and global economic weakness was not evident in the report with participants’ overall outlook remaining generally optimistic. That said, a lack of recent progress in the housing recovery and relatively unchanged conditions in the labour markets compared to the previous reporting period are unlikely to spur a deviation from the Fed’s accommodative monetary policy stance in the near term; however, hiring gains above a 200,000 pace will likely yield a “sustained improvement” in the underutilization of the labour market through the forecast horizon. A shift in the outlook towards a tightening in monetary policy is data dependent and as today’s report is consistent with the Fed’s expectation that the economy will sustain an above-potential pace, there is little need for the FOMC to alter its current policy course in the near term. We expect that the Fed will end its asset purchase program at the upcoming October meeting with the fed funds target range of 0% to 0.25% being maintained until economic conditions warrant an increase, which we anticipate will occur in Q2/15.

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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