Given the ongoing uncertainty gripping the markets, the release of the latest Federal Reserve’s Beige Book provides a timely look under the hood of several local economies. With economic reports for every district under the Federal Reserve System collated into one summary, the book captures a more detailed picture for the U.S. economy. That’s why it’s surprising to us at Zacks Investment Management that few people pay any attention to it.
Ever since its coming into public domain in 1985 (thanks to former Dow Jones reporter Paul Cox, who managed to convince Fed officials to reveal it along with other journalists), the report stands out for its relevancy and up-to-date content as a fresh version is released around two weeks prior to every FOMC (Federal Open Marketing Committee) meeting. The report has even been seminal for construction of economic indices like Moody’s Analytics Beige Book and SMRA Beige Book Activity Index.
How is it Useful?
Each of the 12 Federal Reserve Banks collects anecdotal market insights from its region’s bank and branch directors, business contacts, experts and economists among other sources. With all of that information across districts summarized into a single handbook, we get a more bottoms-up view of the nation’s most current economic situation. It is also handy for those looking to invest in a specific region. Instead of just dishing out data and numbers, it directly presents economic assessments straight from the experts’ tables.
In this way, it’s a useful addendum to the statistical data guiding the Fed’s crucial monetary policy decisions. In fact, in contrast to the monthly lags that are typical of several statistical reports, the beige book includes more recent information on macroeconomic variables, not to mention some forward-looking statements.
Market conditions may vary across districts. So, having a regional level perspective helps the FOMC in identifying potential winners and losers from a policy alternative. Also, the Beige Book keeps the FOMC updated on any economic changes that may have occurred since the previous policy meeting.
The Latest Beige Book Publication Offers Hope
The latest report, which was released last month, summarizes regional information gathered before February 22, 2016. The report states an overall improvement in the U.S. economy since the last reporting session. Richmond and San Francisco experienced moderate economic growth and Cleveland, Atlanta, Chicago, and Minneapolis had modest expansion. While Philadelphia reportedly had slight increase, St. Louis gave a mixed picture. New York and Dallas had flat growth rates and Kansas experienced modest decline in activity. However, business contacts were largely sanguine about future growth prospects. Here are some of the sectoral highlights:
Consumer Spending Rises in Majority of Districts
Barring weakness in Kansas City and Dallas, consumer spending strengthened from the previous reporting period in most districts. In Philadelphia and Richmond, for instance, retail sales rebounded after a temporary hiccup from inclement weather. St. Louis had flat retail sales while New York reported a slight increase from a year ago.
While the drag in gasoline prices had some positive impact on consumer spending in regions like Cleveland, Philadelphia and St. Louis, it did not quite have the desired effect in Boston and Chicago.
Auto sales varied across regions, but it was strong in general. Tourism activity looked healthy for most districts. Kansas, however, saw a moderate decline in tourist activity barring resort areas.
Non-Financial Services Showed Mixed Performance
There was slight expansion in the non-financial services’ sector, with Philadelphia, Dallas and St. Louis contacts attesting to positive growth in service sector firms. But, some weakness in business activity and revenues were noted in New York and Richmond districts’ service firms respectively. On the other hand, staffing services experienced an overall increasing demand.
Transportation performance is reportedly mixed across districts. Gains were offset by the crushing energy sector and the softening agricultural incomes and export volumes. Nevertheless, Richmond and Atlanta port contacts reported strong volumes. Also, trucking services have expansion plans in the St. Louis District. Railway freight volumes, however, reduced in districts like Atlanta, Minneapolis, and Dallas. Kansas City had moderate decline in transportation activity.
Manufacturing Activity Varies Across Districts
Manufacturing reeled from global sluggishness, but conditions were quite varied across districts since the last reporting period. Although the energy sector’s woes took a toll in several districts, San Francisco seemed to have benefitted from lower energy costs in steel production. Exports faced headwinds in many districts from global weakness coupled with a strong greenback. Declines in farm incomes have hampered manufacturing activity in Chicago and Kansas City. But, the auto industry showed strength in Chicago and Cleveland.
Although Cleveland and Dallas are skeptical about prospects in chemical and industrial segments respectively, there were optimistic forward-looking statements from Philadelphia, Atlanta and Kansas City on the manufacturing industry.
Real Estate and Construction Look Promising
Residential property sales increased across districts, except for New York and Kansas City where seasonal factors hurt to some extent. Low to medium priced home sales exceeded that of higher-priced homes in Cleveland, Kansas City and Dallas.
While residential real estate inventories were low in Philadelphia, Cleveland, Richmond, Atlanta, St. Louis, Minneapolis and Kansas City, home prices rose in some of these districts. This may be an indication of tightening housing markets.
There was an overall expansion in residential construction, barring Philadelphia and Kansas City. St. Louis reported a rise in speculative multifamily construction projects.
Non-residential real estate sales and leasing growth ranged from flat to strong. Commercial rents increased in districts such as Philadelphia and Atlanta.
Banking and Finance Show Resilience
There was an overall rise in loan demand. While Philadelphia reported a slight decrease, St. Louis experienced strong mortgage, commercial and industrial loan demand. Crushing oil sector losses reduced loan demand in Dallas, but the region had increased lending in most other sectors.
Credit quality was mostly steady amid some tightening credit standards. While loan quality improved in areas such as Philadelphia, Richmond, San Francisco and St. Louis, lending policies became somewhat stringent in St. Louis and Philadelphia. Also, a more competitive lending environment was observed in several regions including Philadelphia, Richmond and San Francisco.
Agricultural and Natural Resources Continue to Weaken
The agricultural economy was mostly flat-to-weak amid the commodity rout and global slowdown. Richmond, Dallas and San Francisco Districts suffered lower exports due to a strengthening dollar. Chicago farmers tried to offset the impact of commodity weakness by turning to cheaper seed varieties and selling equipment. Credit conditions deteriorated in Kansas City.
While agricultural production was hampered by seasonal sluggishness in Richmond and droughts in San Francisco, production conditions were better in Dallas and Atlanta owing to adequate moisture.
The energy sector continued to weaken, with reduced coal production and dwindling oil and gas drilling rigs in several districts. Not surprisingly, there was retrenchment of labor and capital spending in this sector as a result. On the other hand, refineries were strong performers, with Minneapolis planning capital upgrades over the coming three years.
Labor Market Looks Steady While Prices Remain Flat
Labor market conditions looked constructive, with the majority of districts experiencing modest growth in the labor market. Atlanta, Dallas and San Francisco showed decreased employment in the energy sector. Retail employment declined slightly in Dallas owing to weak consumer demand.
Most districts reported slight to strong wage growth. While Kansas City, Richmond and Atlanta Districts reported flat wage growth, St. Louis saw substantially higher wages from the previous year. There was positive wage growth among high-skilled labor in many districts including Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis and San Francisco. Entry-level wages were also up in five districts.
Prices did not rise much from the previous reporting period. Dallas reported some deflationary pressure building up, although prices were flat overall. Several districts incurred reduced prices of agricultural commodities, fuel and transportation. Manufactured finished goods prices were stable in Cleveland but fell a bit in Kansas City.
Bottom Line for Investors
To all those investors who have been apprehensive about the U.S. economy’s prospects, the latest Beige Book should offer some comfort. Based on opinions of professional experts and other relevant sources across different districts, the larger picture for the U.S. seems more like a beacon of hope than a pit of despair amidst global volatility and uncertainty.
Most of the weaker areas mentioned in the report are a result of global predicaments, while U.S. domestic conditions are mostly strong. Even as manufacturing and agricultural sectors struggle with global volatilities, relatively strong conditions are noted in consumer spending, real estate and banking. With already stable domestic forces, fears of recession seem far-fetched, especially as oil prices have started showing signs of rebound. A positive outlook on the U.S. economy should be reaffirmed once other global worries subside – an outcome we at Zacks Investment Management remain hopeful will occur.
The Federal Reserve’s Beige Book provides a more detailed picture of the U.S. economy that helps lend insight into economic and market factors that are important to consider as you invest for today or the future. This is the domain of our portfolio managers who guide $4B in assets for our clients every day. Manish Jain, our Fixed Income Portfolio Manager and member of our Investment Committee, has offered to provide his view on the market outlook for our readers. Don’t miss this opportunity to hear from Manish on this teleconference scheduled for April 20th at 12p (ET). Space is limited so register now…
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