Fed’s Beige Book Offers Clues On US Economy: Auto Sales, Jobs, Manufacturing, Housing

The U.S. economy continued to expand across most regions and sectors from late November through the end of 2013, the Federal Reserve said in its anecdotal Beige Book report issued Wednesday.

Eight times per year, the Federal Reserve releases the Beige Book, a snapshot of business conditions in each of the Fed’s 12 regional bank districts. Although the findings are anecdotal and can be somewhat obscure, it has become an important part of the information discussed by the Federal Open Market Committee -- the Fed’s policy-setting body.

The Beige Book is updated two weeks before each FOMC meeting in Washington, D.C. That makes it relatively current compared with many other economic indicators, which can lag a month or more behind the period they report on. The policymakers are scheduled to meet Jan. 28-29, which is Ben Bernanke’s last meeting as Fed chair.

Here’s a rundown of some nuggets from Wednesday’s Beige Book. The report can be used to get a feel for the direction of the U.S. economy. Directly quoted from the report:

1. Auto sales in most regions remained a bright spot.

New York, Philadelphia, and Kansas City reported that automobile sales declined a bit in December; dealer contacts in the New York and Kansas City districts reported higher inventory levels. Contacts in the Richmond, Atlanta, and San Francisco districts said that automobile sales remain strong.

Auto sales were mixed across areas within the Dallas district. Chicago and Minneapolis reported that light-vehicle sales increased; Cleveland observed that consumers continue to shift from smaller, more fuel-efficient cars to SUVs, crossovers, and light trucks.

The 2014 outlook for vehicle sales is strong in the Philadelphia, Richmond, Cleveland, Kansas City, Dallas, and San Francisco districts.

2. Holiday retails sales were, for the most part, encouraging.

Three-quarters of the districts indicated that retail activity had increased since the last Beige Book report. The exceptions were St. Louis and Kansas City, where retail results were mixed, and the Richmond district, which cited a softening of retail sales.

Most districts reported that retail spending was up, with activity described as modestly to moderately higher and holiday sales on plan or up a bit compared with 2012. However, Richmond noted a general slowdown in retail spending in recent weeks and the Kansas City district cited lower than expected holiday sales, which retailers there attributed to a shorter selling season and harsh weather conditions.

Atlanta and San Francisco both noted that in-store sales were softer than online sales. Apparel sales were reportedly strong in Boston and Richmond, while Philadelphia, Cleveland, and Chicago indicated that cold-weather gear and winter items were selling well. Home furnishings, home improvement items, and/or furniture sold particularly well in the Boston, Philadelphia, Richmond, and San Francisco districts.

Demand for electronics was quite strong in the Cleveland and Minneapolis districts, but San Francisco reported that electronics sales were weaker than in recent years. Kansas City and dallas reported lagging sales for higher-priced big ticket items.

3. Tourism was mixed.

Reports on leisure and tourism spending were mixed across and within districts.

The Richmond district reported flat to slower bookings in recent weeks, except for resorts specializing in winter activities. San Francisco indicated that travel and tourism were down in Hawaii and remained somewhat weak in Las Vegas.

Minneapolis reported that winter tourism activity was off to a solid start on account of snowy weather. The Kansas City district indicated that tourism activity increased slightly since the last survey and increased modestly year-over-year.

Hospitality contacts in the Atlanta district reported strong advance bookings and increases in occupancy rates, room rates, and revenue per room during the 2013 holiday season compared with year-earlier levels.

4. Manufacturing activity on the rise.

All districts reported year-over-year increases in manufacturing activity, although Kansas City noted slower growth in December. Capital spending was generally up and contacts anticipated further growth.

Three specific areas of strength in manufacturing were mentioned by multiple districts: commercial aviation, autos and construction materials. The Boston, Chicago, and San Francisco districts reported exceptional strength in commercial aviation driven by record backlogs at major aircraft producers. The Richmond, Chicago, and San Francisco districts said that the recovering housing market had led to increased demand for construction materials going all the way from raw materials like lumber to finished products like kitchen cabinets.

Similarly, the Boston, Cleveland, Atlanta, and Chicago districts reported above-average strength in the auto industry. Contacts in the Cleveland district said that most auto suppliers were at or near capacity; one respondent there estimated that 85 percent of auto suppliers should be adding capacity right now but indicated that many are reluctant to do so.

News about semiconductors was mixed, with contacts in the Boston district citing strong demand for semiconductor manufacturing equipment and contacts in the San Francisco district reporting gradually increasing sales of chips. Contacts in the Dallas district said that demand for memory chips was rising but demand for logic devices remained soft.

The one area of weakness was manufacturers of defense-related products; contacts in the Cleveland district expressed hope that the recently enacted federal budget agreement would provide a boost to defense contractors this year and next.

5. Real estate markets continued to improve.

Real estate markets generally continued to improve, according to district reports. Although a few districts indicated home sales or residential construction in some areas had slowed or declined in recent months, most cited increased residential sales activity and construction as well as rising home prices. Reports on commercial real estate were also positive, with commercial construction generally increasing. Two-thirds of the districts reported increases in commercial sales and leasing activity.

6. Banking conditions were largely stable.

According to district reports that mention banking, loan volumes have not changed substantially since the last reporting period.

Philadelphia, Richmond, Atlanta, Chicago, Dallas and San Francisco reported slight to moderate growth. The Cleveland, St. Louis, and Kansas City districts reported no change, whereas New York cited a moderate decline in loan volume.

In addition, while no districts reported major changes in credit standards, Philadelphia, Chicago, and San Francisco cited instances where financial institutions relaxed their underwriting standards. Some contacts attributed this relaxation to increased competition in lending markets. Among reporting districts, credit quality held steady or increased, with the New York district citing declines in delinquency rates for all lending categories.

Residential real estate loans declined in the New York, Cleveland, Atlanta, Chicago, and Kansas City districts, mostly due to slowdowns in refinancing activity rather than in new purchase loan applications; in fact, the latter have slightly increased in some districts. The St. Louis district reported no change in residential real estate loan volume.

Commercial real estate loans increased in the Cleveland district, remained steady in the New York and Kansas City districts, and fell in the Philadelphia and St. Louis districts. Business and industrial loan demand increased in the Richmond, Chicago, and San Francisco districts while remaining stable in Cleveland and Kansas City and declining in the St. Louis district. The Cleveland, Richmond, Chicago, and Dallas districts reported increases in auto lending.

Regarding demand deposits at financial institutions, deposit volumes increased in the Cleveland and Dallas districts, remained stable in Kansas City, and decreased in the St. Louis district. Contacts in some districts expressed concern about new banking regulations and their potential negative impact on lending and operating costs.

7. Hiring picked up.

Two-thirds of districts noted increases in hiring; the Richmond district cited "numerous reports of strong labor demand." A manufacturer in the Dallas district said that for the first time since before the recession, his firm had too many jobs to bid on. Employment was generally described as "steady" with few instances of rapid growth but very few reports of staff cuts or plant closings.

Most district reports indicated that wage and price pressures were contained and did not present major problems for local contacts. Prices were said to be generally stable in the Cleveland, Richmond, Atlanta, Minneapolis, and Kansas City districts; they reportedly increased slightly in the Boston, Philadelphia, Chicago, and San Francisco districts. New York and Dallas cited modest price increases; both mentioned that some service-sector firms plan to raise their selling prices in the near term.

The Cleveland and Atlanta districts reported steady wages, with Atlanta noting that merit increases remained in the 1 to 3 percent range. The Boston, Philadelphia, Richmond, Chicago, Kansas City and San Francisco districts reported slight to modest increases in wages; among these, Richmond noted that average wages declined in the service sector but increased in manufacturing, while Chicago and Kansas City observed that wage pressures were lower compared with the previous reporting period. By contrast, Dallas noted a pickup in reports of pay increases and wage pressures, while Minneapolis indicated that labor markets were showing signs of tightening, and wage increases were moderate.