Beige Book: Economic Activity Continues to Slow

MBA (7/24/2008 ) Sorohan, Mike
The Beige Book released yesterday by the Federal Reserve Board confirmed what many of us already know—that the pace of economic activity continues to slow.
Key highlights of the report:

• Consumer spending—a critical component to economic growth—was “sluggish or slowing” in nearly all districts, despite getting a boost from economic stimulus checks.

• Residential real estate markets declined or were still weak across most of the country.

• Manufacturing activity declined in many districts, although demand for exports remained generally high.

• Commercial real estate activity also slowed or remained sluggish in a majority of districts, although a few districts noted slight improvement.

• Banking loan growth generally reported as restrained, with residential real estate lending and consumer lending showing more weakness than commercial lending.

• Demand for services remained mixed across districts, with strength in the IT and health care industries offsetting some weakness in other service sectors.

• The energy sector continued to strengthen, boosted by rising petroleum prices.

• Overall price pressures reported as elevated or increasing. Input prices continued to rise, particularly for fuel, other petroleum-based materials, metals, food and chemicals. Retail price inflation varied, with some districts reporting increases but others noting some stability, at least for the present. Wage pressures were generally limited in most districts, as labor market demand was soft except for highly skilled workers and in the energy sector.

• Tourist activity was mixed, with residents in several districts choosing to vacation closer to home because of high gasoline prices.

The Book said the outlook for retail activity was generally downbeat. Automobile sales were almost uniformly weak across districts, with sales especially poor for large vehicles such as trucks, SUVs and some minivans, with demand increasing for small fuel-efficient and foreign cars.

Residential real estate markets declined or remained weak across most of the country, the Book said. Boston, Philadelphia, Richmond, Atlanta and St. Louis districts reported declining sales; Cleveland reported flat to declining sales, while sales remained sluggish in Kansas City and New York districts, particularly at the high end, and were below year-ago levels in the Minneapolis district.

The Book reported inventories of unsold homes or condos as higher or excessive in several districts, although Dallas noted a continued decline in inventories, especially at the low end. Home prices continued to decline in most districts as they reported increased use of incentives and discounting. The San Francisco district noted particularly sharp declines in home prices in areas of California, Arizona and Nevada that have experienced large increases in foreclosures. Atlanta reported home price drops across the board.

On a positive housing note, the Book reported home prices as holding up in the Dallas district and little changed in the Kansas City district. However, difficulties obtaining mortgage financing were reported in the New York and Chicago districts. All districts reporting on single-family construction said activity continued to decline and builders in the Philadelphia district noted a rising number of cancellations. The decline in new construction accelerated in some areas of the Chicago district.

The Book noted loan growth as generally “restrained” across the country, with residential real estate lending and consumer lending showing more weakness than commercial lending. Overall loan demand weakened in the New York, Kansas City and San Francisco districts, and as sluggish in the Philadelphia district. St. Louis reported slightly positive overall loan demand. A number of districts reported sluggish growth or slowing demand for residential real estate loans; San Francisco described demand for such loans as very weak.

Consumer loan demand was reported to have declined in the New York, Chicago and Kansas City districts and grew more slowly in the Philadelphia district. Reports on business lending were generally more upbeat. However, slight to moderate declines in business lending were reported in the New York, Kansas City and San Francisco districts. On the funding side, Dallas described competition for deposits as “very tough,” but Cleveland indicated that core deposits at smaller banks as stable to increasing as a result of a flight to safety by investors.

Most districts reported a further tightening of credit standards, especially for residential real estate and construction loans. Dallas reported that lenders were tightening non-price terms and boosting loan spreads in response to increases in their cost of capital. Tighter standards for construction loans were reported in the Atlanta and Chicago districts and San Francisco indicated that credit standards remained quite restrictive for both residential real estate and construction loans. Tighter standards for business loans were reported in three districts, but banks in the Atlanta district were reported to be competing more intensely for business customers with good credit histories. Kansas City and Boston reported that tightened standards were especially prevalent on commercial real estate loans.

Districts that commented on bank loan quality reported some deterioration, including in the Philadelphia, Richmond and San Francisco districts. New York reported increased delinquencies on consumer and residential real estate loans and San Francisco indicated that declines in loan quality were greatest for real estate loans and construction loans. In the Dallas district, contacts had not yet observed a significant decline in loan quality but expected deterioration in coming months, especially for residential real estate and consumer loans.

All reporting districts characterized overall price pressures as elevated or increasing. Input prices continued to rise, particularly for fuel, other petroleum-based materials, metals, food and chemicals. Most districts reported labor markets as unchanged or slightly weaker compared with the last survey period, and that wage pressures were generally modest. Demand for labor remained high for skilled workers in most industries.