National economic conditions deteriorated further from the end of January through late February, according to reports from the 12 Federal Reserve Districts.
Ten of the twelve reports included in the “Summary of Commentary on Current Economic Conditions,” also known as the “Beige Book,” indicated weaker conditions or declines in economic activity; the only exceptions were Philadelphia and Chicago, which said their regional economies “remained weak.”
The deterioration, according to the Beige Book, was “broad based” with no prospect for a quick turnaround. Contacts from various districts described the outlook for near-term improvement in economic conditions as poor, with no significant pickup expected before late 2009 or early 2010.
The report suggested little or no threat of inflation with prices easing for a wide range of final goods and services, largely associated with lower prices for energy and assorted raw materials. The Beige Book also noted “price discounting for items other than energy and food.”
While a weak report often suggests the Federal Open Market Committee would act to reduce the target Fed Funds rate -- the rate banks charge each other for overnight loans -- the rate is already set at a target of 0% to 0.25%, leaving the FOMC little margin to cut rates further to stimulate the economy.
Consumer spending generally remained sluggish, although many districts reported some improvement in January and February compared with a dismal holiday spending season. Travel and tourist activity fell noticeably in key destinations, as did activity for a wide range of non-financial services. Manufacturing activity continued to fall sharply and conditions were reported weaker for agricultural producers
The housing market continued to struggle, with the Beige Book reporting “markets for residential real estate remained largely stagnant, with only minimal and scattered signs of stabilization” in some areas. Demand for commercial real estate also weakened significantly.
While credit markets remain clogged with banks not making loans, reports from banks and other financial institutions indicated demand for borrowing has also dropped with decline in business loan demand and deterioration in credit quality for businesses and households.
Unemployment, according to the Beige Book, “has risen in all areas, reducing or eliminating upward wage pressures.” At the same time, the report noted “outright reductions in hourly compensation costs, through wage reductions and reduction or elimination of some employment benefits.”
The Beige Book contains assessments of conditions by industry sector and geographic region. Here are the highlights by sector:
Consumer spending remained “very weak” but improved slightly “compared with holiday-season sales that were very disappointing.” About half of the districts, the Beige Book said, “reported that consumer demand was softer than during recent reporting periods or fell significantly below levels twelve months earlier.” Sales of luxury goods such as jewelry, electronic equipment, and other big ticket items were reported to be especially slow in the Philadelphia, Richmond, and Chicago districts.Travel and tourist activity, according to the report “continued to fall in most areas, as households reduced their vacation travel and corporate travel spending was scaled back.”Health-care providers reported declining patient volumes, attributed in part to a drop in elective procedures in the Richmond, Minneapolis, and San Francisco Districts. Demand fell as well for business consulting and accounting services, legal services, and other professional services in various districts.Demand for temporary staffing “weakened considerably.”Manufacturing activity fell in all Districts, “with very sharp declines.” Cleveland reported a drop in overall factory output of about 25 percent compared with year earlier levels.The one “bright spot” the Beige Book said, was in manufacturing of biotechnology products and pharmaceuticals which saw double-digit percent sales gains.Residential real estate markets “remained in the doldrums in most areas,” the Beige Book said, “with only scattered, very tentative signs of stabilization.” Builders “generally remain pessimistic regarding recovery prospects this year, and consequently the pace of new home construction declined further in most areas.” Demand for commercial, industrial, and retail space fell further with “more rapid deterioration than in preceding periods.”Lending activity fell further “with mixed results across districts and loan categories.” Demand for commercial and industrial loans was reported lower and consumer loan demand also fell in general. Demand for new mortgages remained depressed, but New York, Cleveland, and Richmond noted refinancing activity “continued at high levels or increased further.” Lenders continued to impose strict standards for all types of loans, with scattered reports of further tightening and particular scrutiny focused on construction projects and commercial real estate transactions.Conditions weakened for agricultural producers in various Districts, as demand fell and growing conditions were mixed, a recipe for further pressure on farmers.Reduced global demand and lower prices for oil, the Beige Book said, “prompted a sharp cutback in oil extraction activity since last fall, with Dallas noting an ‘unprecedented’ decline in the domestic rig count.” Gas prices rose, but according to Chicago and San Francisco the increase “was not large enough to substantially offset the ongoing effects of the net decline from last year’s highs.”Wage pressures “eased” in all districts, with increasing reports of hiring freezes and continued job cuts. Mark Lieberman is the senior economist for the Fox Business Network. Prior to joining FOX, he served as first vice president and manager of economic analysis and research at Washington Mutual in New York. Before that, he served as senior vice president at Dime Savings Bank of New York (which was later acquired by Washington Mutual), where he specialized in credit and risk management. He is a member of the Executive Committee of the New York Association for Business Economics. He has a degree in Economics from the Wharton School of the University of Pennsylvania.
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