Fed’s Beige Book Reports Weakened Economic Activity

The Fed’s Beige Book report released today showed a deterioration of the U.S. economy in recent weeks. Following declines in each of the first three quarters of fiscal ’08, incoming data point to a significant tightening in credit conditions, deterioration in labor markets, a slump in consumer spending, and a sharp fell off in vehicle sales in most regions of the country. Residential real estate and construction activity also weakened or remained low.

• Consumer spending was softer in nearly all twelve Federal Reserve Districts:

Several Districts noted a reduction in discretionary spending by consumers and lower sales on big-ticket items. Several also reported increased activity at discount stores as consumers became more price conscious and shifted purchases toward less-expensive brands. Retailers cited these recent sales trends and concerns about credit availability as reasons for a weaker economic outlook.

• Labor market conditions weakened in most Districts:

Boston, Chicago and Richmond cited reductions in hiring or hiring plans. Atlanta, Minneapolis, Kansas City, San Francisco and Dallas all noted some weakening in employment. However, the demand for skilled labor remained strong in several Districts, and Kansas City noted market tightness for minimum-wage jobs in leisure and hospitality.

• Capital spending decisions continue to be influenced by economic uncertainty.

New York, Chicago, Dallas, and San Francisco noted weaker capital spending. Boston reported capital spending was mixed as firms were cautious about spending resources. Cleveland reported capital spending remained on plan but intentions to increase outlays have declined. Philadelphia indicated concerns over restrictions in access to credit were limiting future capital expenditures for some manufacturers. In contrast, Kansas City and Chicago reported that capital spending for producers of heavy machinery continued to be strong.

• Manufacturing activity remains slow as heightened concerns about the economic outlook and credit conditions contributing to high levels of uncertainty persist:

Declines in manufacturing activity of varying degrees were reported in Boston, New York, Cleveland, Richmond, Chicago, St. Louis, Kansas City, San Francisco, and Dallas. Atlanta reported that production remained at a low level, while Minneapolis described conditions as mixed and Philadelphia noted a slight increase in activity….Activity in the automotive industry also continued to decline.

• Residential real estate and construction activity weakened or remained low in all Districts:

Most Districts reported commercial real estate and construction activity had slowed, with New York, San Francisco and Dallas noting the sharpest declines. In contrast, Cleveland and St. Louis indicated steady activity. Increases in vacancy rates or sublease space were noted in Chicago, Boston, New York, Atlanta, and San Francisco. Several Districts reported project delays and cancellations due to tighter credit conditions and increased economic uncertainty.

However, while still slow, residential markets showed some signs of stabilizing in Cleveland, Atlanta, and Kansas City.

• Credit conditions tightened in all the Districts that reported on them:

Bank lending was described as either stable or lower for both consumers and businesses. Cleveland, Kansas City, and San Francisco noted that loan quality had deteriorated. Credit standards were tightened, particularly for commercial and residential real estate loans, in several Districts….Liquidity problems in inter-bank markets along with a higher cost of funds were reported in several Districts. As a result, Chicago reported that banks were increasingly utilizing alternative sources of funds like the discount window and the brokered CD market.

• Inflation:

Inflationary pressures have largely eased with declines in some retail prices and falling prices for energy and many raw materials. Wage pressures across the twelve Districts remained limited outside of skilled labor positions that continue to experience high demand, such as the energy industry in Cleveland, Dallas, and Kansas City, the report said.

The Fed’s report suggests that businesses across the country continue to feel a high degree of pain as economic activity weakens.