The Beige Book Looks Rosy
The Federal Reserve released the first Beige Book of 2014 on January 15. To prepare the Beige Book—published eight times per year—each Reserve Bank gathers anecdotal information on current economic conditions in its district through reports from Bank and branch directors and interviews with key business contacts, economists, market experts, and other sources.
The first paragraph from the national summary began with this sentence:
Reports from the twelve Federal Reserve Districts suggest economic activity continued to expand across most regions and sectors from late November through the end of the year.
The Atlanta Fed was one of two Reserve Banks that saw conditions improve compared with the previous reporting period. Overall, we said that “[b]usiness contacts indicated that from late November through December overall economic conditions improved moderately in the Sixth District.”
Below are highlights from our report, beginning with the important sections on employment and inflation:
- Businesses did not indicate a significant pickup in hiring, nor did they report any staff reductions. Businesses continued to employ technology and utilized overtime and contract labor as an alternative to increasing permanent staff. Contacts in manufacturing, construction, professional, and energy sectors report persistent difficulty in finding qualified workers. On balance, many firms expressed continued hesitancy caused by concerns about healthcare reform in terms of their overall hiring plans.
- Cost pressures remained mostly stable, according to business contacts. Healthcare was the most cited exception, with reports of larger cost and price increases than usual. Merit increases remained in the 1 to 3 percent range. However, skilled and professional positions in energy, construction, information technology, and logistics continued to see above-average wage increases and higher starting pay. Year-ahead unit costs expectations were 1.9 percent in December, unchanged for the fourth consecutive month, according to the Atlanta Fed's survey on business inflation expectations.
Most sectors of the regional economy reported a solid start to the new year:
- District merchants noted positive year-over-year holiday sales growth, with online sales outpacing traditional store sales.
- The hospitality sector continued to experience the same solid pace of activity that it had all year long.
- Residential housing brokers noted that existing home sales growth continued to slow, while homebuilders experienced modest growth in new home sales.
- Commercial contractors described construction activity as improving, especially in the multifamily segment of the market.
- Manufacturers indicated that overall activity strengthened since the previous report.
- Capacity utilization in the energy industry remained near historic highs, and deep water oil exploration in the Gulf of Mexico increased.
Atlanta Fed business contacts held a positive outlook heading into 2014. Atlanta Fed President Dennis Lockhart shared this view in a speech delivered to the Rotary Club of Atlanta on January 13, where he said:
I expect the stronger pace of economic growth in the second half of 2013 to continue in 2014. My current view is that real GDP will expand between 2.5 and 3 percent this year, and I would not be surprised if we achieve results at the upper end of this range.
A new year often breeds optimism, sometimes misplaced. But based on our view of the data and what our business contacts are saying, we think that being optimistic this January is justified.
By Michael Chriszt, a vice president in the Atlanta Fed’s public affairs department
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Beige Book: Southeast Growing at a Moderate Pace
Eight times a year, the 12 Reserve Banks gather anecdotal information on current economic conditions in their districts through reports from Bank and branch directors as well as interviews with key business contacts, economists, market experts, and other sources. Then, approximately two weeks prior to each Federal Open Market Committee meeting, results are published in the Beige Book on the Federal Reserve Board of Governors' website.
Because the lead sentence—of the national summary and each district's section—often gives a broad view of economic conditions in that region, that first sentence often gets much attention. Here is a roundup of the first sentences of these sections:
- National: Reports from the twelve Federal Reserve Districts indicated that the economy continued to expand at a modest to moderate pace from early October through mid-November.
- Boston: Economic activity continues to expand in the First District.
- New York: Economic growth in the Second District has continued at a moderate pace since the last report.
- Philadelphia: Aggregate business activity in the Third District continued to rise at a modest pace during this current Beige Book period (beginning with the first partial week of October).
- Cleveland: Business activity in the Fourth District expanded at a moderate pace since our last report. On balance, demand for manufactured products grew at a moderate rate.
- Richmond: The District economy expanded moderately in recent weeks.
- Atlanta: Businesses across the Sixth District described economic activity as moderately increasing from October to mid-November.
- Chicago: The rate of growth in economic activity in the Seventh District continued to be modest but slowed a bit in October and early November.
- St. Louis: Business activity in the Eighth District has expanded at a moderate pace since the previous report.
- Minneapolis: The Ninth District economy grew at a moderate pace since the last report.
- Kansas City: The Tenth District economy continued to grow modestly in November.
- Dallas: The Eleventh District economy expanded at a moderate pace over the past six weeks.
- San Francisco: Economic activity in the Twelfth District expanded at a modest pace during the reporting period of early October through late November.
As you can tell, all 12 districts experienced similar levels of activity. Here are some notable highlights from the Atlanta Fed's portion of the Beige Book:
On balance, contacts across the private sector reported that the partial federal government shutdown had little to no direct impact on employment, but it has negatively affected business confidence, which could translate into delayed hiring decisions now or in the near term. Contacts continued to express concern about shortages of qualified labor. Their concern is that companies seeking to hire and expand their business could be impeded by an inability to find qualified workers. Overall, firms experiencing any growth in demand for their products expressed no plans to hire in the near term.
Contacts continued to report stable pricing, with no major concerns about inflation. Isolated reports of cost increases (for example in fast food, grocery stores, and construction) were generally passed through successfully to customers. Year-ahead unit cost expectations were unchanged at 1.9 percent in November, according to the Atlanta Fed's Business Inflation Expectations survey (see the chart). Overall, profit margins were tight across most industries. Aside from scattered reports of upward pressure on wages for high-skilled workers, increases remained stable (mostly in the range of 2 percent to 3 percent) across most industries.
Consumer spending and tourism
District retail contacts indicated that economic uncertainty was having an impact on consumer confidence and behavior. Although merchants reported plans to offer robust discounting, beginning even earlier than the traditional Black Friday, retailers' expectations for the upcoming holiday season are only mildly optimistic. Sales of light vehicles were steady. Hospitality firms continued to cite expanding levels of activity in both leisure and business travel.
Real estate and construction
District brokers indicated that growth of existing home sales have slowed notably in recent months. By most accounts, inventory levels continued to decline on a year-over-year basis. Home prices remained ahead of the year-earlier level, but price gains seemed to be slowing. The majority of builders noted that new home sales and construction were ahead of the year-earlier level. Reports on unsold inventory were mixed, while contacts continued to note modest home price appreciation. District commercial brokers noted that demand for space continued to improve modestly. Construction activity slightly increased as well from earlier in the year.
District manufacturers reported gains in new orders, production, and employment in October compared with the previous month. An increasing number of contacts cited higher-than-desired finished inventory levels and remarked that commodity prices continued to rise, albeit at a modest rate. Manufacturers also noted a mild decrease in supplier delivery times.
Banking and finance
Banking contacts reported better overall lending activity relative to our previous report, although loan demand in rural areas remained low. Commercial real estate lending increased as property values rose; commercial and industrial and auto lending was strong. Mortgage lending and refinancing activity slowed as mortgage interest rates increased. Deposit levels were high at most institutions, and banks remained competitive in seeking quality loan customers. Some banks loosened underwriting standards and reduced margins to attract new loan business.
The next Beige Book will be published January 15.
By Shalini Patel, an economic policy analysis specialist in the Atlanta Fed's research department
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What We’re Hearing
The Atlanta Fed’s most recent Southeastern Insights reported an “increased level of apprehension regarding the pace of growth in the near term as a result of growing concerns over another damaging debt ceiling debate, heightened geopolitical risks, and uncertainties related to regulations and the Affordable Care Act.” The report provided a broad summary of economic intelligence gathered through our network of business contacts and other sources throughout region from August 1 to September 18.
Increasing apprehension about the economic outlook
Recently, we’ve had several opportunities to discuss the outlook with audiences in the region. Lesley McClure, the Atlanta Fed’s regional executive in the Birmingham Branch, gave a presentation to the Rotary Club of Dothan and to the National Business League in Birmingham. Lesley detected a slight increase in apprehension regarding the short-term outlook.
“I queried the audience on how many of them felt things would be the same or get better/ if business activity would increase in the next three to six months,” she said. “The vast majority expected things to stay the same and only a couple raised their hands expecting improvement.”
In Tifton, Georgia, Regional Economic Information Network (REIN) Director Laurel Graefe gave a presentation to the local Rotary Club. Much discussion took place about the federal government’s partial shutdown and what it means on a broader level. The audience wondered about the impact on employment and GDP and was uncertain about what the shutdown would mean for them and their businesses. There was some apprehension about what the current congressional impasse may mean for the bigger discussion of the debt-ceiling limit.
Galina Alexeenko, REIN director at the Nashville Branch, recently gave a presentation to Middle Tennessee State University’s Small Business Development Center and found similar concern over the impact of the government shutdown and the potential economic impact of the government shutdown and failure to raise the debt limit.
I also fielded several questions about the impact of fiscal policy uncertainty in a recent talk in Atlanta and at a presentation to the Carrollton Rotary Club. Rising uncertainty was captured in several other indicators, including the Atlanta Fed’s poll of small businesses in the Southeast, as this recent macroblog post noted.
Questions on inflation
In Dothan, Lesley discussed inflation, which has been running below the Federal Open Market Committee’s target of 2 percent. After Lesley discussed this trend, one audience member asked, “How can you say inflation is low when I see rising prices at the grocery store?”
We get this question quite a bit, and we reply by explaining that inflation cannot be measured by an increase in the cost of one product or service, or even several products or services. Rather, inflation is a general increase in the overall price level of the goods and services in the economy. To read more about how the Fed evaluates inflation and its effects on the economy, see this explanation from the Board of Governors. To follow current trends in inflation indicators, check out the Atlanta Fed’s Inflation Project.
Price developments were also on the minds of my audience in Carrollton and at the Tifton event. The Tifton area has a large concentration of agricultural activity, cotton in particular, and Laurel spent a good deal of time discussing whether and how the Fed’s current accommodative monetary policy stance was affecting agricultural commodity prices and commodity prices more generally. Like Lesley, Laurel discussed recent inflation trends and added that increases in the prices of crude oil, food, and other commodities have proven temporary and can best be explained by the fundamentals of global supply and demand rather than by the stance of U.S. monetary policy. For a deeper discussion of this issue, see this speech by Janet Yellen, the vice chair of the Federal Reserve Board of Governors.
Apprehension about the economic outlook can be attributed to the notable rise in uncertainty we have detected in recent discussion with several audiences. We’ll continue to reach out to our business contacts to determine if this results in a pullback in overall economic activity.
By Mike Chriszt, a vice president in the Atlanta Fed's public affairs department
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Regional input cost, manufacturing indicators rise in January
The Econometrics Center at Kennesaw State University released its monthly Purchasing Managers' Index (PMI) report on manufacturers across the Sixth District this week. In January, the Southeast PMI continued its upward trend as Sixth District manufacturers hinted at a slightly brighter current economic picture and expressed an improving outlook.
Rising input costs were also reflected in the Southeast PMI's Commodity Prices component, which read 82.3 in January. Yet, as the Atlanta Fed's most recent Beige Book contribution noted:
"A majority of business contacts indicated that current cost pressures remained high, citing increasing material prices and rising labor and benefits outlays. However, most firms remained reluctant to pass input cost increases through to consumers given intense competitive pressures."
Atlanta Fed President Dennis Lockhart discussed the topic in his recent speech in Anniston, Ala.:
"And because movements of commodity and other 'headline' prices seem to be creating the impression in the popular consciousness of a growing inflation problem, I would like to give particular attention today to inflation."
Speaking specifically about his view on inflation, President Lockhart noted:
"What we're searching for is the underlying inflation trend that the FOMC [Federal Open Market Committee] statement talks about and which we want to control. And since an exact fix on the state of inflation is elusive in the short run, the best policy approach, in my opinion, is to pursue a low, but positive rate of inflation over the longer term. As a policymaker, I think of the desirable level of inflation as high enough to provide a cushion of safety against the risk of tipping into deflation but low enough to be largely irrelevant—not a consideration—in long-term decision making. For me, this number is around 2 percent.
"Notwithstanding the energy-driven jump in prices in December, underlying inflation is currently below the level that I would define as price stability. My current projection shows underlying inflation gradually rising over the next few years, putting us back into a range consistent with the 2 percent target by 2013. Key to the realization of this inflation forecast is that inflation expectations of the public remain well anchored. And for this to happen, the public has to have a good appreciation of what the central bank is trying to achieve and have adequate faith that we will achieve it."
The overall Southeast PMI as measured by our friends at KSU increased 2.5 points in January, putting the index at 58.9. The national PMI gained just a little less than the regional PMI in January (rising 2.3 points) to reach 60.8.
Both the regional and national indicators have taken a relatively sharp upward turn over the last couple of months, but the Southeast PMI remains on the heels of the national PMI, in their aggregate forms and in most underlying variables.
Though it continues to lag behind the national measure, the new orders index for manufacturers in the Southeast has seen significant upticks over the last few months. As new orders are a leading indicator, this upward movement is encouraging for future production levels. Also noted in the latest report, 63 percent of survey participants across the Southeast said they had plans to increase production levels in the next three to six months, up from 54 percent reporting plans to increase near-term production in December 2010.
Several other Federal Reserve Banks produce monthly manufacturing surveys that yielded similar results as the KSU PMI survey for January. Higher aggregate indices and particularly higher levels of new orders were noticed in the New York Fed's Empire State manufacturing survey (where data is indexed to 0 instead of 50), and the Philadelphia Fed's manufacturing survey, where the new orders index jumped 13 points. Future expectations for new orders were also higher in most regional surveys. Half of respondents in the Kansas City Fed's manufacturing survey indicated they expect new orders to continue increasing over the next six months.
By Mike Chriszt, an assistant vice president in the Atlanta Fed's research department,
Mark Carter, an Atlanta Fed research analyst
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