Interpreting The Federal Reserve's Beige Book

by: George Liu

The Overview

The Federal Reserve released its latest Beige Book today, which was prepared at the Federal Reserve Bank of San Francisco and draws its conclusions from contacts and partners outside of the Federal Reserve system. Overall, it reports consistent growth in many of the sectors it investigated. The report shows encouraging signs of a gradual economic recovery, signs which could point to a positive economic climate in 2012 Although the Beige Book stops short of releasing official Federal Reserve opinion and disregards external factors such as slowing growth in China and the European sovereign debt crisis, its conclusion bodes well for the current domestic economy as well as several. Here are some of the more important aspects of the report:

Consumer Spending and Tourism

One of the main focuses of the Beige Book, consumer spending and tourism ,was reported as positive, with holiday retail sales up noticeably from those of last year in many of the Federal Reserve Districts. The Federal Reserve also noted that consumer spending and confidence strengthened in comparison to many previous reporting periods. This information bodes well for retail companies such as Ross Stores (NASDAQ:ROST), which recently raised its 2011 4Q EPS guidance. Another retail company continuing to benefit from this solid consumer climate is Lululemon Athletica (NASDAQ:LULU), which also boosted its 4Q guidance. On the flip side, be wary of retail companies that have reported flat sales and cut their 2011 4Q forecasts, including Target (NYSE:TGT) and Kohl's (NYSE:KSS). Investors will not look kindly upon retailers that aren't able to meet expectations in an improving retail environment.

Nonfinancial Services

The Federal Reserve also reported strengthening demand for nonfinancial services such as consulting, advertising, engineering, health-care, and legal services. Of particular interest is the growing demand for health-care services, which will bode well for Intuitive Surgical (NASDAQ:ISRG), whose potential competitors face formidable barriers to entry, such as the requirement of specialized training for clients and Intuitive's generous system of replacements/renewals as well as it's unmatched reputation. This company recent delivered a 30% overall revenue growth and a 43% EPS growth (yoy) last quarter; the strengthening of its target market will no doubt prepare Intuitive Surgical for a rosy 2012.


Manufacturing generally expanded in most of the Federal Reserve Districts as subsectors such as heavy equipment manufacturing and steel were boosted by robust growth in the energy, agricultural, and auto manufacturing sectors. This comes at a time when Japanese automakers and manufacturers such as Toyota (NYSE:TM) look to establish increased manufacturing capabilities in the U.S. in hopes of turning North America into a major export base; expect continued growth from the manufacturing sector.

Real Estate and Construction

One of the less positive aspects of the report, real estate proved to remain sluggish without overall significant improvement. However, a bright facet of real estate and construction can be found within continued increases in construction of multifamily residences. These increases in turn have helped lenders such as Signature Bank (NASDAQ:SBNY), which is a New-York based regional bank that has exhibited an average EPS growth of 40% over the last 3 quarters; investors interested in profiting from the real estate and construction sectors should consider investing in lenders to the construction market rather than direct builders.

Banking and Finance

The Beige Book reported that overall, lending activity was up, especially to businesses. This is encouraging, considering that the banking and finance sectors are still reeling from a brutal Great Recession. Areas such as New York have reported increases in demands for commercial mortgages, which in turn will prove to be positive catalysts for banks such as the aforementioned Signature Bank.

Agriculture and Natural Resources

Federal Reserve Districts reported mixed input prices and growing conditions, which have been adversely affected by droughts in several areas. However, it did report significant demand for agricultural products. This will benefit Monsanto (NYSE:MON), which recently reported a very strong FQ1, beating analyst estimates by 6 cents and increasing revenue by 33% year-over-year.

Prices and Wages

Prices of goods tended to remain the same and price increases were very limited. Wages continued to remain stagnant, but there has been some significant demand for specialized workers.


Although our economy definitely has a long way to go, the Beige Book has noted many positive areas of economic progress. It has set a tone for the 2012 economic outlook and select stocks such as Ross Stores and Monsanto are poised to benefit from sector growth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.