Philip Davis'  Instablog

Reports from the twelve Federal Reserve Districts suggest that, on balance, national economic activity continued to rise, albeit at a modest pace, during the reporting period from September to early October.

Manufacturing activity continued to expand, with production and new orders rising across most Districts. Demand for nonfinancial services was reported to be stable to modestly increasing overall. Consumer spending was steady to up slightly, but consumers remained price-sensitive, and purchases were mostly limited to necessities and nondiscretionary items. New vehicle sales held steady or rose during the reporting period; sales of used automobiles were strong as well. Activity in the travel and tourism sector picked up.

The top 10% can skew travel and tourism.  Bottom 90% consumers, as we have noted often, are pulling back BECAUSE of the Fed’s insane inflationary tactics.  Will they get it?  Doubtful…

Housing markets remained weak with most Districts reporting sales below year-ago levels. Reports on prices suggested stability, however. Conditions in the commercial real estate sector were subdued, and construction was expected to remain weak. Lending activity was stable in most Districts. Agricultural conditions were generally favorable, and above-average yields were expected in most reporting Districts. Activity in the energy sector continued to expand.

Input costs, most notably for agricultural commodities and industrial metals, rose further. Shipping rates increased, and retailers in some Districts noted rising wholesale prices. However, prices of final goods and services were mostly stable as higher input costs were not passed on to consumers. Wage pressures were minimal.

Price pressures from commodities and rising wholesale prices that can’t be passed on to the broke consumers is not the kind of thing you should be celebrating.  As noted, steady home prices in a currency that’s dropping 2.5% a month is also nothing to pat yourself on the back over.  Ag bulls should be VERY worried that the Fed does not see any problems with the yields.   

Manufacturing
Manufacturing activity continued to expand, and several Districts reported gains in production or new orders across a wide range of industries. The only exceptions were the Philadelphia and Richmond Districts, where activity softened compared with the previous reporting period. Exports boosted manufacturing activity according to contacts in the Cleveland, Chicago, and Kansas City Districts. Producers of semiconductors and other high-tech equipment saw continued growth in sales in the Boston, Dallas, and San Francisco Districts. Auto production rose strongly in the Cleveland and Chicago Districts. Metals producers in the Chicago District reported that September sales were the strongest year-to-date, while contacts in the Minneapolis, Dallas, and San Francisco Districts saw only modest gains. Shipments of steel in the Cleveland District continued to be buoyed by demand from energy-related, automotive, and heavy equipment industries. Food processors in the Philadelphia and Dallas Districts noted solid demand for their products, while a few contacts in the St. Louis and Minneapolis Districts reported plans to expand existing operations.

Refiners in the Dallas and San Francisco Districts noted a slowdown in activity and rising inventories. Demand for construction-related products remained weak, and reports on activity in the wood products and furniture manufacturing industries were mixed.

Hiring at manufacturing firms remained sluggish. Inventories were generally light or in line with orders. Future capital spending plans appeared to be limited, except for in the St. Louis District where several manufacturers reported plans to build new plants or expand operations. Manufacturers’ assessments of future factory activity were optimistic in the New York, Philadelphia, Chicago, and Kansas City Districts, where contacts expect business conditions to remain positive or to improve in coming months.

Not very exciting is it?

Nonfinancial Services
Activity was stable to modestly increasing for most professional and nonfinancial services. Demand for information technology (IT) services remained solid. IT firms in the San Francisco District noted recent growth was spurred by business investment to enhance production efficiency. In the Minneapolis District firms noted solid demand for IT services from corporate clients.

Accounting activity improved slightly, spurred by merger and acquisition work. Contacts in the Boston and Dallas Districts noted increases in consulting activity since the last report. Healthcare consulting picked up as businesses responded to regulatory changes following healthcare reform. Appraisal and title companies noted continued strength during the reporting period, and there were some reports from architectural firms that activity had picked up.

Demand for transportation services appears to have slowed, although reports were mixed. Freight companies in the Cleveland District noted steady to declining volumes over the past six weeks, and Kansas City’s report said transportation firms saw unexpected weakness. Rail companies in the Atlanta District reported positive, but slower growth of automobile and industrial goods shipments, while port activity in the Richmond District was mixed. Dallas’ report said intermodal and railroad cargo volumes edged up, but growth in international container trade volumes flattened, and small parcel shipping volumes declined in September. San Francisco reported a pickup in demand for trucking services.

Sounds like the last 30 days got pretty tough. 

Consumer Spending and Tourism
Retail spending was flat to moderately positive in most Districts, with the exception of the Richmond and Atlanta Districts, which noted declining traffic and sales. Contacts in the Kansas City District noted sales were stronger than expected; back-to-school spending boosted sales in the Philadelphia and Dallas Districts. Retail spending grew modestly in the Minneapolis and San Francisco Districts, and was flat in the Cleveland, Chicago, and St. Louis Districts. Retailers said consumers are slowly regaining confidence, but remain price-conscious and were largely limiting purchases to necessities and nondiscretionary items. There were reports, however, of a pickup in sales of moderately priced household goods in the Philadelphia, Dallas, and San Francisco Districts, and gains in apparel sales were reported in the Atlanta and Chicago Districts. Inventories were at desired levels. Looking ahead, retailers in several Districts expected modest sales growth through year-end. In particular, some contacts in New York planned to add more holiday staff than last year.

Most Districts reported that sales of new vehicles held steady or rose during the reporting period. Sales of used vehicles were strong as well. Inventories remained tight, particularly for popular vehicles. Used car prices rose, reflective of solid demand and lean inventories. Respondents’ outlooks were for slight growth in sales through year-end.

Reports from most Districts pointed to continued improvement in travel and tourist activity. The Richmond District reported that tourist activity strengthened, and contacts in San Francisco noted that growth in business travel and convention activity led to rising visitor counts and hotel occupancy rates. Hotel occupancy for popular tourist destinations in the Minneapolis and Kansas City Districts also rose during the reporting period and was above year-ago levels. New York’s report noted that hotel occupancy rates remained high in Manhattan, but October bookings were somewhat weaker than expected. Atlanta noted that tourist activity in some areas was still being affected by the Gulf oil spill, but losses incurred in these areas were offset by increased activity in Northeast Florida, Georgia, and Tennessee and respondents’ outlooks for the remainder of the year were positive. Airline traffic was stable to slightly down according to the Dallas District, but conditions were much better than a year earlier thanks to strength in business travel. Restaurants and food service contacts in the Kansas City and San Francisco Districts also noted slight increases in activity.

Tight inventories and returning demand (goes for airline seats as well) = INFLATION! 

Real Estate and Construction
Housing markets remained weak. Most District Beige Book reports suggested overall home sales were sluggish or declining and were below year-ago levels. There were scattered reports of some improvement in sales in a few Districts, however. Philadelphia noted an increase in sales of existing homes, and Richmond, Kansas City, and Dallas reported upticks in sales of higher-priced homes. Sales reports were mixed in the St. Louis and Minneapolis Districts, with increases in some metro areas and declines in others. Home inventories were elevated or rising according to most District reports. Home prices were generally stable since the last report, although Kansas City noted a decrease in prices, and New York and Minneapolis reported declines in some metros. Homebuilders in the Atlanta District reported downward price pressure and expressed concern about rising foreclosures and bank-owned properties coming to market.

Single-family construction activity was at very low levels, but had improved somewhat in the Chicago, St. Louis, and Kansas City Districts. Atlanta reported a softening of construction activity overall, and Minneapolis said single-family building activity was mixed across metros. Builders in the Dallas District said they had pulled back on starts considerably after the run-up earlier in the year.

Respondents’ outlooks suggested sales and construction would remain subdued through year-end. There were some reports that tighter credit standards for buyers and small builders, along with general economic uncertainty, were stalling activity.

Conditions in the commercial real estate sector remained subdued. Reports suggested rental rates continued to decline for most commercial property types. The one exception was the apartment sector, where higher leasing activity led to fewer concessions, most notably in Manhattan. Office, industrial and retail rental markets remained weak, although there were a few reports of slight increases in leasing activity in the Richmond, Chicago and Dallas Districts. Commercial property sales were low overall, but contacts in the Chicago and Dallas Districts said investment demand for distressed commercial properties remained strong. Given lackluster demand for commercial space, nonresidential construction activity was limited to mostly public projects, according to District reports. Industry contacts appeared to believe that the commercial real estate and construction sectors would remain weak for some time.

This is probably their best case for QE2 - focusing on the real estate issue and that’s the issue the most concerns the banks, of course, since they have all their money sitting in this stuff. 

Banking and Finance
Lending activity was stable at low levels across most Districts, but there were some reports that demand picked up slightly. The Richmond and Dallas District reports noted increased lending activity, and Chicago said credit conditions continued to improve in the District. Reports from Richmond and Dallas suggested that competition for quality loans had picked up. Some contacts noted there was pressure to price loans slightly more aggressively.

Demand for commercial and industrial loans remained weak as businesses continued to postpone capital spending plans because of economic and public policy uncertainties. However, merger and acquisition lending picked up in a few Districts. Commercial real estate lending remained subdued and loan standards were still tight.

On the consumer side, lending was sluggish, but there were scattered reports of improvement. Contacts in the Cleveland and Dallas Districts reported growth in auto loans. Residential mortgage lending and refinancing activity increased in several Districts, and San Francisco reported an increase in demand for nonconforming mortgage loans.

Credit quality changed little on balance. New York reported a decrease in delinquency rates on consumer loans, however, and overall quality improved in the Philadelphia and Richmond Districts, according to reports.

Not at all exciting but it is criminal do do QE into this environment.

Agriculture and Natural Resources
Agricultural conditions were mostly favorable. Fall harvest was generally ahead of its normal pace, and above-average yields were expected in most reporting Districts. There were a few exceptions, however. Widespread rains flooded farmland and delayed harvests in the Minneapolis District while dry weather affected some crops in the Atlanta and St. Louis Districts. Unfavorable weather conditions and resulting crop losses abroad continued to boost export demand for U.S. agricultural products. Commodity prices strengthened further, boosting optimism among producers in the Dallas District and spurring higher cropland values and capital spending on agricultural equipment in the Kansas City District. Additionally, corn producers in the Chicago District were holding on to recently harvested corn in hope of even higher prices.

The energy sector continued to expand, with activity rising further in the Atlanta, Minneapolis, Kansas City, Dallas, and San Francisco Districts. The Minneapolis District reported that mines were operating near capacity, and coal production was robust in the Cleveland and Kansas City Districts. Firms in the Dallas District noted strong domestic land-based drilling and a pickup in overseas demand had offset losses resulting from the moratorium in the Gulf of Mexico. The Cleveland and Kansas City Districts reported that strong activity had prompted hiring and an increase in capital spending at some energy firms. Respondents’ outlooks were mostly positive, although low natural gas prices had dampened the outlook for producers in the Cleveland and Dallas Districts.

Notice the corn producers are speculating with their own supply.  That can cause problems when the flood the market later.  Very good for farmers though if US has good crops and world has shortages.  Should be good for dry bulk shippers too!   

Prices and Wages
Input costs rose slightly, but prices of final goods and services were stable across Districts. Upward pressures on agricultural commodities and industrial metals prices were reported by several Districts. In addition, shipping costs increased in the Philadelphia, Atlanta, and Dallas Districts, and retailers in the Philadelphia and Chicago Districts reported higher wholesale prices. Pass-through of rising input costs to final prices remained limited although there were scattered reports of increases. Prices of petrochemicals rose in the Dallas District, and a few manufacturers in the Boston District said recent price increases on some of their products had been successful. Some manufacturers in the Atlanta District noted rising costs of materials and employee benefits would likely be passed on to customers in the near-term, and several manufacturers in the Cleveland District announced plans to raise product prices in an attempt to recover rising costs. In response to rising food costs, food producers in the Dallas District reported plans to raise prices, and menu prices at restaurants rose modestly in the Kansas City District.

Wage pressures remained minimal. Most District reports found little evidence of wage increases in general. There were widespread reports across Districts that firms anticipated increased costs of employee benefits as a result of healthcare reform.

Hiring remained limited, with many firms reluctant to add to permanent payrolls given economic softness. Reports from staffing firms were mixed. Staffing firms in the New York and Dallas Districts noted a slowdown in demand for their services, and contacts in the Cleveland District said new job openings declined. Richmond’s report noted demand for temporary workers picked up slightly since the last report, and staffing contacts in the Philadelphia District said clients were adding positions as workloads increased. The Atlanta report noted a preference for increasing staff hours and using temporary help rather than hiring additional full-time staff.

I am still for those DXD $22 calls, holding the line at $1.30 still (maybe only because we are buying them!).