The Federal Reserve Says the Economy is Weak

The Federal Reserve released the Beige Book last week. This is a great source of economic information. It is essentially a collection of anecdotal information from the Federal Reserve's contacts in each Federal Reserve district. As such it provides valuable insight into what is actually happening on the ground. Here is a link to the complete report. I'm going to break this down into smaller pieces of information and provide some charts to flesh out what the report says. All the charts are from econoday unless noted otherwise.

Let's start with a general overview:

Reports from the Federal Reserve Districts suggest that economic activity remained generally weak in late April and May. Three Districts described economic activity as softer, weaker, or lower, with an additional four Districts reporting slower, sluggish, or modest economic growth. The remaining five Districts of Philadelphia, Cleveland, Atlanta, St. Louis, and San Francisco described activity as stable or little changed in recent weeks.

There are 12 Federal Reserve districts. Seven reported weak activity. The remaining five reported "stable or little change in recent weeks." In other words, this report is nothing to write home about. Let's look at the individual components of the report.

Consumer Spending

Consumer spending slowed further since the last report. Contacts in several Districts said rising energy and food prices contributed to softer sales in other categories.

.....

Reports on overall sales of automobiles and light trucks were weak, with several Districts indicating that sales of trucks and SUVs declined.

.....

Tourist activity varied across Districts.

First, let's add some charts to the above points.

As the above year over year percentage change in personal consumption expenditures shows, real personal consumption expenditures have been dropping for some time.

And the year over year percentage change in retail sales is weak as well. While it is still positive it has been declining since the beginning of the 4th quarter 2007. That is not a healthy trend.

Auto sales have reached an inflection point where American's demand for gas guzzlers is dropping. As a result:

General Motors is closing four truck and SUV plants in the U.S., Canada and Mexico, affecting 10,000 workers, as surging fuel prices hasten a dramatic shift to smaller vehicles.

Also note the Fed cited rising energy and food costs. Here are some relevant charts.

Oil has been rallying for the last year and a half

Agricultural prices have been rallying for three years.

Gas prices have been climbing all year and are at all time highs.

Non-financial services

Reports from nonfinancial services industries varied among Districts.

This area of the economy is doing OK but not great.

This chart of ISM non-manufacturing indicates that services are technically expanding because the reading is over 50. But also note the readings are some of the lowest of the last 4 years indicating this economic sector is slowing.

Manufacturing

Manufacturing activity was generally soft since the last report.

.....

Many Districts cited higher production costs and cuts in employment that contacts attributed to slumping home sales and construction.

.....

Industries demonstrating increased activity were boosted, in part, by a strong overseas market.

There are two important trends with the ISM manufacturing index. The first -- a long-term trend -- is decreasing. Notice that overall activity has been dropped since 2004. However, also notice activity has been picking up since the beginning of the year. My guess is the weak dollar is helping out a great deal with that number.

Overall, the year over year percent change in durable goods has been weak.

And the year over year percent changes in the Philly and Empire manufacturing index are weak.

Real Estate

Residential real estate markets were generally weak across most of the nation.

This should surprise no one. Here are the important points in a nutshell. Inventory is at sky high levels -- levels not seen in years/decades:

The inventory of unsold homes and condos jumped 10.5% to 4.55 million, an "uncomfortably high" level, said Lawrence Yun, chief economist for the real estate trade group.

The number of homes on the market represented an 11.2 month supply at the April sales pace, the biggest since the combined single-family/condo records began in 1999.

.....

For single-family homes alone, the inventory rose to 10.7 months' supply, the highest since 1985. For condos, the inventory of 14.2 months is the highest ever.

As a result, prices are dropping hard:

The Standard & Poor's/Case-Shiller index for the first quarter showed prices for existing homes nationwide declined 14.1% from a year earlier, compared with a year-to-year drop of 8.9% in the fourth quarter.

A separate S&P index that tracks 20 major metropolitan areas on a monthly basis showed home prices dropped 14.4% in March from a year earlier and 2.2% from February.

Jobs

News of employment was sprinkled throughout the report:

Chicago reported a slower pace of hiring in recent weeks and Minneapolis reported that employment in professional services companies decreased from a year ago and is expected to remain flat over the next year. Cleveland and Richmond reported little net change in services employment, while contacts in the St. Louis District said that expansion at firms in some services industries will lead to additional hiring. Boston and Dallas noted tight labor markets for some skilled workers.

.....

Many Districts cited higher production costs and cuts in employment that contacts attributed to slumping home sales and construction

.....

Employment was on the whole unchanged at Boston District retailers, whereas retailers in the Cleveland District said they were only hiring for new stores, and Richmond District retail contacts reported job cuts.

.....

Minneapolis reported that employment in professional services companies decreased from a year ago and is expected to remain flat over the next year. Cleveland and Richmond reported little net change in services employment, while contacts in the St. Louis District said that expansion at firms in some services industries will lead to additional hiring. Boston and Dallas noted tight labor markets for some skilled workers.

.....

[From the manufacturing report] Many Districts cited higher production costs and cuts in employment that contacts attributed to slumping home sales and construction.

The year over year change in job growth has been weak, while

The unemployment rate is ticking up.

Prices

Business contacts in most Districts reported increases in input prices since the last report, especially prices for energy, petroleum derivatives, metals, plastics, chemicals, and food.

Both the CPI and the PPI are at uncomfortable year over year levels.

Simply put, the Federal Reserve says the economy isn't doing that well.

Comments

[research]

Tax the Rich.

[Chavez08]

The collapse of Capitalism as we know it is imminent. The Wallstreet establishment and their Washington enablers are giving out misleading numbers and smoke-and-mirror formulas to make it look like they're in control but, to me, this is all designed to buy the wealthiest some time to gather all the marbles and flee this sinking ship (U.S.)

The American dream was killed in a hit and run. The vehicle make was "Wallstreet" and the driver was a drunken chimpanzee in a flight suit.

[yowza1]

Yes and why no mention of the "LIBOR" index, the London Interbank rate on which most adjustable mortgages are based. It is racing upward just in time to nick those whose adjustable mortgages are soon coming for a rate "adjustment" which is many and includes me. Have a little mercy on us you bankers! Lower those LIBOR rates. Or at least stop raising them!

[MourningDude]

So when it comes to inflation, you tell us that we MUST include the volatile prices of food and energy, even though that's not usually done.

But when it comes to consumption, you tell us that we MUST exclude the prices of food and energy, because they aren't representative.

How about a little consistency?

[MFWolff]

Much good work in the article. I think the debates about the basic measures we take are valuable but, the fundamentals remian our guide to understanding.

http://www.huffingtonpost.com/max-fraad-wolff/caco-phony-and-clarity_b_106990.html

[Bonddad]

I have said the former on many occasions.

I have never said the later.

[MourningDude]

Perhaps you edited, but that's beside the point.

If you're going to argue that energy and food should be included in the inflation calculations, then shouldn't you include energy and food in the consumption calculations as well?

Last I checked, ADM and Exxon were both US companies, and their profitability positively impacts our economy, even if the price of what they sell hurts other areas of consumption.

[olephart]

Unfortunately the economy in large measure depends on the Politics that influences it. We have seen what rampant, unrestrained and unregulated economic policies can accomplish and it is what is described above. As noted by both Bonddad and many respondents this economy has been running on debt for 7 years both Public and Private. The increases in income have been concentrated with the few at the top. Tax policies have allowed this wealth to remain there and not be returned through (and I must apologize for this oxymoron) intelligent Government spending or markedly reduced taxes on moderate wage earners.

We have come to a point where there are no easy solutions. This is extremely bad in that Americans at his point in History have shown no appetite for discomfort or truth. From the bottom to the top, the majority of Americans do not take responsibility for their lives or for their Government's actions. One example: Americans clamor for lower gas prices blaming everyone but themselves for their discomfort. The facts are that we have gotten used to low taxes on energy that facilitate over consumption and have based our lives accordingly. We are blind to our Military's role in securing by force access to this commodity. We wrap ourselves in Patriotic hubris while committing an act of naked aggression. The same with our welfare for the poor, our Middle Class tax breaks and our luxuries purchased with debt.

"The fault, dear Brutus, is not in our stars,
But in ourselves,"

[MourningDude]

It's scary to think that if elected, Obama wouldn't stop the insanity, he'd push the deficit spending to new heights.

He can't pay for his core domestic offerings, let along all of them. His solution is to use "the Iraq money", which we all know is deficit spending from the Chinese, to pay for it.

He would continue spending like we're at war, long after the war has ended. And perhaps the scariest thing of all is that so many otherwise logical liberals, who are rightly very concerned about Bush's deficits, give him a pass on this.

[olephart]

Likewise or better, likedumb, McCain will continue the Policies of Empire and reduced revenues that have worked so well these past 7 years. Both will sugar coat their snake oil and sell it to their respective constituencies. Neither will propose the castor oil required for a cure as the Electorate will only buy the sweet syrupy snake oil of continuing denial.

[Chavez08]

It's funny to hear all the talk about "no easy solutions" though usually it's from the side that has all the money.

The past 30 years of Washington policy has focused on consolidation of wealth to a few thousand at the expense of 5 billion others. Washington and Wallstreet act as like concerted Reverse-Ro­bin-Hoods, those who worked hard building this country are screwed while the most deceiptful, apathetic con-men get to rule the world.

I signed on to the New Deal (work hard, play by the rules, you'll do OK). The Neoliberals cancelled it illegally and burned down the house.

There is plenty of wealth, you just need to take it back fro the thieves who took it. It was pretty easy for FDR, it should be even easier for a President with more advanced tools.

[JoeBlough]

At least, Obama's deficit spending would help all America. McCain's deficit spending will only help the war profiteers. Big difference.

[peterg76]

If "The Federal Reserve Says the Economy is Weak", then it must be so bad it's even starting to hurt rich people. Scary.

[WIpatriot]

Love it, Bonddad, keep 'em comin'.

[mergina]

I usually get a good giggle out of people who dwell on an economy. The world is facing an inability to power itself into the future, facing a planet about to toss us around like the infestation we have become, and people talk about the economy. At some point in the future, when the world is truly in chaos, money will be useless.

[Sciguy]

The economy is much more than just money. It's people working, producing necessities as well as luxuries and unnecessary junk. It's people teaching children (and adults). It's farmers growing everything from tobacco to foodstuffs to fancy horses.It'­s the output of the entire medical establishment, including physicians, nurses, janitors, and pharmaceutical companies. We tend to think of the economy as personified by a bunch of bankers, brokers, and CEOs spending other people's money on trips around the world and luxurious yachts, but it's really everything that goes into daily life. Money may become useless, but the sum of the products and services made or performed by humans for humans (and critters) is still an economy - and a necessity.

[WIpatriot]

Excellent, Sciguy.

[cylindar]

Hey Hale, I enoy your charts and I think you know your stuff. Thank you for your postings.

[dadw5boys]

GOTTA LOVE PREDATORY CAPITALISM!!!!!!!!

HEDGE FUNDS LOVE IT!!!!!

[researcher]

predatory capitalism is there any other kind.

we americans are like teens sitll learning our lessons in life.

we will learn our lessons as a nation and find that deregulated capitalism and imperialism are a recipe for economic disaster.

the world will be much better without our imperialism in the world.

americans are not the brighest bulb on the planet.

as the dollar drops in value so does american influence in the world.

also as the dollar drops so does the standard of living in america.

as the standard of living drops americans will finally realize they are now living with corp and media fascism.

the consitution is not infallible it needs to be changed. ie term limits etc.

the greatest news of all capitalism must self destruct. universal law demands it.

but not until corp and media fascism has ran it course and americans see a need to protest in the streets and the voting booth on a mass scale.

[WIpatriot]

'xactly, researcher.

[rmreddicks]

Okay in part. But "universal law"? What the heck is that? (Outside of philosophy and philosophes what use is it?) Name me a law outside of the laws of physics that isn't generally thwarted and abused. Even the laws of physics get a bit twisted at times - probably due to a lack of complete understanding.

[Chavez08]

Americans won't get any smarter until they chuck their TVs into the street.

[GreedyOldPsychopaths]

Privatization, deregulation, free trade: greed run rampant. With the collective intellect available in this country, it is difficult to believe that the root cause of this economic malaise is not better understood.

Wealth is created in an economy through "value added" processes with multiplier effects and in international trade through "comparative advantage". Almost any other type of activity deals in the transference of wealth, not wealth creation.

Since 2000, median income (normalized) has either fallen or stagnated. Yet, disparity with top income brackets has increased. For more than twenty years, our economy has become increasingly more reliant on financial instruments dealing in wealth transference rather than wealth generation (value-added production) with equitable income distribution.

2/3 rds of our economy is based on consumerism. Decreasing incomes for a majority of consumers indicates long term growth is unsustainable. We have been running our economy on fumes via debt extenuation.

Debt coupled with FED action has devalued the dollar, especially since October '07. This has led to what many have cited as non-core inflationary pressure i.e. increasing energy and food prices.

Further complicating matters, even though there is an excess of money supply, banks are reluctant to extend loans. And now new analysis indicates the banking credit crisis is likely to spillover into the huge consumer credit market to the tune of two trillion.

The solution? End rampant privatization, deregulation, free trade, and return to "value-added" production with equitable income distribution.

INCOME DIVERSITY NOT DISPARITY
PRODUCTION EQUIVALENT CONSUMPTION

[avraamjack]

What do you say t o the economists who say protectionism is counterproductive?
.

[WIpatriot]

I say take 'em out back and slap some common sense into them.

[olephart]

Tell them to get a real job.

[GreedyOldPsychopaths]

I believe in fostering trade agreements that are mutually beneficial to the incomes of the general population for both trading nations. This would require "comparative advantage" as opposed to "absolute advantage". Our FTA with China illustrates the concept of counterproductive "absolute advantage". I am an advocate of "fair trade", not "free trade".

[Sciguy]

The biggest problem with "value added" stuff is that too often, the only value added is the expression "value added." Really. I worked for a company once upon a time that decided to make its product "value added." So - they started calling it "value added." No other changes were made.

And we wonder why we're in trouble...

[WIpatriot]

LOL...true­, Sciguy.

[rmreddicks]

Sounds as if you worked for Thompson Learning Center in the "value added" dept. Wherein we get all those little 4x6 pieces of card stock falling out of everything. Value added to the paper mills and recyclers.

[Podewumun]

Another excellent article, Bonddad.

[Rockyman]

"The economy isn't doing that well" is a soft euphemism for saying the economy is very poor with no end in sight. That is the scary thing. What will turn it around? The cost of living will continue rising and our ability to "consume" will diminish. Forced belt-tightening will be a new way-of-life in the American decline!