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.

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

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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.

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

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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.

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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.

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

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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.

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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.

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[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.