Canada's largest trading partner seeing slow and steady growth

A new report titled 'The Fed Beige Book report of Regional Economic Activity' continues to indicate a “moderate” expansion, with housing now a bright spot.

Highlights of the Report:
• Retail sales were up in several districts but were dependent on discounting.
• Housing market reports were mostly “positive” across districts, with gains in sales and construction and declines in inventories.
• Manufacturing activity was generally mixed, but offsetting small gains and losses and concern about the effects of the slowing global economy.
• Input price pressures eased in most districts thanks to falling energy costs and only modest wage pressures.
• Credit conditions were generally improved. Loan demand was mixed but borrowing terms and conditions were more favorable.
• Hiring was slow and little changed from the previous report.

Details of the Report
The Fed’s latest Beige Book report, containing anecdotal information from regional business contacts, suggested that regional economies continued to grow in July and early August, though at a slow pace. With only a few exceptions, growth in most regions was characterized as “gradual,” “modest,” or “moderate.”

Most districts reported a pickup in retail sales though the gains were generally small. Moreover, several districts noted that either discount stores performed better than traditional stores, or that consumer spending depended heavily on discounting by retailers clearing space for the back-to-school season. Outlooks for retailers were upbeat or mixed, with some districts “cautiously optimistic” or “conservative.”

Manufacturing was a mixed bag, with districts largely reporting either small and uneven gains or small declines. Natural gas production lifted manufacturing in some districts while hurting coal production in others. Improvements in the housing market boosted demand for construction materials and finished home goods. Slowdowns in European and Asian markets were cited as headwinds by several districts, but the outlook for manufacturing was nonetheless upbeat. Hiring in manufacturing was largely flat as was capital investment.

Credit conditions were improved across most districts. Credit spreads narrowed, particularly for business loans. Lending guidelines were relaxed in some areas. Delinquency rates were down in a few districts. Loan demand varied. Demand for consumer and residential mortgage loans improved. But business loan demand was more mixed. Where business loan demand was higher, it was from small and mid-sized businesses and more for refinancing than for new capital expenditures.

Housing markets were also better in most districts. Buyer traffic was up, pending home sales were strong, and building permits were rising. In some districts, however, improvements were small or modest. A number of districts reported declining inventories of unsold homes, particularly distressed properties. In some districts, this was putting upward pressure on home prices. But other districts reported concerns that shadow inventories could enter the market, disrupting some of this progress.

Employment held steady or grew slightly in most districts. In some districts, employment gains failed to meet expectations. Demand was strongest for skilled manufacturing and engineering positions. Wage pressures were well contained in all districts. But there were some reports of upward pressures on medical benefits. Where wage pressures were evident, they were primarily for high-skilled workers in the information technology field.

Prices for finished goods were reported as stable. Higher agricultural prices, however, were reported due to the drought. Rising gasoline prices were once again cited as a concern in some districts. Increases in raw materials could make their way into final goods prices according to some contacts.

Outlook
Since the last Beige Book report in mid-July, economic activity has bottomed and even strengthened in some key areas. The economy added 163,000 jobs in July and retail sales grew 0.8%. While the ISM Manufacturing Index is below the 50 mark, it is still above recession territory.

The Fed’s latest Beige Book report reflected this leveling off in activity and indicated that outlooks among regional business contacts remained guardedly optimistic. Housing was once again a bright spot, with improvements in sales and construction activity.

There is little in this report to change our view that the Fed is likely to provide some additional accommodation to the recovery next month. The economy isn’t heading towards recession, but this isn’t the bar the Fed sets for further action. As long as activity grows at a rate that fails to bring down the unemployment rate, Fed action remains on the table.