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The Federal Reserve reported modest improvement in the US economy

Thursday, March 4th, 2010

Texas Border Business

The Federal Reserve’s Beige Book reported that economic conditions improved modestly since the last report. However, some districts noted that the severe winter weather in February inhibited activity.

Consumer spending improved “slightly,” with gains cited in retail sales and services. While demand remained stronger for lower priced items, a few districts noted an increase in discretionary spending, which is a positive sign that consumers are beginning to loosen their tight spending habits.

Consistent with results from recent manufacturing indicators, manufacturing activity rose across most districts with strength noted in production of metals and high-tech equipment.  Some districts raised concerns about the sustainability of the increase due to the impact of inventory restocking, tight credit markets, uncertainty in tax and regulatory developments and the underlying strength of the Chinese economy, which has driven the increase in exports.

Nevertheless, manufacturers in most districts remained optimistic and reported planned increases in capital spending, which could support growth in non-residential investment.

Demand for residential real estate also improved, but many districts reported that sales were strongest for low-priced and starter homes. Realtors also remain concerned that much of the increase in demand is due to the tax credit for home buyers, which is due to expire on April 30, 2010. On the other hand, commercial real estate conditions remained weak or continued to decline in most districts, illustrating that commercial real estate will remain a challenge for the economy and hinder non-residential investment.

The employment situation stabilized further with layoffs slowing in most districts. Hiring was reported in the financial, manufacturing and temporary staffing industries, which is consistent with the most recent BLS data. The overall weakness of the labor market kept wage pressures in check, which is in line with our scenario of low inflation in 2010.

Bottom-line:  The Federal Reserve’s Beige Book report is consistent with our scenario of economic growth in 1Q10. However, it does highlight some of the risks that will restrain the pace of economic growth. Overall, it is in line with our forecast of 1.9% growth in 2010.

 Source: US Economic Research Department

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