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Labor market improving Commercial real estate is still suffering from high vacancy rates

Thursday, July 29th, 2010

Texas Border Business

The Federal Reserve’s Beige Book reported a modest improvement in economic activity since that last release on June 9. These results are in line with our expectation of GDP growth in 3Q10, but at a slower pace.

The labor market is improving, but gradually. Many districts reported increased demand for temporary hires, which indicates that businesses are still hesitant to commit to full-time employees. Hiring was also reported in the manufacturing and healthcare industries, but Dallas reported energy industry lay-offs due to the deepwater drilling moratorium.

Consumer spending continued to pickup, but at a slow pace. Most districts reported an improvement in retail sales, but strength focused on apparel, food and other necessities rather than big ticket items. Furthermore, retailers are expecting modest sales growth in the upcoming months.

In line with indications from the ISM and regional manufacturing indices, manufacturing activity continued to improve, but at a slower pace in some districts. Strong points were manufacturing of automobiles and parts and aircraft and parts.  The semiconductor manufacturing industry also reported strong sales, which is a positive sign for non-residential investment.

Both residential and commercial real estate remain weak points for the economy. Residential housing demand slowed since the end of the home buyers’ tax credit and residential construction remained limited.

Commercial real estate is still suffering from high vacancy rates, which are exerting downward pressure on rents. Inflationary pressures also remain limited according to the report. Wage pressures were mostly non-existent across districts and prices of final goods and services remained stable.

Bottom-line: The Beige Book’s findings are in line with our expectation of economic growth in 3Q10 but at a slower pace. Private demand is improving modestly. There are indications that business investment continues to firm, but significant progress in the labor market recovery will be necessary for consumer spending to pick-up at a faster pace.

Source BBVA

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