The Fed’s optimistic March 2015 ‘Beige Book’ report in detail

Issued March 4, the current Beige Book survey confirms continuing job and production growth, stable consumer credit and no serious declines in consumption.

FOMC Meeting.
2014 Meeting of the Federal Open Market Committee (FOMC), Eccles Building, Washington, D.C. (Via Wikipedia)

WASHINGTON, March 6, 2015 − Overall, this March’s Beige Book report was optimistic. Officially entitled “Summary of Commentary on Current Economic Conditions,” this widely read Federal Reserve Board publication is issued eight times a year in advance of Federal Open Market Committee (FOMC) meetings.

Anecdotal information is included from each Federal Reserve district. Issued March 4, the current survey confirms continuing job and production growth, stable consumer credit and no serious declines in consumption. Consumer spending rose in most districts, including home sales despite the mixed nature of actual construction, when mapped across the nation.

Points of concern for investors are the decrease in food and oil supply, the latter less so than the former, as the global supply of oil does not change, only the access and the degree to which the current supply is refined. With core inflation benefiting from decreases in food and gas prices, the generally inevitable increase in consumer spending driven by that new demand was notable in restaurant sales but not in great evidence in other sectors.

There is a reported decreased demand for oil and a corresponding amount of downsizing taking place in the associated industries in the Cleveland, Atlanta, Minneapolis, Kansas, and Dallas districts. Drilling service firms reported decreased demand for their products and services. Contrasting with this trend is the price and consumption of electric service, which is supplemented by nuclear energy, but that was not reported, nor was the retail vs. wholesale price of energy highlighted.

Concerns for the Fed, and the prime indicator needed to justify even a minimal upward push on interest rates, is evidence of upward pressure on wages. Consistent with recent reports, that number remained essentially flat. Overall, employment levels remained stable, despite this week’s ADP reporting of lower than expected job growth. The potential for optimism resides in the fact these new hires are the result of increased demand for human resources and not merely replacement cost.

Automobile manufacturers have attracted the attention of consumers, as indicated by the fact that “automobile sales rose in most districts during the reporting period,” notably in the sales of new vehicles. Restricted travel habits put into place by consumers during the previous period of rapidly rising gas prices still remain to a great extent, as indicated by the lower demand for fuel. In addition, the typical seasonal winter slowdown in travel and tourism has also occurred.

As consumers dipped into pent-up product inventories in the most recent period, manufacturers surveyed indicated that there was a general increase in manufacturing to replenish inventory, an activity also buoyed by lower input costs.

Aerospace, the current economic leader in terms of space exploration and resource consumption, expects 2015 to be a record year according to reports. The Air Force Department in particular expects spending to expand as the result of the nation’s critical need to replace aging bomber inventories to maintain the ability to hold at risk any target on the globe.

Locally, the Philadelphia district experienced a strong increase in loan demand as global lending standards relaxed, further marginalizing long-term yields.

Globally, the dollar hit an 11-year high against the euro on Wednesday, dropping to 1.1073. (By Friday morning, March 6, it had dropped further to just over 1.08.) Despite the easy money policy employed by the European Central Bank (ECB), demand has not crept past the current price floor.

There remains a fundamental question: Are traders swapping debt instruments for less risk, higher return, or out of a desire to increase the weighted average of their portfolios, an activity that invariably decreases overall risk. That is to be expected in a market awash with cash.

January’s Federal Open Market Committee (FOMC) meeting resulted in no change in the Fed Funds target rate of 0 – 1/4 percent, despite the unemployment rate falling below the 6.5 percent target set in the January 2014 statement. This suggests the unemployment rate itself is not solely indicative of the overall level of employment. The still significant number of marginally-employed and under-employed may be factors affecting this decision.

On the other hand, while the dual mandate inflation target is set at 2 percent, expectations for long-term inflation remained stable. Household spending rose moderately due to the decline in energy prices. In line with its statement a year ago, the committee is holding longer-term securities in its portfolio, maintaining downward pressure on interest rates.

There was no peak in residential construction or sales, based on the reports of the January 15 Beige Book. The combination of wage pressures and moderate payroll expansion is limiting overall recovery projections. The payroll and wage data has been neither decisively robust nor evidence of consistently sturdy, sizable wage increases indicative of a real change in consumer confidence. Increases in spending seem to stem from lower energy prices, namely oil, rather than any significant wage pressure.

The White House has reported significant job growth numbers, estimating over a year of job growth greater than the natural growth in the labor force. This is one of the few permanent fixtures in the President’s State of the Union speech. But is the reality as widespread as the media portrays?

Japan’s recently instituted sales tax hike, upwards of 8 percent, has set its economy back on a course towards recovery, causing the yen to fall against the dollar. Calls for a domestic tax increase in the U.S. could have similar effects in curbing Gross Domestic Product (GDP) growth.

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