Bloomberg News

Fed Sees Economy Picking Up Across U.S. in Beige Book Survey

January 16, 2013

The U.S. economy picked up across much of the country last month, boosted by auto and home sales, even as the outlook for unemployment showed few signs of improvement, the Federal Reserve said.

“Economic activity has expanded since the previous Beige Book report, with all 12 districts characterizing the pace of growth as either modest or moderate,” the central bank said today in its Beige Book business survey, which is based on reports from the Fed’s district banks.

The report, prepared for discussion at the Federal Open Market Committee’s Jan. 29-30 meeting, may strengthen the resolve of policy makers who want to press on with the Fed’s $85 billion in monthly bond purchases until the labor market improves substantially.

“There’s still plenty of potential headwinds” for the economy, said Terry Sheehan, an economic analyst at Stone & McCarthy Research in Princeton, New Jersey. Policy makers “have not seen the recovery in labor markets that they had hoped for yet.”

The New York and Philadelphia districts “rebounded from the immediate impact of Hurricane Sandy,” while Boston, Richmond and Atlanta reported that growth increased slightly in their districts. Still, the report said that “labor market conditions remained mostly unchanged in all districts.”

The Beige Book provides anecdotal evidence on the health of the economy. In the previous report on Nov. 28, the Fed said the economy expanded at a “measured pace” and “consumer spending grew at a moderate pace in most districts, while manufacturing weakened.”

‘Generally Optimistic’

By contrast, today’s report said manufacturing was “mixed” and that the outlook of manufacturers was “generally optimistic.”

The anecdotal accounts were collected on or before Jan. 4 and compiled by the Federal Reserve Bank of Philadelphia.

The Standard & Poor’s 500 Index was little changed at 2:53 p.m. in New York at 1,473.35, while the yield on the 10-year Treasury note fell 0.01 percentage point to 1.82 percent.

The Beige Book found that all 12 districts reported “some growth in consumer spending” and that “auto sales were reported as steady or stronger” in most districts. Tourism increased due to strong business and international travel and early snowfall in some ski areas.

Growth in residential real estate was “described as moderate or strong” in nine districts, as prices rose in all reports received. New construction was reported higher in 11 of 12 districts.

Continuing Gains

The S&P Case-Shiller index of home prices in 20 cities rose 4.3 percent in October from a year earlier, gains that the Beige Book suggests will continue.

Contacts in Boston, Richmond, Atlanta, Chicago, Kansas City and San Francisco all reported delayed hiring “often in defense manufacturing, due to fiscal cliff uncertainties,” referring to a legislative dispute over spending cuts and tax increases that went unresolved until Jan. 1.

The Beige Book said that wage pressures have been “stable,” with the San Francisco Fed specifically citing “an abundance of workers” holding down wages.

Minutes from the Dec. 11-12 FOMC meeting showed that even as they were preparing new Treasury purchases, “several” FOMC members said it would “probably be appropriate to slow or stop buying well before the end of 2013.” A “few” others were willing to let the program run to the end of the year, while “a few others” didn’t give a time frame.

Economy’s Progress

Policy makers from St. Louis Fed President James Bullard to Eric Rosengren of Boston have said the duration of the program will depend on the economy’s progress and won’t be tied to a calendar date.

Recent data reports have highlighted an economy that, while growing at a moderate pace, made steady gains even as U.S. lawmakers wrangled over fiscal policy. Gross domestic product may expand at a 2 percent pace in 2013 after a 2.3 percent gain last year, according to the median forecast of economists surveyed by Bloomberg News this month.

Industrial production climbed for a second month in December as demand picked up for business equipment, according to a separate report released by the Fed today.

Payrolls increased by 155,000 workers in December, keeping the unemployment rate at 7.8 percent, a Labor Department report showed Jan. 4. Retail spending climbed 0.5 percent in December after a revised 0.4 percent increase in November.

Annual Gain

Another report today showed the cost of living was little changed in December, capping the smallest annual gain in the past decade. The unchanged reading in the consumer price index followed a 0.3 percent decrease in November, according to Labor Department figures.

At the same time, a report today showed that confidence among homebuilders held in January at the highest level in more than six years, a sign the housing market will probably spur growth in the larger economy. The number of building permit applications issued in November rose to a four-year high, a rebound that bodes well for companies including Los Angeles- based KB Home. (KBH:US)

“Housing is becoming a bright spot for the economy,” Jeffrey Mezger, chief executive officer of the Los Angeles-based homebuilder, said on an earnings call Dec. 20. “The industry is once again positioned to play its historical role of being a job creator and leading the national economy into a full recovery.”

Spending Cuts

Earlier this month Congress sidestepped a showdown over spending cuts and tax increases by raising payroll taxes and postponing a decision on automatic spending reductions for defense and health care.

The improving outlook for jobs and wages may help cushion the harm to consumer spending from the higher payroll tax used to pay for Social Security benefits. Starting this month, that tax rate returned to the 2010 level of 6.2 percent, from 4.2 percent, as part of the Jan. 1 fiscal pact passed by Congress.

Politicians are debating raising the nation’s legal borrowing limit, currently set at $16.4 trillion. The Treasury Department has been using emergency measures since the end of December to prevent a breach. The U.S. government makes about 80 million payments each month, including for Social Security, veterans’ benefits, defense contractors, law enforcement and income-tax refunds.

Never Defaulted

The debt limit has been periodically raised since its creation in 1917, when Congress and President Woodrow Wilson authorized the Treasury to issue long-term securities to help finance entry into World War I. Since 1960, Congress has raised or revised the limit 79 times, including 49 times under Republican presidents, according to the Treasury Department, noting the U.S. never has defaulted on its obligations.

The last time Congress fought over raising the ceiling, President Barack Obama signed an increase on Aug. 2, 2011, the day that Treasury warned U.S. borrowing authority would expire. Standard & Poor’s cut the nation’s credit rating.

Still, U.S. Treasury bond investors -- who most directly bear the risk of any government default -- haven’t shown alarm over political fights ultimately resolved in Washington. Yields on 10-year U.S. Treasury notes declined to 2.56 percent on Aug. 5, 2011, the day of the S&P downgrade, and continued to fall.

Yields on 10-year Treasuries, a benchmark for everything from mortgages to corporate borrowing costs, have fallen from more than 5 percent in 2007, before the financial crisis of 2008.

To contact the reporter on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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