Green or Beige?

by Tom Vanderwell

Mortgage Officer

Author website

This afternoon, the Federal Reserve released their Beige Book.  What’s a Beige Book?  It’s their report based on observations and comments from people inside the business world on the state of the economy.    I’m going to walk through some “highlights” and “lowlights” of what’s happening.   My comments are in bold and italics……

“Reports from the twelve Federal Reserve District Banks indicate that economic conditions remained weak or deteriorated further during the period from mid-April through May.”

No surprise there, at least not for me.  So, if conditions remain weak or deteriorated, then where are the gree shoots of recovery that people are talking about?

“However, five of the Districts noted that the downward trend is showing signs of moderating.”

So, let’s think about that.   5 out of 12, that’s 41% show that the pace of downward trend is slowing down.  Is that a good thing?   Well, let’s look at a couple of other numbers.   According to this, 100% of the districts show that they are slowing down.  59% of them are slowing down at the same or faster paces than they were previously.

“Manufacturing declined or remained weak in most Districts.”  

“Nonfinancial Services – Districts reporting on nonfinancial services indicated that for the most part activity continued to decline………In contrast, San Francisco reported a substantial pickup in real estate services such as title insurance due to an increase in home refinancing.

Ooohhh, that illustrates the trouble that we’re in.  One of the biggest “improvements” in the non-financial services is the title insurance industry because of mortgage refinancing.   Guess what’s not going to last very long due to rising rates…..

Consumer Spending and Tourism
Consumer spending remained soft as households focused on purchasing less expensive necessities……   Several Districts reported that discounters have seen their sales increase, while purchases of luxury goods continued to weaken. Respondents from Boston, Philadelphia, Cleveland, Atlanta, St. Louis, Kansas City, and Dallas expect soft consumer sales to persist. Purchases of new cars remained depressed across most Districts.

Travel and tourism activity declined, and vacationers are tending to spend less.

The information about consumer spending is all consistent with an ongoing deleveraging.    Consumers are spending what they need to but are not spending extra.   What’s the easiest way to get consumers to spend again?   It’s not to make borrowing easier, because consumers have already shown that they have, in many ways, woken up from the “how much would my payments be?” syndrome.   To get consumers spending more, we need to do one of a couple of things:  1) Create more jobs and better paying jobs or 2) Lower tax rates so that people can keep more of what they earn.    Hmmm, how’s that working so far?

“Real Estate and Construction – Although the residential real estate market remains weak, agents in the New York, Philadelphia, Cleveland, Richmond, Chicago, Kansas City, Dallas, and San Francisco Districts reported an uptick in home sales. The reasons cited include seasonal factors, low interest rates, declining house prices, and tax credits for first-time buyers. Much of the sales increase was found in the lower-priced end of the market……

First – residential real estate – it’s no surprise that declining house prices are improving home sales.   But, if you look at what we talked about in “Is Housing at a Bottom – Part 5”  there’s a very real chance that house prices aren’t, for most areas, at the bottom.

Second – tax credits for first time home buyers expire December 1, 2009.   If you are a first time buyer and haven’t at least started thinking about buying a home or at least talking to a lender about getting preapproved and starting  to look for a house.   December 1 will be here before you know it.

Third – interest rates are cited as one of the factors that encouraged home sales during this period.   What will be a very telling is what effect the bump in interest rates will have to purchases.   My take on it – the first time home buyers won’t be affected nearly as much as the very few “move up” buyers who are looking at moving up and might find it harder to handle if the rates are higher.

Commercial real estate markets continued to weaken across all Districts…… Eight Districts cited difficulty in obtaining financing as one of the primary reasons for delaying or stopping construction of new developments and for limiting sales of existing properties.

Do you think that one of the reasons the banks are “supposedly” doing well is because they aren’t doing new commercial financing?  Just asking the question…..

“Banking and Finance – Most Districts reported that overall lending activity was stable or weak, but with mixed results across loan categories………..

Most Districts said that credit conditions remained stringent or tightened further…… The credit quality of loan applicants and existing clients showed deterioration in Philadelphia, Richmond, Cleveland, and Dallas, although Richmond noted that the rate of deterioration has slowed…..  New York and Cleveland said that delinquencies had increased across numerous loan categories, particularly those tied to real estate.”

Lending activity is stable or weak with mixed results but the banks can all give back their TARP money because they are fine?   Hmmm…..

“Employment and Wages – Labor market conditions continued to be weak across the country, with wages generally remaining flat or falling.”

“Prices – With few exceptions, the District Banks reported that prices at all stages of production were generally flat or falling……. The notable exception to the downward pressure on input prices was oil. Increases in oil prices were widely reported.

So,  you tell me…..   Are we dealing with green shoots of a recovery?   Or is the economy looking a wonderful shade of beige?  

Tom Vanderwell

Fed Beige Book, Green Shoots