Beige Book: Fed Says U.S. Recovery Slowed in the Second Quarter

Federal Reserve Bank
Federal Reserve Bank

The latest Beige Book report from the Federal Reserve confirms what other recent economic reports have suggested: The U.S. economic recovery slowed somewhat in the second quarter, with some regions reporting stalled conditions.

"The Cleveland and Kansas City Districts reported that the level of economic activity generally held steady," the Fed said. "Among those Districts reporting improvements in economic activity, a number of them noted that the increases were modest, and two Districts, Atlanta and Chicago, said that the pace of economic activity had slowed recently."

Concerning manufacturing, which has heretofore led the U.S. economic recovery, the Fed said, "Manufacturing activity continued to expand in most Districts, although several Districts reported that activity had slowed or leveled off during the reporting period."

On consumer spending, the Fed said the early summer months were generally positive, but gains in most Districts were modest. "Retail sales in the New York, Philadelphia, Minneapolis, and Kansas City Districts were higher than year-earlier sales, and Dallas reported solid gains," the Fed said. However, sales in the Boston District were mixed compared with the previous year, and that recent sales increased slightly in the Cleveland, Atlanta, Chicago, and San Francisco Districts.

The report did highlight one major economic positive: Low inflation. "Consumer prices of goods and services held steady in most reporting Districts," the Fed said. Districts also noted improved conditions in the services sector, it added.

Housing Market Slows After Tax Credit Ends

On the downside, the Fed said almost all districts reported sluggish housing markets since the expiration of the federal home buyers tax credit on April 30. "The Boston, Philadelphia, Atlanta, and Kansas City Districts reported that home sales are expected to weaken going forward. Residential construction remained limited in several Districts," the Fed said.

Equally concerning, commercial and industrial real estate continued to experience challenging conditions nationwide. "Overall, vacancy rates were flat to slightly increased and continued to exert downward pressure on rents. Construction activity remained weak in most Districts," the Fed said.

The Fed described banking conditions as "largely mixed across the Districts." In addition, "Most Districts reporting on credit standards continued to note that lending standards remain restrictive."

Meanwhile, labor market conditions improved modestly in several districts: New York, Chicago, Minneapolis, Richmond and Atlanta each reported improvements. However, "wage pressures remained largely contained across most Districts," the Fed added.

Modest Growth, but Outlook Is Uncertain

The Fed's latest Beige Book analysis comes at a time when the U.S. economic outlook is, in the words of Fed Chairman Bernanke, "usually uncertain," even as the economy continues to grow. Recent corporate earnings reports and economic indicators confirm that clouded view.

On the one hand, in general, major U.S. corporations have reported better-than-expected earnings for the June quarter -- with some even raising earnings guidance for the quarters ahead. Moreover, many are lean, productive, flush with cash, and poised to tackle new tasks and markets.

On the other hand, sluggish home sales, inadequate job growth, and recent slowdowns in durable goods orders and industrial production all show that the U.S. economic recovery slowed in the second quarter.