Fed's Beige Book Steady, But With Inventory Concerns

The Federal Reserve’s newest Beige Book comments are out.  They were prepared at the Federal Reserve Bank of Chicago and the cut-off date for information was May 28, 2010.   In short, the Fed found that economic activity continued to improve across all twelve Federal Reserve Districts, although it also noted that gains in many Districts were only “modest.”  Consumer spending and tourism activity increased and business spending also rose.  Employment and capital spending as inventory investment slowed.

The gradually improving sectors were non-financial services, manufacturing, and transportation.

On the housing front, residential real estate activity in many Districts was buoyed by the April deadline for the homebuyer tax credit. The comments also note that commercial real estate remained weak, although some districts reported an increase in leasing.

Financial activity was little changed with only a few districts noting a modest lending increase in lending.

On the farming and agriculture front, spring planting was generally ahead of the normal pace but conditions in the natural resource sectors varied.

No major inflation nor deflation was stressed as prices of final goods and services were largely stable as higher input costs were not being passed along to customers and wage pressures continued to be minimal.

The biggest takeaway here is on inventories.  There was a huge concern that the robust Q4-2009 and the Q1-2010 was artificially high as waves and waves of inventories were being replaced and added to.  The notion of a slowing down in inventories will signal more and more concerns from businesses that they could get stuck holding inventories for longer than they are comfortable with in The New Normal.

The full Beige Book is here.

JON C. OGG

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