Weekly Economic Commentary

Beige Book: Window on Main Street
Sequel to Last Summer?

This Wednesday, June 6, the Federal Reserve will release its Beige Book — one of our favorite economic reports. The Beige Book compiles qualitative observations made by community bankers and business owners about economic (labor market, prices, wages, housing, nonresidential construction, tourism, manufacturing) and banking (loan demand, loan quality, lending conditions) conditions in each of the 12 Federal Reserve (Fed) districts (Boston, New York, Philadelphia, Kansas City, etc.). Each Beige Book is compiled by one of the 12 regional Federal Reserve districts on a rotating basis — the report is much more “Main Street” than “Wall Street” focused. It provides an excellent window into economic activity around the nation using plain, everyday language. The report is prepared eight times a year ahead of each of the eight Federal Open Market Committee (FOMC) meetings. The next FOMC meeting is June 19 – 20, 2012.

Warm Weather Impact

The Beige Book prepared ahead of the April 24 – 25, 2012 FOMC meeting (released on April 11, 2012) described an economy that was still expanding “at a modest pace.” At that time, there were few signs of the themes that dominated the Beige Books in the summer and fall of 2011: weak confidence, rising food and energy prices, European concerns, and high economic and financial market uncertainty. (Please see our April 16, 2012 Weekly Economic Commentary.) In addition, the numerous mentions of warmer-than-usual weather in the April 11, 2012 Beige Book suggested to us that warm winter weather almost certainly impacted economic activity.

Expansion and Uncertainty

Unfortunately, many of the themes that dominated the Beige Book in the summer and fall of 2011 may reappear in this week’s Beige Book, making it look like a sequel to the ones prepared in the middle of 2011. In addition, the return to more “normal” weather this spring has led to a noticeable cooling of economic activity in recent weeks. We have been describing that as “payback” from the warmer-than-usual winter of 2011 – 2012 that pulled forward hiring, home buying, construction activity, and even some consumer purchases. It will be interesting to see how business and banking leaders describe the weather’s impact on the economy in recent weeks and months. The slowdown in economic activity in China will also likely be mentioned in this week’s Beige Book. On balance, we expect the Beige Book released this week to look more like the sequel to the Beige Books from last summer and fall, rather than the relatively upbeat Beige Books released thus far in 2012.

We do not expect the Beige Book to be all bad news. Indeed, business and banking contacts across the country are sure to note several positives in this week’s Beige Book, including the:

·         Recent drop in consumer energy prices,

·         Continued increase in bank loan activity (to both consumers and businesses),

·         Sharp increase in refinance activity as the result of the sharp drop in mortgage rates,

·         Ongoing revival in the housing market (sales, prices, construction, employment),

·         Dramatic decrease in raw materials costs, and

·         Revival of the manufacturing sector.

In addition, the global supply chain disruptions resulting from the earthquake in Japan that dominated the Beige Books last summer have now been resolved and are not acting as a drag on global growth as they were throughout the final two-thirds of 2011. Notably, compared with the Beige Books released in June of 2008 and 2009 — when the economy was in the midst of the Great Recession — this week’s Beige Book is likely to be far more upbeat.

Behind the Key Words and Phrases

We expect an increase in mentions of uncertainty, Europe, and confidence in this week’s Beige Book, and perhaps even a sharp uptick in the number of mentions of China. Weather mentions will likely remain elevated as well. We don’t expect to see any mentions of Japan/Thailand as it relates to global supply chain disruptions, but we do expect plenty of mentions of lower gasoline, fuel, and commodity prices impacting the economy.

On balance, the Beige Book will likely paint a picture of an economy that is growing, but perhaps growing more slowly than it was just a few months ago. The slowdown in the pace of economic growth here and abroad, growing policy uncertainty overseas and at home, along with a sharp decline in food and energy prices ought to provide the Fed with the scope to pursue another round of quantitative easing later this year, and perhaps even as soon as the end of this month, when Operation Twist is scheduled to end.

IMPORTANT DISCLOSURES The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Quantitative Easing is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity. This research material has been prepared by LPL Financial.
The Federal Open Market Committee action known as Operation Twist began in 1961. The intent was to flatten the yield curve in order to promote capital inflows and strengthen the dollar. The Fed utilized open market operations to shorten the maturity of public debt in the open market. The action has subsequently been reexamined in isolation and found to have been more effective than originally thought. As a result of this reappraisal, similar action has been suggested as an alternative to quantitative easing by central banks.
This research material has been prepared by LPL Financial.
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