By Neil Irwin
Washington Post Staff Writer
Thursday, September 10, 2009
An economic recovery may well have arrived, but a Federal Reserve report released Wednesday shows just how varied it is proving to be among different industries and different regions.
The mixed picture underscores how fragile the economy remains. While growth overall may have resumed, the nation is still vulnerable to new shocks as long as there are such large pockets of weakness.
The report "clearly depicts the challenges the U.S. economy faces as it attempts to crawl out of the basement," said Richard Yamarone, chief economist with Argus Research. "Sporadic growth in select regions implies an uneven and potentially difficult process."
Overall, business people around the country "remained cautiously positive" about economic prospects, according to the "beige book," a compilation of anecdotal information the Fed publishes eight times a year.
Wednesday's report found "modest improvements in the manufacturing sector" when the survey was conducted in the weeks leading up to Aug. 31, and that "retail activity was flat." The report is prepared in advance of every Fed policymaking meeting to help top officials understand what is happening at the ground level of the economy.
The most consistent theme in the latest report is inconsistency. For every sector where the worst seems to be over and a recovery is starting to take shape, there seems to be another that remains in deep distress.
The auto industry appeared to be a big winner, for example, though it is unclear how resilient that improvement will be. The beige book says a majority of regional Fed banks "reported that the cash-for-clunkers program helped boost traffic and sales," though businesses in the districts headquartered in Cleveland and Kansas City noted that "used car sales were adversely affected by the program."
And consumers in much of the country seem to be avoiding large purchases. Business contacted by the regional Fed banks saw "improvement in sales, but attributed the increase primarily to back-to-school purchases," the report says.
The Philadelphia, Chicago, Cleveland and San Francisco Fed districts "observed that shoppers remained focused on essentials and continued to refrain from purchasing discretionary and big-ticket items."
There were positive signs from manufacturing, as most of the country reported modest improvements. The San Francisco Fed in particular said orders rose for manufacturers of semiconductors and other information technology products, and several districts reported increases in automobile and pharmaceutical production.
The housing market improved across much of the country, though mainly at the lower end of the market, amid signs that the first-time home buyer tax incentive is helping to encourage sales. There were some scattered exceptions, including Washington and Richmond.
The job market remained weak, but not quite as bad as it has been, as sources noted "a decline in the pace of layoffs." And there were the earliest signs of stabilization in the job market, as staffing firms in eight of the 12 districts reported a slight pickup in the hiring of temporary workers.
The banking sector remains a mess, and consumers and businesses are reluctant to borrow money. "Most Districts reported that loan demand was weak and that credit standards remained tight," the beige book says. The commercial real estate sector also remains in rough shape. Industry officials indicated that "demand for space remained weak and that construction continued to decline in all Districts." The Richmond Fed, whose district includes the Washington area, noted that "some landlords had postponed property improvements in an effort to conserve cash."
The mixed assessment is consistent with economic data of late.
"The beige book read like a pretty cautious assessment of the economic recovery to this point," said Peter Hooper, chief economist at Deutsche Bank Securities. The expansion that he and other economists believe is underway is driven more by temporary factors than hard evidence of the kind of underlying trends that will "ultimately be needed to sustain a recovery."