Beige Book Blues

OK, the financial press spin in favor of "green shoots" is getting absurd. The AP headline on the story about the Fed Beige Book reads: "Fed survey sees signs recession is easing." Did the reporter even bother to read the report, or did he write the headline first to show what he wanted the report to show, not what it actually said?

Here is the link to the whole beige book, and a few key sections (with my comments in between paragraphs):

"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. However, five of the Districts noted that the downward trend is showing signs of moderating. Further, contacts from several Districts said that their expectations have improved, though they do not see a substantial increase in economic activity through the end of the year."

In other words, seven of the twelve districts did not see signs of moderating.

"Manufacturing activity declined or remained at a low level across most Districts. However, several Districts also reported that the outlook by manufacturers has improved somewhat. Demand for nonfinancial services contracted across Districts reporting on this segment.

"Retail spending remained soft as consumers focused on purchasing less expensive necessities and shied away from buying luxury goods. New car purchases remained depressed, with several Districts indicating that tight credit conditions were hampering auto sales. Travel and tourism activity also declined.

"A number of Districts reported an uptick in home sales, and many said that new home construction appeared to have stabilized at very low levels. Vacancy rates for commercial properties were rising in many parts of the country, while developers are finding financing for new commercial projects increasingly difficult to obtain. Most Districts reported that overall lending activity was stable or weak, but with mixed results across loan categories.

"Credit conditions remained stringent or tightened further. Energy activity continued to weaken across most Districts, and demand for natural resources remained depressed. Planting and growing conditions varied across Districts as did agricultural input costs."

Check out the verbs and adjectives used: "declined," "contracted," "remained soft," "declined," "stabilized at very low levels," "weaken." Positive verbs were only used for things that you don't want to go up, like commercial vacancy rates.

"Labor market conditions continued to be weak across the country, with wages generally remaining flat or falling. Two Districts also mentioned employers' plans to scale back employee benefit programs. The Atlanta, Chicago and St. Louis Districts reported that some state and local governments faced hiring freezes or outright job cuts.

"While manufacturing employment levels remained low, some Districts saw signs that job losses may be moderating. With few exceptions, Districts reported that prices at all stages of production were generally flat or falling. The notable exception to the downward pressure on prices was the widely-reported increase in oil prices."

Expect labor market conditions to stay weak for some time now. Flat or falling wages will keep retail sales soft and the consumer focused on less expensive necessities. The good news is that for now, core inflation is not going to be a problem.

Rising oil prices will make headline inflation a bit more problematic. Dollars going to Exxon (XOM - Analyst Report) at the pump cannot be spent at J.C. Penney (JCP - Analyst Report) for more discretionary goods.

Manufacturing

"Manufacturing declined or remained weak in most Districts. Boston, Philadelphia, Cleveland, Chicago, St. Louis and Minneapolis reported declines in activity, while production remained at very low levels in the San Francisco District. Atlanta and Kansas City indicated that the pace of the decline in manufacturing had moderated or slowed. New York characterized the sector as having stabilized, while Dallas mentioned signs of stabilization. In contrast, Richmond reported a rise in both new orders and shipments."

OK, only one district, Richmond, was clearly positive on the manufacturing side of things. The New York district might be called neutral, and perhaps the same could be said of San Francisco.

"Philadelphia reported that the primary metals, machinery and electrical equipment industries remain especially weak, and Cleveland noted that steel shipments continue at depressed levels. Chicago commented that, apart from Asia, export demand was weak. Dallas reported that construction-related manufacturing and the petrochemicals markets remained weak, while San Francisco stated that activity in the wood products industry was depressed and that demand in the metal fabrication industry was extremely weak.

"Cleveland, Chicago, St. Louis and Dallas all noted weakness in automotive-related industries. In contrast, Boston, Dallas, and San Francisco indicated that high technology industries experienced some increase in activity, and Richmond noted strengthening across a number of industries. Several Districts also reported that the outlook of manufacturers has improved somewhat, though Boston, Cleveland and Kansas City mentioned that capital spending was weak."

"Remain weak," "remain weak," "remain especially weak," "was extremely weak." How the heck do you get "signs the recession is easing" from this report? Look, I would love to be able to say that things are getting better, but I am not going to be doing anybody any favors by holding out false hope, or spinning a headline so that black is white.

This was not a strong report. Look at the data yourself -- don't just rely on those in the financial media who want to say things are coming up roses. A slowing rate of decline is still a decline, and stabilizing is not the same thing as going up. Orwell's classic 1984 was published 60 years ago on Monday, and it seems as relevant as ever.