Fed Beige Book

The latest Fed Beige book came out at 2:00 p.m. Eastern Time. It procvides the bulk of the anecdotal information about the U.S. economy down to the regional level that will be used by the FOMC members when they discuss the economy and monetary policy at the end of the month.

The Fed Beige Book reported that "Economic expansion continued across the twelve Federal Reserve Districts through the last several weeks of 2005."

This was a positive report.

Notes include:

• "Most Districts reported moderate increases in employment"
• "on the whole, wage increases were characterized as moderate"
• "input-price pressures have continued for many items ... but they were less intense at year-end than earlier"
• "Retail prices and producers' prices for more finished goods, however, were widely reported as rising only moderately or remaining stable"
• "Retail sales rose in most Districts"
• "Increases in manufacturing activity were widely reported"
• "Most Districts indicated some cooling in residential real estate activity, while many noted that commercial real estate activity generally continued to improve"
• "Consumer borrowing was flat or fell in most Districts, while commercial borrowing was more mixed, with many Districts reporting moderate increases in activity"
• "Several Districts (San Francisco, Kansas City, Chicago, Richmond, Cleveland, Philadelphia, and Boston) reported that increases in energy prices moderated, or actually fell, albeit from high levels. In the San Francisco, Cleveland, and Richmond Districts, these developments were thought to be associated with a wider easing in overall price pressures. However, in the remaining nine Districts, nonlabor-input-cost increases continued to concern companies, particularly those in the manufacturing sector"
• "Producers were reported to have attempted to recoup these costs, although, according to the Atlanta, Boston, San Francisco, and Dallas Districts, intense competition was thought to be holding down price increases in parts of the supply chain further 'downstream.'"
• "Increases in the prices of construction materials were widely reported"
• "Retail prices were generally regarded as stable, though there was some significant discounting reported in the Cleveland and Atlanta Districts during the holiday selling season. More moderate discounting was reported in the Dallas District, levels about the same as last year were reported in the San Francisco District, and no widespread discounting was reported in the Philadelphia District"
• "Price increases are planned in the months ahead by a large share of retailers, according to the Kansas City District"
• "Most Districts reported signs of continued, if generally moderate, increases in employment"
• Some tightness of labor markets was reported.
• "All Districts reported that their retail sales rose during this latest holiday selling season except Cleveland, where sales were generally flat or less than at this time a year ago. Philadelphia, Chicago, St. Louis, Minneapolis, and Kansas City reported modest to moderate increases. Boston, New York, Richmond, Atlanta, Dallas, and San Francisco reported stronger holiday sales than these Districts. The Cleveland, Richmond, Chicago, Minneapolis, and Dallas Districts noted significant increases in gift card sales, which led retailers in Richmond and Dallas to anticipate stronger sales and profits in early 2006"
• "Automobile sales were generally somewhat sluggish across the nation"
• "Philadelphia and Kansas City characterized truck and SUV sales as especially slow"
• "Production of high-technology goods was steady to slightly increasing toward the end of 2005, according to the San Francisco and Dallas Districts"
• "Conditions in the energy sector were characterized as strong or stable at a high level by four of the five Districts reporting on natural resources. As a result, San Francisco, Dallas, and Kansas City all reported shortages of labor, materials, and equipment among energy-related enterprises. Producers of natural gas and oil reportedly operated near 100 percent capacity in the San Francisco District, while the Atlanta and Dallas Districts reported that facilities in the Gulf of Mexico continued to recover from hurricane-related damage. Minneapolis reported that most mining operations in its District were running near capacity."

It sounds to me that the Fed is saying that the economy is doing fine, not headed for a recession or significant slowdown, and that there is enough lingering anxiety about inflationary pressures that the FOMC should not be in any rush to back off on their interest rate hiking campaign.

So, expect a hike this month, probably a hike in March, and then we'll remain in the same boat until we get to a Beige report that basically says that inflationary pressures have backed off significantly.

Regardless of what some misguided commentators have suggested, the Fed is still fighting inflationary pressures. It does not matter what headline inflation is, but what's going on in the economy that might (and likely will) lead to inflation.

You can also read our Stock Market Outlook for 2006 and our Daily Stock Market Commentary.

-- Jack Krupansky