Trying to understand where the economy is going these days is like making predictions with yesterday’s tea leaves. Events are moving so fast that we have to recalibrate our understanding on a daily basis. We’ve left the old normal behind, but the new normal remains elusive.
In these circumstances, the regional snapshots taken by the 12 Federal Reserve Banks and compiled periodically into the Federal Reserve Beige Book are oddly comforting. Yes, some of the regional profiles are almost instantaneously out of date, having been overwritten by the spread of the pandemic. The latest edition, which appeared on July 15, is based on information collected on or before July 6. But even so, the Beige Book is valuable because it freezes a moment in time, allowing readers to compare economic activity in one region with another and form a baseline for interpreting subsequent events.
The Beige Book in Context
Readers should approach the Beige Book with a few caveats in mind. Regional analyses collected in the report are based on interviews with key business contacts, community leaders, economists, market experts, and other sources. The result: The Beige Book is less a scientific survey than an impressionistic overview. In addition, each Federal Reserve Bank organizes its findings differently. For instance, while the Federal Reserve Bank of Boston devotes a section to commercial real estate, its counterpart in Kansas City combines residential and commercial real estate with construction. Making direct comparisons among regions can be tricky.
Despite these differences, a number of common threads run through the July edition. The first, a useful corrective to any irrational exuberance among investors, is that economic activity is nowhere near what it was last year. Second, the ability of the economy to muddle along until a vaccine is discovered is dependent on the continuation of the Paycheck Protection Program and other CARES Act stimuli. And third, the demand for industrial space, especially warehouses, is stronger than ever and remains the standout among commercial real estate segments.
Regions in Recovery
At the same time, the Beige Book makes it clear that circumstances vary significantly from region to region, reflecting both the uneven nature of the pandemic as well as the response. The picture in areas where the pandemic has been contained is encouraging. The Federal Reserve Bank of Chicago, for instance, stated that the local economy grew strongly in the weeks since the last edition was published on May 27. Employment, consumer spending, and manufacturing increased substantially, while business spending and construction and real estate activity increased modestly.
New York also saw an uptick as the virus subsided and businesses began to reopen. Employment came off its lows across most industry sectors in June, and business leaders were more optimistic about the near-term outlook. Even leisure and hospitality businesses reported some improvement. Consumer spending on balance had also rebounded substantially, especially for vehicles.
The report indicated that the residential rental market in New York City has weakened in part because tenants are not renewing. This confirms other anecdotal evidence that tenants are either moving to the suburbs or putting their belongings in storage and waiting out the pandemic in the country.
A Glimpse of the Future
The story was more upbeat in areas covered by the Federal Reserve Bank of Atlanta, which includes Alabama, Florida, Georgia, and parts of Tennessee, Louisiana, and Southern Mississippi. In June, these states were rapidly opening for business, and labor markets were improving. As we now know, however, this recovery was short lived. Although the Beige Book snapshot doesn’t account for the subsequent shuttering of Southeastern businesses as the pandemic surged in July, it may provide a glimpse of how local economies might gather strength when the pandemic is ultimately defeated.
Seen in this light, the Southeastern experience suggests that commentators keep an eye on retail. In June, Southeastern retailers reported strong consumer demand, especially for automobiles, and expected sales and margins to improve over the remainder of the year.
At the same time, commercial real estate activity may take more time to make up lost ground in the event of a recovery. Although some remote workers returned to Southeastern offices in June, many firms indicated success with remote arrangements and noted they will continue this stance for the near term and possibly beyond. In multifamily, owners reported minor softening in occupancies and greater concessions to minimize lease turnovers. There were also accounts of tenants and borrowers seeking relief.
CRE Investment activity was still muted compared with pre-COVID-19 levels. Contacts reported that capital was readily available at banks; however, underwriting criteria tightened for the financing of operating CRE projects, and originations continued at a subpar pace.
When the Recovery Comes
Not surprisingly, the dominant point of reference in the Beige Book is the much-wished-for recovery. The report is littered with passages describing firms “putting off merit increases until they were more confident in the sustainability of the recovery” (Cleveland) and or “laying off workers as they reassessed how long the recovery will take” (St. Louis). Of course, the timing of the recovery maintains uncertain. The only bank willing to provide an estimate was Chicago. It reported that its “contacts expected further growth in activity in the coming months, but most did not expect a full recovery until at least the second half of 2021.” If a vaccine is introduced next winter, that sounds right.
Go to the Source: The next edition of the Beige Book will be available on September 2. The current issue is available from at Federal Reserve website.