Kicking off the New Year with an optimistic tone, the Federal Reserve’s latest ‘beige book’ released Wednesday, reported some strengthening in the economy and modest hiring increases in a variety of sectors.
Stocks rose in response, with an additional boost from a successful auction of government debt in Portugal. The Standard & Poor’s 500-stock index was up 0.9 percent.
Paul Dales, an economist with Toronto based Capital Economics, said the Fed’s new report doesn’t mean a change in the unemployment rate, which in December fell to a 19-month low of 9.4 percent despite adding just 103,000 jobs. Economists have said that more jobs need to be added to make a significant dent in the unemployment rate.
The report, the first of eight this year, is a roundup of economic data from 12 districts in the U.S. and showed that overall, the economy “continued to expand moderately” from November through December. All regions experienced some improvement in labor market activity, better news than the last beige book of 2010 that reported growth among 10 of the 12 districts.
All 12 districts reported optimism about the hiring outlook for 2011.
Moody's Analytics forecast for 2011 “also has grown decidedly more optimistic in the wake of the passage of the tax cut and unemployment insurance benefits package by Congress and signed by President Obama at the end of 2010,” said Marisa DiNatale, economist with Moody’s. “Our own job growth outlook for this year expects average job gains in 2011 to be almost double the pre-tax cut forecast gains.”
But some experts warn that the economic recovery remains unbalanced.
“While activity in the manufacturing and retail sectors remains healthy, conditions in the construction sector are still very depressed,” Dales said. “We believe this will be a recurring theme of this year.”
Retailers, meanwhile, have indicated that sales appeared to be higher in this holiday season than in 2009 and, in some cases, better than expectations. However, the blizzard following the Christmas holiday negatively impacted sales in New York and Philadelphia.
The Fed’s report also highlighted better conditions in districts with manufacturing, retail, and nonfinancial services sectors such as in Richmond and Chicago, rather than in areas with financial services or real estate like Boston and Dallas which saw weak demand for manufacturing services.
Cleveland, Atlanta, and Kansas City saw stable to slowing shipping volumes while Philadelphia and Richmond noted loan demand slowly improving.
Real estate remained a drag on the overall economic recovery. Most other sectors were expanding. “Housing remains something of an issue down the road even though we come into the year with a degree of economic optimism,” said David Ader, head of U.S. government bond strategy, at CRT Capital Group. “Housing is going to take a much longer time to come out of this,” Ader added.
There was, however, an increase in commercial leasing activity in four districts. The St. Louis district mentioned an uptick in permit issuance and several districts said multifamily construction had risen since the last survey. Some districts said difficulty in obtaining credit was hampering demand for new homes. Overall, most districts expected only a slight improvement in 2011 and residential markets expected to be weak this year.
Most districts reported that costs were rising, but indicated that competitive pressures had led to only modest pass-throughs into final prices. Auto sales were either holding steady or were increasing in eight of the 12 districts.