Why I Keep The Beige Book Under My Pillow. . .

It gives me vivid dreams of whats to come in the economy and I like that, also it matches the color of my pillow case. The Beige Book is a summation of the 12 regional Federal Reserve Banks on whats currently occurring. It's a snapshot of the economy which is released 8 times a year, generally two weeks before the Fed's FOMC meetings. If you want to have some sort of a clue as to what the Fed will recommend at the next FOMC meeting then read the Beige Book and the Fed's speeches. The Beige Book is based on interviews with local business people and academics from each of the 12 regions. A look inside this report (The WSJ econ blog has its own tidbits here) reveals that economic activity has continued to improve but growth is at a "modest" pace.

Home sales and construction picked up till the end of the Home Buyers Tax Credit which expired on April 30th, and coincidentally in May these areas have been reported as slowing. Lower rents have pointed as a reason for increasing leasing activity in New York, Philadelphia, Richmond, Kansas City, Dallas, and San Francisco. One noteworthy extract is that some districts cited concerns over the potential impact of the European fiscal crises on financial and business conditions. These districts reported a corresponding increase in uncertainty and financial market volatility.

A look at Cleveland's report (since Cincinnati is a local branch) reveals that demand by business for new loans remains weak sauce. However, some bankers commented that the lending environment is starting to grow more competitive. This is generally consistent with yesterdays release of the Small Business Optimism Index . On a positive note, a large majority of the contacts reported that inventories are now well balanced which reflects increased demand. Furthermore, the number of respondents who plan on additional spending during the second half of 2010 has increased "substantially" since the last report.

For some Gulf oil spill action, the Atlanta Feds district said that contacts indicated the potential impact on the tourism industry along the coast line of Louisiana, Mississippi, Alabama, and western Florida could be substantial:

"In some cases, vacation lodging cancellations have been replaced by bookings for clean up crews, laborers, and the National Guard."

Index of Small Business Optimism and the Aggregate Demand Dilemma

The National Federation of Independent Business Index of Small Business Optimism increased 1.6 points in May with a reading of 92.2. The analysis states that although this is not a strong sign of recovery, it is nevertheless headed in the right direction. It is recorded as the best reading since September 2008. A look inside the report reveals that only one percent of small business owners plan on increasing employment, but this is still better than in April. An important insight into how this recessions recovery compares (lags behind) to those of the past:

"Since the third quarter of 2009, job creation plans have seriously underperformed the recoveries from the other two deep recessions covered by the NFIB survey. Coming out of the milder 1991 recession, construction added more than 100,000 jobs and 20,000 new firms in a year's time."

Credit conditions are of special interest in the report and point to very slow improvement. A net 13 percent of NFIB members reported loans harder to get than in their last attempt, which is down one point from April. The main reason for small businesses owners not hiring or expanding their business is because of the lack in aggregate demand as ninety-two percent of the owners reported all their credit needs met, or they did not want to borrow.

"Very weak plans to make capital expenditures, to add to inventory and to expand operations make it clear that many good borrowers are simply on the sidelines, waiting for a good reason to make capital outlays and order inventory and take out the usual loans used to support these activities."

The report makes the claim that what businesses need are customers, giving them a reason to hire and make capital expenditures and borrow to support those activities. Indeed, thirty percent cited weak sales as their top business problem, which is up one point from April.