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Beige Book Sees Slowdown In Employment And Inflation, Sharp Tightening In Credit Standards And Spike In "Liquidity" Concerns

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by Tyler Durden
Wednesday, Apr 19, 2023 - 06:44 PM

The Fed's latest Beige Book, which  based on information collected on or before April 10, 2023, indicated seemingly little change in the Us economy, reporting that "overall economic activity was little changed in recent weeks" but when one reads deeper between the lines, some stark issues begin to emerge.

But first, let's start with the basics: according to the periodic note, Nine Districts reported either "no change or only a slight change in activity this period" while three indicated modest growth. Expectations for future growth were mostly unchanged as well; however, two Districts saw outlooks deteriorate.

Contrary to reports of a sharp drop in spending following the March bank crisis (confirmed by the drop in March retail sales), the Beige Book reported that consumer spending was generally seen as flat to down slightly amid continued reports of moderate price growth. Some more details:

  • Auto sales remained steady overall, with only a couple of Districts reporting improved sales and inventory levels.
  • Travel and tourism picked up across much of the country this period.
  • Manufacturing activity was widely reported as flat or down even as supply chains continued to improve.
  • Transportation and freight volumes were also flat to down, according to several Districts.
  • On balance, residential real estate sales and new construction activity softened modestly. Nonresidential construction was little changed while sales and leasing activity was generally flat to down.

Turning to labor markets, the beige book notes that employment growth moderated somewhat this period as several Districts reported a slower pace of growth than in recent Beige Book reports. A small number of firms reported mass layoffs, and those were centered at a subset of the largest companies. Some other firms reportedly "opted to allow for natural attrition to occur, and to hire only for critically important roles." As a result, Fed contacts reported the labor market becoming less tight as several Districts noted increases to the labor supply. Additionally, firms benefited from better employee retention, which allowed them to hire for open roles while not constantly trying to back-fill positions. And while wages have shown some moderation, they still remain elevated as several Districts reported declining needs for off-cycle wage increases compared to last year.

The slowdown wasn't only in labor markets but also in inflation: overall price levels rose moderately during this reporting period, though the rate of price increases appeared to be slowing. While peak inflation is clearly behind us, some regions are already experiencing defaltion: "Contacts noted modest-to-sharp declines in the prices of nonlabor inputs and significantly lower freight costs in recent weeks." Nevertheless, producer prices for finished goods rose modestly this period, albeit at a slightly slower pace. Selling price pressures eased broadly in manufacturing and services sectors. Consumer prices generally increased due to still-elevated demand as well as higher inventory and labor costs. Prices for homes and rents leveled out in most Districts but remained at near record highs. Contacts expected further relief from input cost pressures but anticipated changing their prices more frequently compared to previous years.

What we found most interesting, however, with everyone still waiting for the May SLOOS report, was the Beige Book comments on the bank sector in general, following the March bank crisis, as well as loan volumes and demand. This is what it found:

  • Conditions in the broad finance sector deteriorated sharply coinciding with recent stress in the banking sector. Small to medium-sized banks in the District reported widespread declines in loan demand across all loan segments. Credit standards tightened noticeably for all loan types, and loan spreads continued to narrow. Deposit rates moved higher. Finally, delinquency rates edged up on residential and commercial mortgages.

  • Lending volumes and loan demand generally declined across consumer and business loan types.

  • Several Districts noted that banks tightened lending standards amid increased uncertainty and concerns about liquidity.

Turning to the specific regional Feds, we find the following banking comments:

  • New York Fed: "Conditions in the broad finance sector deteriorated sharply, coinciding with recent stress in the banking sector. Regional banks continued to report widespread declines in loan demand, ongoing credit tightening, and modestly rising mortgage delinquency rates. Credit standards tightened noticeably for all loan types, and loan spreads continued to narrow. Deposit rates moved higher. Finally, delinquency rates edged up on residential and commercial mortgages.... Amid heightened uncertainty, most businesses do not expect economic conditions to improve in the coming months."
  • Philadelphia Fed: "Banks reported tighter lending standards. Expectations were subdued as sentiment remained cautious."
  • Cleveland Fed: "Economic activity was generally flat in the Fourth District and developments in the banking sector appeared to have very little impact on either recent economic activity or credit availability. One dealer hoped that more manufacturer incentives would increase demand, but he cautioned that higher credit standards had become an additional headwind for potential buyers"
  • St Louis Fed: "Banking contacts reported slowing loan growth and a decline in deposits, but expressed confidence in their overall position."
  • Kansas City Fed: "After tightening credit standards over the past several weeks, many contacts reported expectations for further tightening or more strict pricing related to credit risks. Loan demand also weakened modestly in the past month, driven by increased borrowing costs and economic uncertainty. "
  • Dallas Fed: "Credit standards and terms tightened sharply, and marked increases in loan pricing were noted. Banking outlooks continued to deteriorate, with contacts expecting a contraction in loan demand and business activity and an increase in nonperforming loans over the next six months... Outlooks were largely negative, and contacts voiced concern about weakening demand, a potential recession, and the spillover effects of the recent bank failures on the broader economy."

As for the cause of all this apprehension about loans, lending standards and tightening conditions, one look at the chart above showing the frequency of mentions of one key word in recent Beige Books should be sufficient.

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