Highlights
The Beige Book prepared by regional Fed banks for the upcoming March 18 FOMC meeting finds that the economy clearly has slowed. Inflation news is mostly favorable from the labor sector but mixed on the upside elsewhere. Markets should be relieved that the overall tenor of the Beige Book reads that the economy is not in recession but rather merely slowing significantly. The Fed may or may not be doing its own spin job on the economy, but the bottom line is that the tone of the report indicates that the Fed does not need to be in a desperation mode. The flip side to this report not having a really negative tone is that Fed may not ease as aggressively on March 18 as many expect. We may get "only" a 50 basis point cut rather than a 75 basis point cut. Nonetheless, the Fed has focused more on credit conditions than face value of the economic indicators in recent months and could still cut by the larger amount for insurance purposes.

Within the real economy, manufacturing is described as "sluggish or to have slowed" in many districts although export driven manufacturing is still healthy. Residential real estate remains weak while commercial real estate generally is slowing. Retail activity is "weak or softening" while services are slowing overall. Banks indicate that they have tightened credit standards. On the positive side, tourism is strong as are agriculture and energy sectors.

Turning to inflation, "most Districts indicated that contacted businesses reported limited wage pressures, moderate wage increases, and some loosening of labor markets." Price pressures were mixed although more manufacturers reported passing along rising costs while retailers indicated that they were constrained from passing along higher costs. For manufacturers, "upward pressures on input costs from high or rising energy prices were frequently cited, which also translated into increased transportation and shipping costs."

The labor market is starting to be hard hit by the slowing in economic growth as there were reports of "increased prevalence of layoffs, reductions in work hours, or hiring freezes."

But the credit markets may be the key focus of the Fed. Districts generally are reporting tighter credit standards, increases in mortgage delinquencies and foreclosures, and a decline in credit quality. The Fed's decision for a large rate cut may end up being based on these credit market conditions more so than being based on more traditionally followed economic indicators.

The bottom line is that the economy is not yet in recession as implied by the Beige Book, inflation is a near-term concern, and credit problems are still very serious. The Fed is still on track for a significant rate cut on March 18 and there certainly will be much debate within the FOMC on March 18 on how far the Fed should go.

2008 Release Schedule

Released On: 1/16 3/5 4/16 6/11 7/23 9/3 10/15 12/3 Released For: Dec Feb Mar May Jun Aug Sep Nov