The latest so-called “Beige Book” from the US Federal Reserve is the most ‘cheery’ in months. After two rather gloomy reports in succession, reading this latest report you can see the basis for talk about “green shoots” from Chairman Ben Bernanke.

But unemployment remains unremittingly gloomy and for the moment, Wall Street and other analysts are ignoring that and its implications.

The changed tone in some of the comments in the latest issue of the Fed’s summary of economic conditions from its 12 banking districts across the US helped reverse a negative tone on Wall Street after another fall in industrial production in March (much steeper than forecast), a fall in consumer prices, news of rising credit card defaults and lower sales at a leading fast food chain.

The markets and commentators are now more fixated on the “rebounding economy” story than ever after the Fed started its report with this comment:

“Reports from the Federal Reserve Banks indicate that overall economic activity contracted further or remained weak. However, five of the twelve Districts noted a moderation in the pace of decline, and several saw signs that activity in some sectors was stabilizing at a low level.”

Punters cheered and others and economists got out their models, dusted off the abacus and spruiked: “bounce” and Wall Street reversed a weak opening to end higher.

This comment helped as well: “Housing markets remained depressed overall, but there were some signs that conditions may be stabilising,” the Fed said.

These were the “green shoots” much of the rest of the Beige Book was decidedly mulch:

Manufacturing activity weakened across a broad range of industries in most Districts, with only a few exceptions. Nonfinancial service activity continued to contract across Districts. Retail spending remained sluggish, although some Districts noted a slight improvement in sales compared with the previous reporting period.

Residential real estate markets continued to be weak. Home prices and construction were still falling in most areas, but better-than-expected buyer traffic led to a scattered pickup in sales in a number of Districts. Non-residential real estate conditions continued to deteriorate.

Difficulty obtaining commercial real estate financing was constraining construction and investment activity. Spending on business travel declined as corporations cut back. Reports on tourism were mixed. Bankers reported tight credit conditions, rising delinquencies, and some deterioration of loan quality.

They skated over those and other comments which show the recession remains deep and is brining unemployment to the fore as the most serious problem:

Wage and salary pressures eased as labour markets weakened in all Districts, and many contacts continued to report job cuts and wage and hiring freezes. Employment continued to decline across a range of industries, with only scattered reports of hiring.

Labour market conditions were weak and reports of layoffs, reductions in work hours, temporary factory shutdowns, branch closures and hiring freezes remained widespread across Districts. Staffing firms in the New York, Cleveland, Richmond, Chicago, and Dallas Districts reported that demand for workers remained sluggish. The manufacturing and energy extraction sectors were the most affected.

The employment outlook is generally bleak. Contacts in several Districts have instituted hiring freezes and anticipate further cuts in jobs and work hours.

Continuing layoffs, furloughs and hiring freezes kept wage pressures minimal. Contacts from a broad range of industries reported pay freezes, with some noting salary reductions.

It’s hard to see those “green shoots” growing into anything substantial when unemployment remains such a drag on activity.

Falling industrial production is making it harder for those green shoots to take hold, but that will reverse itself in a few months as retailers and others restock after liquidating inventories.

Production fell for a fifth successive month in March, dropping by 1.5% (more than the expected 0.9% fall expected by analysts). Industrial production is down almost 13% on a year ago.

Falling production of business equipment and construction supplies drove the decline. The Fed said the capacity utilisation rate, a measure of the proportion of plants in use, across all industries, fell to 69.3 from a revised 70.3%. That’s the lowest since 1967, when the Fed started keeping such records.

And inflation remains a concern: it the moment it’s about disinflation, but there’s a whiff of deflation appearing in the US. Tuesday saw producer prices fall 3.5% over the previous year, with consumer price inflation falling in the same month to record the first ever fall in the headline rate since 1955.

The 0.1% fall came largely from a sharp drop in energy prices and was the first fall after two months of increases. Consumer prices were down by 0.4% year-on-year. Economists had forecast a rise of 0.1% in the headline rate.

The so-called core rate which excludes food and energy rose 0.2% and was up 1.8% over the year. But a couple of analysts pointed out that the 11% rise in tobacco taxes in the Obama stimulus package was responsible fort the rise in March, otherwise the core reading would have been near flat, which would have set the ‘deflation dogs’ barking again. The Labor Department said that tax increase accounted for “60%” of the rise in the core CPI.

Peter Fray

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