Inquiring minds are reading the “Good News” from the Fed’s Beige Book today.

Reports from the twelve Federal Reserve Districts indicated that while economic activity remains at a low level, conditions have improved modestly further, and those improvements are broader geographically than in the last report.


  • Consumer spending: The recent 2009 holiday season was modestly greater than in 2008 for eight Districts, although as retailers in the Philadelphia and San Francisco Districts noted, 2008 sales were so low compared with 2007, that the relatively small 2009 gains did not represent a significant shift in trend.
  • Nonfinancial Services: Districts reporting on nonfinancial services generally indicated an upward trend in activity, although in some areas reports were mixed.
  • Manufacturing: Manufacturing activity has improved since the last report in six Districts.
  • Residential: Homes sales increased toward the end of 2009 in most Federal Reserve Districts, except San Francisco, where demand for housing has been steady, and Kansas City, where residential real estate activity has eased since the last Beige Book. In New York, Richmond, and Atlanta, residential real estate activity was described as mixed across areas of the District. In the Atlanta District, existing home sales increased, but new home sales decreased. In all Districts, sales of lower-priced homes tended to increase proportionately more than sales of higher-priced homes, due at least in part to the first-time buyer federal tax credit, according to real estate contacts. In several Districts real estate contacts reported that the original expiration date for the credit boosted sales in November and led to a more than usual slowdown in sales in December.
  • Nonresidential: Nonresidential real estate conditions remained soft in nearly all Districts. New York, Philadelphia, Kansas City, and San Francisco reported further weakening in demand for commercial and industrial space.
  • Employment, Wages, and Prices: Labor market conditions remained soft in most Federal Reserve Districts, although New York reported a modest pickup in hiring and St. Louis reported that several service-sector firms in that District recently announced plans to hire new workers.
  • Loan Demand: Loan demand continued to decline or remained weak in most Districts. St. Louis, Kansas City, Dallas, and San Francisco noted general declines or soft loan demand. New York reported declining demand for all types of loans except residential mortgages for which demand has been steady. Philadelphia reported continuing declines for all categories of credit. Cleveland noted declining demand for business loans and underutilization of commercial credit lines.
  • Credit Conditions: A number of Districts reported that credit quality continued to deteriorate. Financial institutions in the New York District reported ongoing increases in delinquencies for all types of loans. Banks in the Philadelphia District reported that delinquencies and defaults continued to rise for all types of loans, although less sharply than at the time of the previous Beige Book. Cleveland received reports of steady consumer credit quality but high and rising commercial loan delinquencies. Kansas City noted year-over-year declines in credit quality among financial institutions in the District, and Dallas and San Francisco reported continued deterioration at financial institutions in their Districts.

27 Million Unemployed or Underemployed

In the latest jobs report (see Jobs Contract 24th Straight Month) there were 15.3 million unemployed, 2.5 million marginally attached workers (those who want a job but did not look in the last 4 weeks), and another 9.2 million part-time workers who want a full time jobs but do not have one. Add that up and you have 27 million unemployed or underemployed workers.

Credit Conditions and Jobs: Where the Rubber Meets the Road

The Fed can say there is modest improvement but imagine telling that to 27 million people out of work and wanting a job, many of them too discouraged to even look. Furthermore, the 27 million count does not include those with Master’s Degrees working at Pizza Hut or Walmart because it is the only work they can get. How many underemployed with huge salary cuts are not included in any official count? 5 million? 10 million? Higher?

Moreover, until job conditions improve, credit conditions will continue to deteriorate, banks will not lend, and businesses will not hire.

Take another look at the Beige Book paragraphs above on nonresidential, employment, loan demand, and credit conditions and ask yourself “what kind of recovery is this?”

Yes, I know some of those are “lagging” indicators. How lagging is the question now?

The Swiss Cheese Recovery

If Congress sloshes around enough money and the Fed holds rates low enough some of that money will be spent and GDP will rise. But if you tell 27 Million People who want full time employment and do not have it, that the recovery is improving, they are likely to ask “On what planet?”

Trillions of dollars of taxpayer money has been wasted and all we have to show for it is a meager 2.2% GDP. Most of that GDP improvement came from additional stimulus efforts via cash for clunkers and an improvement in low-end housing prices thanks to huge tax credits. Both housing and autos are destined to die on the vine. There is no lasting pent-up demand.

Spending money we do not have, borrowed into existence on the backs of future taxpayers, can never produce a recovery. The current improvement in economic conditions is simply an illusion, like Swiss cheese without the cheese. Take away the stimulus cheese and all you have is holes. That unfortunately is the true state of this recovery.

Mike “Mish” Shedlock
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