The Fed’s “beige Book” is a compilation of anecdotal evidence on economic conditions from each of the 12 Federal Reserve districts two weeks before a Fed interest rate policy meeting. Wednesday’s Beige Book shows defined weakening in some Fed regions.

Bloomberg Econoday Comments on the Beige Book.

Weakness in exports and deepening contraction in the energy sector make for a flat description of economic growth in today’s Beige Book, prepared for the mid-month FOMC meeting. Most of the Fed’s 12 districts are reporting moderate to modest growth with Kansas City, however, which is getting hit by the energy sector, in modest decline. But other descriptions are solid with the labor market continuing to improve and consumer spending continuing to increase. Wage growth is described as varied, between flat to strong with the latter a definite though isolated indication of strength. Otherwise, consumer prices are described as steady. Positives are residential and commercial real estate which are both described as growing. Today’s report won’t turn up the heat for a March rate hike but neither does it point to a downgrade for the economy.

Slowing is Obvious

Econoday says “The Beige Book does not point to a downgrade for the economy.”

I disagree. The downshift is obvious. Construction was up primarily because of government spending on road projects. Housing has stalled.

Seconding my opinion, albeit in a half-hearted way, the Wall Street Journal reports Fed Beige Book: Economic Activity Slowed in Some Districts.

Economic activity downshifted in parts of the U.S. in recent months, the Federal Reserve said, with a few areas reporting a hit to consumer spending tied to recent market turmoil.

Just half of the Fed’s 12 districts reported modest or moderate growth since early January, according to the central bank’s “beige book” summary of regional economic conditions released Wednesday. The prior report showed nine districts expanding at that pace.

The latest report “is further proof that the U.S. economy is growing steadily, and not falling into recession,” PNC economists said in a note to clients. “Consumer spending, the housing market, and commercial construction continue to lead growth in early 2016.”

Domestically oriented sectors appeared stable as consumers continued to spend and the labor market added jobs. But sectors with more overseas exposure have taken a hit from low commodity prices, economic slowdown overseas and the strength of the U.S. dollar.

Eight districts reported “significant headwinds” for manufacturing due to weak demand from the energy sector, and many districts said “the strengthening dollar and weakening global outlook” reduced demand for exports.

The latest Fed report “was marginally weaker in tone than January’s,” said Dana Saporta, an economist at Credit Suisse. “But, in general, the weakness could be found among the usual suspects” like energy and manufacturing.

The WSJ report was a step up from Bloomberg Econoday’s report, but neither pointed out that jobs are a very lagging indicator and housing has slowed if not stalled. Importantly, only half the regions show modest growth, down from three-fourths. That’s how recessions start.

But don’t worry, it’s just the “usual culprits”.

Mike “Mish” Shedlock