Fed's Beige Book Reports on US Economy -- Housing Decline a Concern

On November 29, the Federal Reserve was cautiously optimistic about the US economy's performance in October, as released in its Beige Book status report. At first blush, the report seemed fairly optimistic in that:

• Most of the 12 districts reported moderate growth.
• Inflation wasn’t a concern now that gas prices were lower.
• Employment was strong, especially for highly skilled occupations.
• Consumer spending had increased during October and early November. As a result, the districts were optimistic about the Christmas retail sales outlook.

Beige Book Reports Continued Housing Slowdown

However, all 12 Federal Reserve districts reported that housing had not yet bottomed out. In most districts, housing activity and mortgage lending continued to slow, especially in the single family market. Housing inventory continued to rise, and in some districts home prices had started to decline. Several districts reported that they expected the housing market to continue to soften over the next several months.

The continued softness of the housing market belies the optimistic tone of the report. As housing continues to decline, it will eventually be felt in the pocketbooks of consumers. This might not show up in the consumer spending and retail sales numbers until after Christmas. Since housing is so interest-rate dependent, it is a leading indicator. If retail sales and consumer spending start to decline, that will be a confirmation of further slowdown in the US economy.