LPL Financial’s Kleintop Says Beige Book Economic Outlook Brighter

Report from Fed districts indicate the economy continued to improve during reporting period

The Beige Book economic report, a compilation of the 12 Federal Reserve districts, indicated Wednesday that the economy continued to improve, on balance, during the reporting period from early/mid-October to mid-November. Manufacturing activity continued to expand in almost all districts, with relatively strong growth seen in metal fabrication and the automotive industries. Reports also showed steady to increasing activity for professional and nonfinancial services. Two districts noted a decline in demand from government agencies due to budgetary shortfalls.

“The report backs up the report we got from China earlier in the day about increased manufacturing, as well as the PMI report,” says Jeff Kleintop (left), Chief Market Strategist for LPL Financial. "The only two districts that really declined were St. Louis and Philidelphia, which are service centers. The real manufacturing districts, like Cleveland, did well.”

Klientop noted that although the news is good, it’s balanced by confusion over extension of Bush-era tax cuts and European sovereign debt concerns.

“Those are policy issues which we will continue to watch,” he says. “But the bottom-up fundamental issues contained in this report appears to suggest we’ve shaken off the summer soft spots in output and lending, and they should remain strong well into 2011.”

Hiring activity showed some improvement across most districts, although the report said employers are waiting for clearer signals of expanding business prospects before adding significantly to payrolls.

“I think Friday’s jobs report will be strong,” according to Kleintop. “If so, it will be about six consecutive months that we’ve added 150,000 jobs, which is enough to start to positively affect the unemployment number.”

Reports on consumer spending tended to be positive. Nonetheless, several districts noted that households remain price sensitive and focused on buying necessities. Expectations for the holiday shopping season were generally positive, with several districts expecting higher sales when compared to year-ago levels. Sales of new cars and light trucks were largely higher than in our last report. Tourism improved in all reporting Districts.

Housing markets remain depressed, with several Districts reporting further weakening during the past six weeks. Conditions in commercial real estate were mixed, and activity stayed at low levels. Agricultural conditions were generally favorable, with several Districts reporting yields nearing historic highs. Agricultural sales to off-shore buyers increased. Overall activity in the energy sector continued to expand.

Lending activity remained stable across most Districts. Credit quality has been steady to improving for most of the Districts that commented on it. Prices for final goods and services were fairly stable, despite rising input costs, especially for agricultural commodities, metals and fuel. Hiring activity showed some improvement across most Districts. Wage pressures were contained.

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