Beige Book calls for extended recession

seems that the Fed may be more honest than we want about the economy. For weeks, we’ve been getting just gloomy outlooks for the near term. And the latest Beige Book was not an exception. The Beige Book prepared for the March 17-18 FOMC meeting confirmed recent statements from Fed officials that the recession is worsening in the first quarter—but about as was expected at this point. The standout statement is that no significant recovery is seen before the end of this year or early 2010. It seems that forecasts for recovery in late 2009 now have been hedged with the rebound date also including the possibility of early 2010.





"Looking ahead, contacts from various Districts rate the prospects for near-term improvement in economic conditions as poor, with a significant pickup not expected before late 2009 or early 2010."





The Beige Book indicated that manufacturing has worsened, consumer spending is still sluggish but slightly firmed from December, residential real estate remains stagnant, and unemployment is rising. Basically, economic deterioration is broad-based but essentially as expected.





It was no surprise that consumer spending habits have changed sharply during the recession – and discounters are the beneficiaries.





"As reported by Richmond, Chicago, and San Francisco, discount chains fared much better than traditional department stores and specialized retailers, recording sales gains in many cases as consumers continued to switch away from discretionary spending and luxury items and toward basic necessities."





The Beige Book also notes that price pressures have eased—including for wages.





"Upward price pressures continued to ease across a broad spectrum of final goods and services. This was largely associated with lower prices for energy and assorted raw materials compared with earlier periods, but also with weak final demand more generally, which spurred price discounting for items other than energy and food."





On the critical issue of housing stabilizing, there are few signs of that. Residential real estate activity remains depressed and house prices continue to fall. The bottom line is that the recession is worsening but there were no unexpected bombs from the latest Beige Book. We are still on track for a longer and deeper than average recession.





The bottom line

The recession clearly has worsened in the first quarter. The good news is that inflation has eased sharply, leaving the Fed much leeway to continue its credit easing. But there are yet no signs of the recession bottoming. This is why equities continue to drift down as fiscal stimulus has not yet kicked in and banks are not doing much lending. These are reasons why the Fed’s TALF facility may be critical to boosting consumer and small business credit to get the economy moving.