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Beige Book Sees Moderate Growth, Sequester Threat

Despite threats from the federal budget sequester, the nation's economy expanded ""at a moderate pace"" from late February to early April, the Federal Reserve reported Wednesday in its periodic ""Beige Book"":http://federalreserve.gov/monetarypolicy/beigebook/files/Beigebook_20130417.pdf.

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Activity in five Federal Reserve Districts--Cleveland, Richmond, St. Louis, Minneapolis, and Kansas City--was described as growing at a moderate pace, while in five other districts--Boston, Philadelphia, Atlanta, Chicago, and San Francisco--growth was notched slightly slower as ""modest."" In the two remaining districts--New York and Dallas--growth ""accelerated slightly"" since the previous Beige Book seven weeks ago.

While most districts reported an increase in manufacturing (specifically in industries tied to residential construction and automobiles) several districts reported ""uncertainty or weakness in defense-related sectors,"" a clear reference to the federal budget sequestration cuts, which began March 1. The previous Beige Book had been issued on March 6, too soon to reflect those cuts.

At the same time, the Beige Book said ""consumer spending grew modestly,"" with some districts citing higher gasoline prices, expiration of the payroll tax cut, and winter weather as ""restraining sales growth.""

Reports from four districts--Boston, Philadelphia, Richmond and Chicago--specifically cited concerns about the federal sequester cuts. The Richmond report expected a reduction in government-rate hotel bookings and speculated ""that sequestration had put potential [home] buyers on the sidelines.""

The Chicago report said ""uncertainty surrounding sequestration had affected their customer's [manufacturing] orders,"" while in the Philadelphia district, the sequester slowed financial transactions, and the Boston district cited contacts who said ""the federal sequester poses a threat to [Rhode Island's] defense industry""

Indeed, according to the Beige Book, ""numerous districts reported uncertainty or weakness in military or defense-related sectors,"" with the San Francisco district reporting furloughs, layoffs, and plant closures at defense-related manufacturers. Meanwhile, ""military customers in the Chicago District were taking measures to lower costs in anticipation of tighter future defense budgets.""

Those concerns were offset by reports of ""strength in residential construction"" increasing manufacturing increases in several districts with an increase in demand for wood products. According to the report, ""a sawmill in Montana restarted production after idling for more than four years"" and ""a Dallas district lumber firm noted a seasonal demand increase for the first time in several years.""

At the same time, the Beige Book said, ""automobile sales remained strong or increased moderately"" in most of the country since the last report, with ""a slight decline in sales of used vehicles"" in New York and Cleveland.

Residential real estate activity, the report said, ""continued to improve in most districts"" with some--notably Cleveland, Richmond, Chicago, Minneapolis, Kansas City, Dallas, and San Francisco--reporting ""increased momentum since the last report."" New York, the Beige Book summary said, reported ""especially strong improvement in residential real estate-both in for-sale housing and apartment markets.""

Home sales continued to rise in most with low home inventories were restraining sales, keeping growth modest in Boston and Richmond.

""Tight inventories and strong sales led to rising home prices in ... Atlanta, Minneapolis, Kansas City, Dallas, and San Francisco,"" the report said.

The Beige Book also said ""new home construction continued to pick up"" in most areas, ""although the Richmond District said that a low supply of residential building materials had stalled construction.""

The report cited improved commercial real estate and construction activity with office vacancy rates declining, for example, in the Boston District as construction of mixed-use projects increased. New York also reported office vacancy rates continued to decline, and rents rose in Manhattan.

Commercial construction, the report said, was improving in New York, Atlanta, St. Louis, Minneapolis, and Kansas City.

Loan demand, according to the Beige Book, was ""steady to slightly up"" at most of the district banks that commented on lending, though the Philadelphia district said ""loan volumes softened somewhat since the previous report."" Other districts--New York, Cleveland, and Dallas--described the increase in loan demand as either ""widespread"" or ""broad-based"" for both consumer and business loans.

Reports on mortgage lending, the Beige Book said, ""were mostly favorable"" with stronger refinancing activity in New York and Atlanta. The Cleveland and Kansas City districts, according to the report, ""noted a shift from mortgage refinancing to new purchases,"" and New York, Richmond, Dallas, and San Francisco ""reported an uptick in residential mortgage loans.""

Preparation of the Beige Book rotates among the 12 Federal Reserve banks. Some analysts believe the tenor of the report changes based on which Bank prepares the summary. Wednesday's report was compiled by the Federal Reserve Bank of Dallas, which last prepared the report in June 2012, when it struck a moderate tone.

_Hear Mark Lieberman every Friday on P.O.T.U.S. radio, Sirius-XM 124, at 6:20 a.m. Eastern time._

About Author: Mark Lieberman

Mark Lieberman is the former Senior Economist at Fox Business Network. He is now Managing Director and Senior Economist at Economics Analytics Research. He can be heard each Friday on The Morning Briefing on POTUS on Sirius-XM Radio 124.
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