EconomicsFed Policy

Fed’s Short-Term Economic Outlook Darkens

An overwhelming majority — 10 of 12 — of the Federal Reserve district reports indicated weakened conditions and declines in economic activity from January through late February, the Fed said Wednesday in the Beige Book, a regular publication released eight times per year. Philadelphia and Chicago were the only exceptions, reporting regional economies that “remained weak” in the reporting period (it’s a definite sign of recession that economies which only remain weak are at the head of their class). “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 Fed said in the report. Markets reported understandably weak consumer spending across the nation, with Richmond, Chicago and San Francisco reporting sales gains at discount chains  “as consumers continued to switch away from…luxury items and toward basic necessities.” Households and businesses also scaled back on travel, which resonated in weaker airline and hotel business. Commercial, industrial and consumer loan demand fell in most markets, as did demand for new mortgage loans, although New York, Cleveland and Richmond experienced continued highs and increases in refinance activity. “Markets for residential real estate remained largely stagnant, with only minimal and scattered signs of stabilization emerging in some areas, while demand for commercial real estate weakened significantly,” the Fed said. Many districts reported “small declines” in the pace of home sales, though New York cited a 60 to 65 percent sales drop in Manhattan from 12 months earlier. According to the Fed’s reports received from Cleveland, Richmond, Dallas and San Francisco, sales paces for new or existing homes in some areas rose or performed better than expected, “attributed largely to falling prices and improving financial terms for some types of mortgages.” Federal Reserve Bank of Dallas president and CEO Richard Fisher shared the weak short-term outlook present in so many Fed district market reports, according to his statements from a speech Wednesday. “Our gross domestic product shrank at an annualized pace of 6.2 percent in the final quarter of 2008,” Fisher said. “…All indicators thus far point to our economy being on track for a decline of roughly the same magnitude in the first quarter of 2009.” According to Fisher’s remarks, “armchair quarterbacks” who claim they saw all this coming do not acknowledge the mentality that prevailed for so long: when times are good, the financial players and government can do no wrong, and “crisis” is a thing unheard of. “Indeed, we must acknowledge that many in the financial community, including those at the Federal Reserve, failed to either detect or act upon the telltale signs of financial system excess,” Fisher said. And although the Fed in coordination with the Treasury Department has taken a number steps including reducing the federal funds rate to a range of zero to 0.25 percent and more recently expanding Treasury commitment funding to the GSEs from $100 billion each to $200 billion each in an attempt to free up credit and keep interest rates low, “we have miles to go before we sleep” and much more remains to be done, Fisher said. He cited “cash and fetal” behaviors from banks and consumers that hoard cash as a form of protectionism that will only lead to increased economic hardship. “As global growth slows and economic conditions in the United States toughen, our elected representatives, newly elected chief executive and his agents must resist with every fiber of their beings the temptation to compound our travails by embracing protectionism,” Fisher said. “For if they fail to do so, the economic situation we are now all working so hard to overcome will seem like a cakewalk.” Write to Diana Golobay at

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