Beige Book Reports Weakened U.S. Economy

The Federal Reserve releases its latest Beige Book on the ups and downs of the U.S. economy; oil prices spike after a disorganized meeting of OPEC; and rating agencies encourage Congress to take default seriously.

By Dees Stribling, Contributing Editor

The Federal Reserve released the latest “Summer of Commentary on Current Economic Conditions by Federal Reserve District” (a.k.a. the Beige Book) on Wednesday, and it was a mixed bag. “Elevated food and energy prices, as well as unfavorable weather in some parts of the country, are said to be weighing on consumers’ propensity to spend,” the report says in its curiously noncommittal language. On the other hand, “districts indicated that economic activity generally continued to expand since the last report, though a few districts indicated some deceleration.”

On the whole, the Fed said, labor market conditions continued to improve gradually across most of the nation, with some places noting a short supply of workers with specialized technical skills. Wage growth generally remained modest, though there were scattered reports of steeper increases for highly skilled workers in certain occupations (brain surgeons are probably doing okay, for instance). “Most districts continued to report widespread increases in commodity prices,” the Beige Book says. “Manufacturers are said to be passing along a portion of the higher costs in the form of price hikes and fuel surcharges.”

In real estate, the Beige Book says that residential construction continued to show widespread weakness, except in the rental segment, where market conditions have strengthened and construction has picked up. “Non-residential real estate leasing markets have been generally stable, though construction activity has remained very subdued,” the report notes. “Loan demand was steady to stronger in most districts, especially in the commercial sector, and widespread improvement was reported in credit quality.”

Oil prices spike after OPEC meeting

Meeting in Vienna, the Organization of Petroleum Exporting Countries proved itself to be not very organized this week, as it failed to agree on how to proceed on crude oil production, the first time that has happened in about 20 years. Saudi Arabia, Kuwait, Qatar and the UAE want to increase the cartel’s output by 1.5 million barrels a day, but they were voted down by a larger faction.

In theory, such an increase could help keep the world economy from slowing down too much, considering that oil is now such an anchor on economic activity. That in turn would help maintain demand for oil.

Other members of the cartel, such as Venezuela and Iran, apparently disagreed with that assessment, and nixed the idea of a production increase. The price of oil on international markets jumped immediately on word of the decision, and that doesn’t bode well for the price of gas for U.S. drivers, which has been creeping downward lately. Still, it’s possible that the Saudis, who are in a position to do so, will boost oil production by themselves by nearly as much as 1.5 million barrels a day.

Fitch warns Congress on U.S. default

Two rating agencies–Moody’s Investors Service and Standard & Poor’s–have already put Congress on notice that if its game of chicken over the debt ceiling actually proceeds to a default by the U.S. government, however short-lived, U.S. debt stands to lose its best-in-class ratings. Now Fitch has joined the rating agency chorus warning Congress to get its act together, saying it will downgrade $30 billion worth of Treasury bills due Aug. 4 from AAA to B+ if Congress does not.

So far, investors don’t seem to think a default is actually going to happen, with 10-year Treasury notes still yielding less than 3 percent, which is pretty close to a low for 2011. But Congress still has a little less than two months to play chicken, which is a long time for investors.

Wall Street had a down day for the sixth time in a row on Wednesday. The Dow Jones Industrial Average lost only 21.87 points, or 0.18 percent, but the S&P 500 was down a more substantial 0.42 percent, and the Nasdaq declined 0.97 percent.