Federal Reserve Bank Beige Book - Economy

Federal Reserve Board ^ | September 7, 2005 | Federal Reserve Bank of Minneapolis

[economist-student]

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September 7, 2005

Summary

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Summary Districts Boston New York Philadelphia Cleveland Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco Full report

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Prepared at the Federal Reserve Bank of Minneapolis and based on information collected before August 29, 2005 and, thus, before Hurricane Katrina made landfall on the Gulf Coast. This document summarizes comments received from business and other contacts outside the Federal Reserve System and is not a commentary on the views of Federal Reserve officials.

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Economic activity increased across the nation from mid-July through August, except in the Boston District, where activity was mixed. The growth was widespread as retail sales, services, finance, construction, manufacturing, mining, energy, and tourism all expanded. A few Districts reported softening in residential real estate markets, albeit from still brisk levels of activity, while commercial real estate markets strengthened in most Districts. Lending activity increased, and credit quality was stable. Conditions in the agricultural sector improved slightly, with late summer rains somewhat alleviating the effects of drought. Meanwhile, labor markets showed signs of tightening with modest wage increases. Except for energy, overall consumer price increases were modest. Most Districts reported significant price increases in certain commodities and energy products, especially gasoline.

Manufacturing
Manufacturing activity increased in all Districts except Boston and St. Louis, where activity was mixed. New orders and production were up over a year ago. Nearly all Districts noted increased activity across a broad range of industry sectors. Atlanta, Chicago, and Dallas reported strong production in construction-related products. San Francisco indicated strong demand for semiconductors and that orders increased at commercial aircraft and defense product firms. However, Atlanta and St. Louis reported that auto parts and motor vehicle industries experienced net declines in activity, and Boston reported declines in the textile industry. Rising material and energy costs were a common theme across most of the nation.

Excerpt Click here for the full report

[BipolarBob]

Nevermind that, are we still running a deficit. How about Social Security? Is it fully funded? Just how broke are we?

[economist-student]

The Budget deficit should be fixed as soon as possible. Congress should make it a top priority and stop spending so much.

On the other hand, trade deficits are not necessarily bad. But running current account deficits for prolonged periods of time creates instability and depletes the capital pool. The only way to eliminate the current account deficit would be to drastically raise interest rates. That way, we should see a rise in the personal savings rate.

Here are the current account deficit and the personal savings rate graphs:




A current account deficit is the result of FED policy, that is, it's cheaper to consume and to get in debt than to manufacture something.

If we want prosperity to last, the Fed should be abolished and we should return to a truly commodity-backed currency.

Here is a great article about trade and current account deficits:

What Are We to Make of the Trade Deficit?

Regards,

[jwh_Denver]

commodity-backed currency.

Like gold and silver?

[economist-student]

Yes, especially gold. In the near term, it might be difficult to return to a gold standard, but I believe it can be done in the future.

This is how much money supply has increased during the last 50 years.

Regards,

[jwh_Denver]

I think it's imperative we start ASAP even if it's a very small fraction and then build on that. Problem is is that I don't think it will ever happen. Way too much power would be wrestled away from the financial powers that be.

[economist-student]

At least the Federal Reserve Bank Act should be reformed. It should limit how much can increase the money supply, ideally to some small percentage. A good target would be projected population growth. If for example FY 2009 the population would increase by say 1.5%, that's how much the money supply should grow. Doing that, we would see little inflation (if any) or traditional capitalist long term deflation. (Like the one we had during the late 1800's)

"Thus, this vast increase in the market value of asset claims is in part the indirect result of investors accepting lower compensation for risk. Such an increase in market value is too often viewed by market participants as structural and permanent. To some extent, those higher values may be reflecting the increased flexibility and resilience of our economy. But what they perceive as newly abundant liquidity can readily disappear. Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher asset prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums."
From Chairman Alan Greenspan speech. August 26, 2005

What astonishes me is that after he has created a bubble, he acts as if the "market" was to blame. Time to appoint some real inflation "hawk" like Paul Volcker. Regards,

[economist-student]

Another reform that should be dealt with is that of Fractional Reserve.

Bank reserve requirements should be raised immediately. Currently, it's about 5% for checking or current accounts and 1% for savings accounts.

[jwh_Denver]

Federal Reserve Bank Act should be reformed.

That would be a good start.

I didn't like Volcker at first but history has proved his legacy. It will just the opposite for Greenspan.