Beige Book Paints Optimistic Picture of Recovery

Yesterday’s release of the Beige Book – a compilation of reports produced by each of the twelve regional reserve books – suggests that eleven of the twelve jurisdictions are either currently, or will soon, experience growth. The St. Louis region is the lone hold-out, but overall, the Fed claims to be “cautiously optimistic” that this quarter could spell the end of the worst recession since 1930. Talk about hedging your bets.

It only takes one quarter of positive growth to officially bring about the end of a recession from a technical standpoint, but an isolated quarter of growth amidst a sea of losses, does not a recovery make. And given some of the potential traps still lurking out there, the “double-dip” of recession that Nouriel Roubini continues to warn about, could very well come to fruition.

Consider for example, that on the very same day that the Federal Reserve was releasing its Beige Book update, two other stories were hitting the newswires; either of which calls into question the likelihood of an economic turnaround. For starters, in the month of July, 235,247 homeowners took advantage of the Obama administration’s Home Affordable Modification Program – or HAMP, for short – that limits mortgage payments for those that qualify, to 31 percent of the homeowner’s income.

In August, the number of mortgage holders seeking assistance jumped to 360,165; yet, according to the Treasury Department, this represents only about twelve percent of the total number of mortgage holders that regulators believe qualify for HAMP. Clearly then, there are millions of homes yet subject to foreclosure and until a greater level of stability returns to the housing sector, significant economic recovery is – at best – questionable.

And don’t expect consumers to ride to the rescue as they did in the early 90s when then-President Clinton convinced the public to spend their way to prosperity. This point was illustrated in the second news article that caught my eye indicating that the year-over-year drop in consumer lending for the month of August, exceeded $21 billion. While the amount of decline in consumer loans may be surprising, the fact that lending and subsequent spending is down should not come as a shock to anyone. Individuals with disposable income are hoarding cash right now, but even those willing to buy big-ticket items, are finding it difficult to borrow as banks continue to tighten credit requirements.

Of course, the most significant impediment to spending right now remains unemployment. At the end of August, the unemployment rate – which doesn’t include those whose benefits have expired – was 9.7 percent or 6.9 million people. Even if unemployment has reached a plateau as some have suggested, it will take some time yet for employers to return to typical staffing levels. No, the more I look at the fundamentals here, the more I fear that Roubini could be on to something.

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