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Economy Down So Long, It Now Looks Like Up To Some

Reading the Federal Reserve's latest report on the nation's economic activity, the so-called Beige Book, put me in mind of the old blues tune performed by The Doors called "Been down so long." The opening lyrics: "I've been down so (bleep) long, that it looks like up to me."

That's pretty much where we are with this economy. Fed officials have noticed some modest increases in economic activity but the gains are coming off some really weak data from preceding periods. So the economy appears to be improving but it would be hard not to considering where it was.

An excerpt from the Fed's summary:

Reports from the 12 Federal Reserve Districts indicated either stabilization or modest improvements in many sectors since the last report, albeit often from depressed levels. Leading the more positive sector reports among Districts were residential real estate and manufacturing, both of which continued a pattern of improvement that emerged over the summer. Reports on consumer spending and nonfinancial services were mixed. Commercial real estate was reported to be one of the weakest sectors, although reports of weakness or moderate decline were frequently noted in other sectors.

Reports of gains in economic activity generally outnumber declines, but virtually every reference to improvement was qualified as either small or scattered. For example, Dallas cited slight improvements residential real estate and staffing firms, while New York noted gains only in a few sectors (predominantly manufacturing and retail). Retail and manufacturing conditions were mixed in Boston, but some signs of improvement were reported. New York, Philadelphia, Cleveland, and San Francisco cited small pickups in manufacturing activity. In the Kansas City District, an uptick was noted in technology firms, while services firms posted revenue gains in Richmond. However, conditions were referred to as stable or flat for business services and tourism firms in Minneapolis and agriculture in St. Louis and Kansas City.

The weakest sector was commercial real estate, with conditions described as either weak or deteriorating across all Districts. Banking also faltered in several Districts, with Kansas City and San Francisco noting continued erosion in credit quality (often with more expected in the future). One bright spot in the banking sector was lending to new homebuyers, in response to the first-time homebuyer tax credit. Finally, labor markets were typically characterized as weak or mixed, but with occasional pockets of improvement.

The commercial real estate mention in the Fed's summary was understated. But there's nothing minor about the collapse in that part of the real estate market.

Fed officials are known to be deeply worried about the state of the commercial real estate market. The fear is that many banks holding loans on commercial properties are now or will soon be in deep trouble. The Beige Book use of words "weak or deteriorating" for commercial real estate is very sobering, indeed.