The Beige Book Hints at a Housing Spillover

The Fed's Beige Book painted a picture of benign inflation and mild growth. Housing remains very weak, but no wide-spread housing spillover are yet obvious:

"Residential real estate markets continued to weaken, and most Districts reported additional declines in home sales, prices and construction."

"At firms without direct ties to real estate and construction, contacts are still wary that credit tightening and slowing construction might slow activity in their industry, but there is cautious optimism because few see much evidence of such spillovers at this time."

"Consumer spending expanded, but reports were uneven and suggest growth was slower in September and early October than in August."

"Labor markets remain tight across much of the country, and there continues to be moderate upward pressure on wages and benefits. Job growth eased in some regions, however, and wage pressures softened."

"Competitive pressures are restraining retail price increases in many instances."

However, when we look at some of the regional reports, the signs become a little more worrying. If you look at the Case-Shiller home price indices, you'll find that the hardest hit areas are in Florida. Prices in Miami and Tampa are down an average of 6.85% YTD. If we take a closer look at the report from the Atlanta District, which is the district that includes Florida, we find the first hint of a spillover from housing:

"In Florida, several contacts noted that the pace of hiring has slowed, with workers laid off from the homebuilding sector finding it more difficult to find alternative employment."

You get a similar picture on the West Coast. California, Las Vegas and Phoenix have also seen significant recent declines in house prices, with their respective Case-Shiller price indices down an average of 3.77% YTD. If we look in detail at the San Francisco District report, which covers all the western states, we again start to see the first signs of spillover from housing to broader weakness in consumer and business spending:

"Reports on retail sales suggested growth on balance but at a slower pace than in the last few survey periods. ... Demand for home furnishings fell further as the slowdown in housing markets intensified."

"Sales decelerated for advertising agencies and providers of media services, as weak demand for ... home furnishings held down advertising expenditures...."

Now contrast that with the details of the Dallas district, where home prices are still firm (up 2.1% YTD in Dallas):

"The [Dallas Fed District] economy is still digesting ... a slow down in homebuilding and residential real estate, but there continues to be little evidence that this is significantly affecting the broader District economy."

Housing is beginning to spill over. The question is whether there will be enough evidence that the spillover effect is big enough to convince the hawks on the FOMC to vote for a cut on Oct 31, rather than waiting until the Dec 11th meeting for more evidence to appear. Any way you cut it, though, the odds of an additional rate cut have gone up.