People who know me probably wouldn't describe me as a "glass-half-full" sort of person. In many cases, if I see a glass that's half-full, I might pour some out just so that I can complain about how it's more than half empty.
Much of the recent economic coverage, however, makes me want to act like one of those starry-eyed optimists and start shaking people and saying, "Look folks, it's not that bad."
Take Wednesday's Beige Book report from the Federal Reserve for instance. The report begins, "Economic activity has continued to increase, on balance, since the previous survey ..." Not a bad start. It then goes on to note that economic activity held steady in two districts, and the pace of improvement slowed in two others. Modern math would suggest that that leaves eight of the 12 districts with modest-to-good economic improvement.
So what was Bloomberg's headline for the report? "Fed's Beige Book Says Economic Recovery Slowed in Some Areas." If that's not glass-half-empty, then I don't know what is. Jumping into the article, we get a pensive picture of Fed chief Ben Bernanke and an opening paragraph that laments:
The Federal Reserve said U.S. economic growth slowed in some areas over the past two months, dragged down by commercial real estate and the expiration of a tax credit for homebuyers.
While that seemed pretty pessimistic to me, the "unusually uncertain" economic environment -- as Bernanke recently described it -- gives plenty of room for varying perspectives. To try and get a better view into this muddy picture, let's take a closer look at the high and low points of the Beige Book report. (This link will take you to a summary of the July 28 report.)
The highs: making things and buying things
Manufacturing and general business activity, along with consumer spending, were stronger areas of the Fed's report. While the pace of activity slowed in a handful of districts, these areas continued to move in the right direction. And that's a very good thing, as they both are key components to a healthy economy.
Times seem to be pretty good for generalized manufacturers, as the report noted that those in the Boston, Philadelphia, Kansas City, and Dallas districts were "optimistic that demand would continue to improve in the following months." If you're looking for a way to translate that to the markets, you might look toward some of the industrial conglomerates, like 3M (NYSE: MMM ) , Emerson Electric (NYSE: EMR ) , and Illinois Tool Works (NYSE: ITW ) .
The freight transportation industry was highlighted as a particular strength in the services sector. We certainly got a taste of that from UPS (NYSE: UPS ) and FedEx, and continued strength in that area bodes well not only for the companies directly involved -- and that includes rail bloc members like CSX (NYSE: CSX ) and ground transport players like J.B. Hunt -- but also the economy as a whole.
The bottom line on consumer spending, meanwhile, was that it was pretty positive on the whole. However, the Fed did note that consumers are still shying away from "big-ticket items" in favor of "necessities" like apparel and food. That may mean that investors will want to look to companies like Procter & Gamble (NYSE: PG ) and Target over Best Buy and Whirlpool.
The lows: banking and real estate
At this point I don't think it should be all that surprising that banking and real estate continue to lag. The precrisis binge was focused on the areas, and it was an epic binge. The digestion will take awhile and I don't think we should expect a much different picture in September when the next Beige Book is released.
When you have a nationwide bubble, the notion of all real estate being local loses some of its punch. Sure, Maui is no Las Vegas, and North Carolina isn't exactly Florida, but I think real estate struggles around the country should continue to keep pressure on homebuilders across the board. This would mean tread carefully around KB Home, Toll Brothers, and Pulte -- just to name a few.
Banking is a similar story, except that uncertainties about financial reform are still swirling around the top of the totem pole -- the big boys like Bank of America (NYSE: BAC ) and JPMorgan Chase. I'd be more likely to get positive on a bank than a homebuilder, but the Fed data are pretty discouraging. And that's whether you're talking about residential real estate, commercial real estate, or even overall loan demand.
Bottom line: one thumb up
Based on the Fed's report, the economy appears to be continuing to recover. It's not particularly fast and it's definitely not furious, but it's in the right direction. Considering that we spent around two years moving in the wrong direction, I find that pretty encouraging.
However, as I pointed out at the beginning, when the picture is muddled, as it is right now, a lot boils down to perspective. Should you be looking at the strength in manufacturing or the weakness in banking? The improving areas of the country or the ones that are slowing? Strong earnings or slow employment growth?
What have you been focusing on lately? Head down to the comments section and share your thoughts.
Looking for stock picks instead of economic noodling? Well what are you waiting for, check out the 11 O'Clock Stock!
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