Fed’s Beige Book: “Overall economic activity rose slightly”

Fed’s Beige Book

Overall economic activity rose slightly since mid-January. Six Districts reported no change, four reported modest or moderate growth, and two noted slight contractions. Consumer spending was lower on balance, with reports of solid demand for essential goods mixed with increased price sensitivity for discretionary items, particularly among lower-income shoppers. Unusual weather conditions in some regions over recent weeks weakened demand for leisure and hospitality services. Vehicle sales were modestly lower on balance. Manufacturing activity exhibited slight to modest increases across a majority of Districts. Contacts in manufacturing, ranging from petrochemical products to office equipment, expressed concerns over the potential impact of looming trade policy changes. Banking activity was slightly higher on balance among Districts that reported on it. Residential real estate markets were mixed, and reports pointed to ongoing inventory constraints. Construction activity declined modestly for both residential and nonresidential units. Some contacts in the sector also expressed nervousness around the impact of potential tariffs on the price of lumber and other materials. Agricultural conditions deteriorated some among reporting Districts. Overall expectations for economic activity over the coming months were slightly optimistic.

Labor Markets


Employment nudged slightly higher on balance
, with four Districts reporting a slight increase, seven reporting no change, and one reporting a slight decline. Multiple Districts cited job growth in health care and finance, while employment declines were reported in manufacturing and information technology. Labor availability improved for many sectors and Districts, though there were occasional reports of a tight labor market in targeted sectors or occupations. Contacts in multiple Districts said rising uncertainty over immigration and other matters was influencing current and future labor demand. Wages grew at a modest-to-moderate pace, which was slightly slower than the previous report, with several Districts noting that wage pressures were easing.

Prices

Prices increased moderately in most Districts, but several Districts reported an uptick in the pace of increase relative to the previous reporting period. Input price pressures were generally greater than sales price pressures, particularly in manufacturing and construction. Many Districts noted that higher prices for eggs and other food ingredients were impacting food processors and restaurants. Reports of substantial increases in insurance and freight transportation costs were also widespread. Firms in multiple Districts noted difficulty passing input costs on to customers. However, contacts in most Districts expected potential tariffs on inputs would lead them to raise prices, with isolated reports of firms raising prices preemptively.

This report was prepared at the Federal Reserve Bank of Minneapolis based on information collected on or before February 24, 2025.
emphasis added

ICE Mortgage Monitor: Property Insurance Costs Rose at a Record Rate in 2024

Today, in the Real Estate Newsletter: ICE Mortgage Monitor: Property Insurance Costs Rose at a Record Rate in 2024

Brief excerpt:

Property Insurance Premiums Increased Sharply in 2024

Here is a chart from the Mortgage Monitor. These increases are largely being driven by losses due to natural disasters.

ICE Refinance Activity

• The average annual property insurance premium among mortgaged single-family homes rose by a record $276 (+14%) to $2,290 in 2024

• That’s the largest single-year increase on record dating back to 2013 when ICE began tracking the metric, and when stacked on top of the $245 (14%) increase seen in 2023 caps off a 61% ($872) increase over the past 5 years

• Property insurance costs continue to be the fastest-growing subcomponent of monthly home payments compared with principal, interest, and property taxes

• The average total mortgage payment (PITI) rose 6% last year, with the 14% rise in property insurance costs significantly outpacing an 8% rise in interest payments and the 5% rise in property taxes among all outstanding mortgages

• While all other subcomponents rose, the amount of principal paid on the average mortgage held flat from 2023

• Over the past 5 years we’ve seen 21-22% increases in principal, interest, and tax payments among the active mortgage population, roughly a third the rise in property insurance

There is much more in the mortgage monitor.

There is much more in the newsletter.

ISM® Services Index Increased to 53.5% in February

(Posted with permission). The ISM® Services index was at 53.5%, up from 52.8% last month. The employment index increased to 53.9%, from 52.3%. Note: Above 50 indicates expansion, below 50 in contraction.

From the Institute for Supply Management: Services PMI® at 53.5% February 2025 Services ISM® Report On Business®

Economic activity in the services sector expanded for the eighth consecutive month in February, say the nation’s purchasing and supply executives in the latest Services ISM® Report On Business®. The Services PMI® registered 53.5 percent, indicating expansion for the 54th time in 57 months since recovery from the coronavirus pandemic-induced recession began in June 2020.

The report was issued today by Steve Miller, CPSM, CSCP, Chair of the Institute for Supply Management® (ISM®) Services Business Survey Committee: “In February, the Services PMI® registered 53.5 percent, 0.7 percentage point higher than the January figure of 52.8 percent. The Business Activity Index registered 54.4 percent in February, 0.1 percentage point lower than the 54.5 percent recorded in January. This is the index’s 57th consecutive month of expansion. The New Orders Index recorded a reading of 52.2 percent in February, 0.9 percentage point higher than the January figure of 51.3 percent. The Employment Index remained in expansion territory for the fifth consecutive month; the reading of 53.9 percent is a 1.6-percentage point increase compared to the 52.3 percent recorded in January.
emphasis added

This was close to consensus expectations.

Wednesday: ADP Employment, ISM Services, Beige Book

Mortgage Rates Note: Mortgage rates are from MortgageNewsDaily.com and are for top tier scenarios.

Wednesday:
• At 7:00 AM ET, The Mortgage Bankers Association (MBA) will release the mortgage purchase applications index.

• At 8:15 AM, The ADP Employment Report for February. This report is for private payrolls only (no government). The consensus is for 140,000 payroll jobs added in February, down from 183,000 added in January.

• At 10:00 AM, the ISM Services Index for February.

• At 2:00 PM, the Federal Reserve Beige Book, an informal review by the Federal Reserve Banks of current economic conditions in their Districts.

Update: Lumber Prices Up 7% YoY

This is something to watch again. Here is another monthly update on lumber prices.

SPECIAL NOTE: The CME group discontinued the Random Length Lumber Futures contract on May 16, 2023.  I switched to a physically-delivered Lumber Futures contract that was started in August 2022.  Unfortunately, this impacts long term price comparisons since the new contract was priced about 24% higher than the old random length contract for the period when both contracts were available.

This graph shows CME random length framing futures through August 2022 (blue), and the new physically-delivered Lumber Futures (LBR) contract starting in August 2022 (Red).
On March 4, 2025, LBR was at $658.00 per 1000 board feet, up 6.9% from a year ago.
Lumber PricesClick on graph for larger image.
There is somewhat of a seasonal demand for lumber, and lumber prices frequently peak in the first half of the year.
We didn’t see a significant runup in the Spring period of 2023 or 2024 due to the housing slowdown.  
The recent increase might be due to the tariffs on Canadian lumber.

Heavy Truck Sales Decreased 9% YoY in February

This graph shows heavy truck sales since 1967 using data from the BEA. The dashed line is the February 2025 seasonally adjusted annual sales rate (SAAR) of 460 thousand.

Heavy truck sales really collapsed during the great recession, falling to a low of 180 thousand SAAR in May 2009.  Then heavy truck sales increased to a new record high of 570 thousand SAAR in April 2019.

Heavy Truck Sales Click on graph for larger image.

Note: “Heavy trucks – trucks more than 14,000 pounds gross vehicle weight.”

Heavy truck sales declined sharply at the beginning of the pandemic, falling to a low of 288 thousand SAAR in May 2020.  
Heavy truck sales were at 460 thousand SAAR in February, down from 491 thousand in January, and down 9.3% from 508 thousand SAAR in February 2025.  
Usually, heavy truck sales decline sharply prior to a recession.  Currently heavy truck sales are somewhat solid.
As I mentioned yesterday, light vehicle sales increased in February to 16.00 million SAAR.

Vehicle SalesThe second graph shows light vehicle sales since the BEA started keeping data in 1967.  

Light vehicle sales were at 16.00 million SAAR in February, up 2.5% from January, and up 2.1% from February 2024.

Fannie and Freddie: Single Family Serious Delinquency Rates Increased in January; Fannie Mae Multi-Family Delinquency Rate Highest Since 2011 (ex-Pandemic)

Today, in the Calculated Risk Real Estate Newsletter: Fannie and Freddie: Single Family Serious Delinquency Rates Increased in January

Excerpt:

Freddie Mac reported that the Single-Family serious delinquency rate in January was 0.61%, up from 0.59% December. Freddie’s rate is up year-over-year from 0.55% in January 2024, however, this is close to the pre-pandemic level of 0.60%.

Some of the recent increase in the 90+ day delinquency rate is probably related to the hurricanes last year.

Freddie’s serious delinquency rate peaked in February 2010 at 4.20% following the housing bubble and peaked at 3.17% in August 2020 during the pandemic.

Fannie Freddie Serious Deliquency RateFannie Mae reported that the Single-Family serious delinquency rate in January was 0.57%, up from 0.56% in December. The serious delinquency rate is up year-over-year from 0.54% in January 2024, however, this is below the pre-pandemic lows of 0.65%.

The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59% following the housing bubble and peaked at 3.32% in August 2020 during the pandemic.

There is much more in the article.

Lawler: Federal Reserve Earnings Still Running Negative; No Remittances to Treasury for a While

From housing economist Tom Lawler: Federal Reserve Earnings Still Running Negative; No Remittances to Treasury for a While

The sharp runup in short-term interest rates over the last few years that followed the Federal Reserve’s huge purchases of long-term Treasuries and MBS at extremely low interest rates has resulted in negative earnings at the Federal Reserve since the latter part of 2022. The reason, of course, is that the Federal Reserve “funded” the bulk of these long-term fixed rate assets with increases in interest-bearing very short-term liabilities – mainly depository institution deposits (reserves) and repos –with interest rates tied to the federal funds rate. While the Fed has more interest earning assets than interest-bearing liabilities – with the “gap” mainly reflecting Federal Reserve Notes outstanding (currency) and Treasury general account deposits – the sharp increase the federal funds rate resulted in interest expense surging relative to the interest income on the Fed’s long duration assets.

Below is a table showing Federal Reserve net income – the vast bulk of which reflects net interest income – from 2008 to 2024 (2024 is my estimate), as well as Fed remittances to the Treasury as shown in the Fed’s financials (more on this later).

Federal Reserve Income
As the table shows, Federal Reserve net income was substantially negative in 2023 and 2024, with a combined net loss in these two years of almost $200 billion.

At first glance one might think that this table suggests the Treasury remitted almost $200 billion to the Federal Reserve over the last two years. That is not, however, the case. If the Federal Reserve books a net loss, then it “books” a negative remittance to the Treasury but it also “books” an increase in its “deferred asset – remittance to Treasury.” This deferred asset reflects the fact that the Treasury does not in fact remit any funds to the Fed when the Fed books a loss. Rather, the deferred asset balance reflects the amount of positive net income the Fed would earn in the future without remitting any funds to the Treasury. For example, if this deferred asset balance were $200 billion and over the next four years the Fed’s net income totaled $200 billion, then the Fed would not remit any funds to the Treasury over those four years.

Weekly data on this deferred asset balance is from the Fed’s H4.1 release, and is available in the FRED database. Here is a chart from 9/7/22 to 2/26/25.

Deferred Asset Federal Reserve As of 2/26/2025, the Fed’s “deferred asset-remittance to Treasury was -$223.98 billion. Note that (1) this balance has continued to grow in the first 8 weeks of this year, suggesting that Fed net income was still negative over this period; and (2) the growth in the negative balance has slowed, suggesting that net losses are shrinking. This of course is not surprising, as the funds rate is 100 basis points lower now than prior to mid-September of last year.

Trying to predict Fed net income over the next year of two depends very heavily on projections of the federal funds rate, and depends somewhat on the pace of balance sheet reduction and the Fed’s reinvestment strategy. However, it is highly likely that the Fed will not be remitting any funds to Treasury anytime soon.

Chart of the Day: When Will Quantitative Tightening Begin?

Federal Reserve Long Term Treasury HoldingsData through 2/26/2025

Tuesday: Tariffs!

Mortgage Rates From Matthew Graham at Mortgage News Daily: Mortgage Rates Roughly Unchanged Over The Weekend

Mortgage rates faced a very small threat of a very small increase this morning. The underlying bond market was in weaker territory to start the day and that typically means mortgage lenders raise rates. Indeed, many lenders were slightly higher at first.

But just as the first lenders were publishing rates for the day, the ISM Manufacturing Index (an important economic report that often causes a reaction in bonds) was released. The results were good for bonds, thus allowing mortgage lenders to set rates in line with Friday’s latest levels, on average…. [30 year fixed 6.74%]
emphasis added

Tuesday:
• No major economic releases scheduled.

Vehicles Sales Increase to 16.00 million SAAR in February

Wards Auto released their estimate of light vehicle sales for January: Despite Affordability Headwind, U.S. Light-Vehicle Sales Rise 3.4% in February (pay site).

Continuing January’s trend, market strength was at the two far ends of the affordability scale, as entry-price cars and lower-cost CUVs posted big gains, while the same was true in most premium-price segments. The range of vehicles generally thought of as the bread-and-butter of the market, non-luxury compact and midsize cars, CUVs and SUVs, all recorded big declines. However, even when including lower-price vehicles, sales of non-luxury sedans and compact/midsize CUVs and SUVs were down 3.8% in January-February, which really is indicating a continued affordability issue – at least compared with pre-2020 (pandemic) history.

Vehicle SalesClick on graph for larger image.

This graph shows light vehicle sales since 2006 from the BEA (blue) and Wards’ estimate for February (red).

Sales in February (16.00 million SAAR) were up 2.5% from January, and up 2.1% from February 2024.

Sales in February were slightly above the consensus forecast.

The second graph shows light vehicle sales since the BEA started keeping data in 1967.

Vehicle Sales

This was the best February since 2020.