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Fed’s Beige Book shows downgrades in about half of Districts

Overall the Fed’s Beige Book reflected economic expansion for the US, but 7 of the 12 Districts downgraded their assessment of conditions for the comments compiled by the Chicago Fed through January 7.  New York reported growth had “leveled off” and Kansas City said growth was “flat”. Boston and St. Louis said growth had slowed from the prior report.  Cleveland said growth increased slightly from the prior period in which it was said to be moderate. Richmond notched down its characterization of growth to modest from moderate, as did Dallas. Growth remained moderate for Atlanta, Minneapolis, and San Francisco. It was still modest for Philadelphia and Chicago. The main drivers of slower activity seemed to be in the manufacturing and energy sectors, and reflected in a plateau for motor vehicle sales. Real estate was sluggish on limited supply and higher prices.

The Beige Book hasn’t reported neutral conditions in two Districts since August 2016. Like some of the surveys of manufacturing and business sentiment, this suggests that whatever boost in confidence occurred in the post-election 2016 period that led to a subsequent pickup in activity, it has now worn out in the face of increased economic uncertainty.  This may well still be evident in the next Beige Book on March 16 unless the federal government funding impasse is resolved soon.

In the mean time, the Beige Book indicates that employment continued to increase across the US. It said, “All Districts noted that labor markets were tight and that firms were struggling to find workers at any skill level. Minneapolis indicated that construction firms had turned down business because they could not find workers, and Atlanta reported that a few contacts were either actively overstaffing or retaining employees through lulls in demand in anticipation of future growth.” Additionally, wage growth was widely reported as moderate and “across skill levels.”

Upward pressure on prices was “modest to moderate” in spite of declines in energy commodities. The Beige Book said, “Reports often cited rising materials and freight prices as sources of cost increases, and a number of Districts said  that higher tariffs were also a factor.” Prices were up for residential real estate, flat or up for commercial and industrial real estate, and agricultural commodities “were generally somewhat higher.”

There was and is no expectation that the FOMC would increase rates again at the January 29-30 meeting. The contents of this issue of the Beige Book certainly counsel caution going forward in spite of the strength in the labor market. While wages are on the rise, it does not seem to be passing through into prices at an unacceptable pace. With signs of deceleration in the economy, there could be a subsequent cooling in employment that would not be alarming as long as inflation remains near the symmetric 2% objective.

On net, in spite of still being positive in the outlook, the Beige Book said, “Districts reported that contacts had become less optimistic in response to increased financial market volatility, rising short-term interest rates, falling energy prices, and elevated trade and political uncertainty.” It is not an environment in which rates are likely to rise again soon.

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