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Comment: Fed’s Beige Book reflects continued softening in activity into early July

The Fed’s Beige Book covered the period between May 24 and July 8. The report’s anecdotal evidence is that the US economy is seeing a fade in activity since the start of the second quarter. Although the outlook was said to be “broadly positive”, on net, the tone of the report is more downbeat. Five Districts had a mild downgrade (Boston, New York, Philadelphia, Cleveland, Chicago), five were about the same (Richmond, Atlanta, Kansas City, Dallas, San Francisco), and two were a little improved (St. Louis, Minneapolis).

Ten Districts reported growth along the slight-to-moderate spectrum with most of those modest, at best. Only Dallas and San Francisco said growth was moderate. There was little or no growth in Cleveland and Chicago.

It is too soon to say that the Beige Book is signaling a downturn for the overall economy. With 83% of the Districts reporting at least some expansion, the report is certainly not a weak one. However, it is down for a second report in a row. It is not unusual for the number of Districts reporting expansion to decline in the face of exogenous factors like severe weather or a government shutdown. This past spring was one of the wettest on record and has interfered with agriculture which is contributing to some of the more downbeat tone. A pause in manufacturing activity related to trade policy is also visible in the Districts’ information gathering. Nonetheless, I would take it as an alarm bell if the next Beige Book on Wednesday, September 4 at 14:00 ET does not reflect a firmer assessment of conditions, or at least no worse.

There was a hint of cooling in the labor market in the Beige Book. It said, “On balance, employment grew at a modest pace, slightly slower than the previous reporting period.” This does not mean that labor markets are not tight, only that hiring had lost a step. Some of this may simply be “continued worker shortages across most sectors, especially in construction, information technology, and health care. However, some manufacturing and information technology firms in the Northeast reduced their number of workers. A few reports highlighted concerns about securing and renewing work visas, flagging this as a source of uncertainty for continued employment growth.”

Wages and benefits continued to rise at a “modest-to-moderate pace” and “some contacts emphasized significant increases in entry-level wages.” It may be that even if the labor market is a trifle less active, workers will continue to see wage gains.

Prices were said to be “stable to down slightly”. Where costs were higher, tariffs and labor costs were cited as the reasons even as “brisk competition” did not allow firms to fully pass through increases.

There are enough hints of lost upward momentum for the economy in this report to give policymakers a reason to cut short-term rates at the July 30-31 FOMC meeting. The Beige Book should give those voters who prefer adding back a little accommodation another argument, and those voters who might be wavering on whether to cut or not enough information to clinch the decision.

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