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Comment: Fed’s Beige Book points to more entrenched softness in activity through late August

The next edition of the Fed’s Beige pointed to entrenched softer activity across the 12 Districts in the period from early July through late August. The September 4 Beige Book presented anecdotal evidence about the economy with information compiled through August 23. The report said, “Although concerns regarding tariffs and trade policy uncertainty continued, the majority of businesses remained optimistic about the near-term outlook”. However, the tone of the report seems more downbeat and with fewer bright spots for present conditions.

Nine of the 12 Districts reported at least some growth over the summer months with two characterizing growth as more-or-less flat.  Only Dallas and San Francisco said growth as moderate, while growth was said to be modest for Boston, New York, Philadelphia, and Richmond. Growth was considered slight or only slightly higher for Atlanta, Chicago, and Kansas City. Conditions were running about neutral for Cleveland, St. Louis, and Minneapolis.

The summary said, “On balance, reports from Federal Reserve Districts suggested that the economy expanded at a modest pace through the end of August.” However, in reading over the comments, it is clear that activity is on net running at a slower rate than it has been. By my count, only 75% of the Districts are reporting growth which is the smallest share since 67% in March 2016. That was an isolated dip that due to severe weather conditions. In itself the 75% figure might be dismissed except that it is a third report in a row on a downward trajectory, and is quite similar to the situation in late 2009.

Although the Beige Book is not hard data, it does have a good track record of signaling a downturn is imminent. The report isn’t in recessionary territory yet, but it is heading there. I wouldn’t pronounce it a near certainty unless and until the next report on Wednesday, October 16 at 14:00 ET nudges still lower the share of Districts with growth. The economy is experiencing strong employment and stable prices, and an active consumer spending sector that might be able to tide over a soft patch in growth. However, the consumer can’t carry the economy for a sustained period. If business spending also picks up in the third quarter, things may look better by the start of the fourth.

This Beige Book is persuasive that the FOMC will lean toward another rate cut at the September 17-18. It probably isn’t enough to prompt Fed policymakers to cut rates by 50 basis points rather than 25 basis points, but it could silence the dissent in the last vote, especially if the August Employment Situation at 8:30 ET on Friday, September 6 shows payroll growth is being stymied for manufacturing in a period of turmoil for trade policy.

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