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Comment: Conditions broadly softer across the 12 Districts in the Beige Book

The Fed’s Beige Book released on October 16 was prepared from material collected about conditions in late August through October 7 and compiled by the Cleveland Fed. Overall, economic activity could be described as in a slight-to-modest expansion. Although comparatively improved from the prior Beige Book, this is not a testament to economic vigor.

In the current report, three Districts showed some gains. Atlanta upgraded from slight to modest, and St. Louis and Minneapolis from neutral to slight. Three Districts downgraded their assessment. Boston shifted to “signs of slowing” from modest, New York to subdued from modest, and San Francisco to modest from moderate.

In spite of the fact that this brings the number of Districts reporting at least some growth up to 11 (92%) from the 9 (75%) in the previous report, I do not read this as any substantive change.  The downgrade for San Francisco – the largest Fed District – is the first after a long string of “moderate” descriptors since January 2014. The other Districts that reflect slowing are barely holding above neutral, and those that were upgraded were only slightly so. The exception of the moderate expansion in the Dallas District has to be read in the context of “[o]utlooks were mixed and uncertainty remained elevated”. Elsewhere, most of the Districts reported only cautious optimism about the outlook and greater uncertainty.

There are signs of softening in the labor market. Whether only slight increases in hiring are due to “persistent worker shortages” or few job openings is not entirely clear. At the moment is looks like some is due to contraction in the factory sector, although “some firms were more concerned about the longer-term availability of workers and subsequently chose to reduce hours rather than staff levels.” So layoffs may not immediately follow on the declines in new orders. Wages continued to rise “moderately”, “with upward pressure noted for lower-skill workers in the retail and hospitality industries and for higher-skill professional and technical workers.” Businesses are having to offer “bonuses and benefits to attract and retain talent.” Where wage growth was moderate, overall price increases were deemed “modest” as businesses attempted to avoid passing on costs from tariffs.

When the FOMC meets on October 29-30, it will have plenty of evidence that the labor market is still strong, but also that at the margins it is starting to fray just a bit. In the balanced approach to monetary policy, it will then be more on the side of price stability where any justification for a rate cut may lie. The lack of upward pressure on prices should provide room to act. Also, the Beige Book offers a picture of the US economy that suggests that first “insurance” cut in the fed funds rate target range back in July may have started to stabilize economic activity, but this is overall a downbeat report. There’s not a lot of sense of upward momentum, and enough of the Districts remain on the cusp of stalling that a third rate cut may be warranted.


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