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Comment: Fed’s Beige Book shows majority of Districts have slight-to-modest expansion

The final edition of the Fed’s Beige Book for 2019 was released Wednesday and covered the period of early October through mid-November. Overall the tone of the report was little changed from the prior one that looked at late August through September. The report highlighted that there is still a lot of uncertainty about the economic outlook. In particular, manufacturing continued its sluggish performance across Districts.

In the report 83% of Districts reported at least some growth in conditions. If this is down from the 92% in the prior assessment, it does not fully reflect the tone of the anecdotal evidence. Last time only the Dallas Fed reported moderate growth, but in the current report Richmond upgraded its description to moderate as well. Boston reversed from signs of slower activity to a modest-to-moderate pace. Cleveland bettered its description from stable to modest and Minneapolis was up from slight to modest. Growth continued to be slight or modest for Philadelphia, Atlanta, Chicago, St. Louis, and San Francisco. Conditions in New York slipped from subdued to no growth and Kansas City was down from slight to flat. On net, I think that the middle ground of activity was improved and reflected more stable conditions for expansion as the fourth quarter began.

Importantly for the economic outlook, the labor market remained strong. There where scattered reports of some layoffs in a few sectors, but overall broad gains continued. The report said, “The vast majority of Districts continued to note difficulty hiring driven by a lack of qualified applicants as the labor market remained very tight. The shortage of workers spanned most industries and skill levels, and some contacts noted that their inability to fill vacancies was constraining business growth. Moderate wage growth continued across most Districts. Wage pressures intensified for low-skill positions.” The bottom line is that even with pockets of less-than-stellar growth, businesses need workers and are having to pay more for them.

The report said, “Prices rose at a modest pace during the reporting period.” There were variations in input cost pressures across Districts. However, where price pressures exist, “Firms’ ability to raise prices to cover higher costs remained limited, though a few Districts noted that companies affected by the tariffs were more inclined to pass on cost increases.” The report added, “Overall, firms generally expected higher prices going forward.” If this proves to be the case, the FOMC will be relieved to see some movement in the right direction to get inflation back towards the Fed’s 2% target.

If the economic data and developments cooperate, this Beige Book reinforces that the FOMC will be comfortable in holding on any further cuts in short-term rates at the December 10-11 meeting. A balanced approach to monetary policy needs to pay attention to the strength in the labor market and give the lagged effects of previous rate cuts to do their work in regard to price stability.

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