Seven months after the Fed first downgraded its outlook on the US economy from "modest-to-moderate" to "slight-to- moderate" before then upgrading it again, it has done so again, and in its just released October beige book, the Fed concluded that the US economy again expanded at a "slight to modest pace" in recent weeks, the latest downgrade by the central bank of the country's economic health. The report followed disappointing data released earlier on Wednesday showing retail sales declined in September for the first time in seven months.
"The U.S. economy expanded at a slight to modest pace since the prior report as business activity varied across the
country" the Fed said, noting that "reports from Districts representing states in the southern and western U.S. generally were more upbeat than Districts representing the Midwest and Great Plains."
And while "contacts in some Districts suggested that persistent trade tensions and slower global growth weighed on activity" respondents said that "the early impact of a recent auto strike was limited", and may soon be completely gone should GM and the UAW find a solution to the strike now approaching its 30th day, the outlook was optimistic as "business contacts mostly expect the economic expansion to continue" even as "many lowered their outlooks for growth in the coming 6 to 12 months."
Some other big picture observations from the latest report:
- "Household spending was solid on balance: non-auto retail sales increased modestly, while light vehicle sales were generally robust. Tourism and travel-related spending was up modestly. Housing market conditions changed little."
- "On the business spending side, nonresidential construction increased at a slightly slower yet still modest pace, while leasing activity advanced at a slow but steady rate" while "Manufacturing activity continued to edge lower."
- "Freight shipments stabilized after falling during the previous reporting period."
- "Bankers in many Districts reported moderately rising loan volumes, while activity in nonfinancial services increased solidly. Agricultural conditions deteriorated further due to the ongoing impacts of adverse weather, weak commodity prices, and trade disruptions."
A notable change is that while traditionally employment and wages were seen as a bright spot in an otherwise shake economy, this time the Fed was far more concerned about the latest developments in the labor market.
To be sure, the usual lament of skill shortages was there, as "employment rose slightly amid reports of persistent worker shortages" and "labor market tightness across skill levels and occupations was widely cited as a factor restraining hiring", the Fed noted that "a number of Districts reported that manufacturers reduced their headcounts because orders were soft." Additionally some firms were "more concerned about the longer-term availability of workers and subsequently chose to reduce hours rather than staff levels." Curiously the Beige book noted that "wages rose moderately in most Districts, with upward pressure noted for lower-skill workers in the retail and hospitality industries and for higher-skill professional and technical workers." Alas, the latest payrolls reports found precisely the opposite as wage growth suddenly slumped to a 1+ year low. Here the Fed offered one reason why wage growth appears to be missing: "employers continued to use nonwage approaches such as bonuses and benefits to attract and retain talent."
One place where the Fed has no concerns about was Inflation, as most Districts characterized the recent pace of price increases as "modest" as both retailers and manufacturers noted rising input costs, often for items subject to new tariffs, and yet "retailers had relatively more success passing through these cost increases to their customers" than manufacturers, suggesting that when its comes to manfuacturing, tariffs are not being passed on.
Curiously, quantifying the shift in the economy, while respondents no longer appeared as concerned about trade, with "Tariff" talk sharply reduced and dropped to a 4 month low, mentions of "slow"-ness rebounded, and rose to 56 from 50 last month, which is to be expected in light of the overall deterioration in the broader outlook.
What is perhaps most amusing is some of the things the Fed blamed the slowdown on, such as sharks and tornadoes, as the following anecdote from the Boston Fed notes:
Cape Cod had an unexpectedly challenging summer tourist season. One theory was that the strong US dollar prompted more Americans to vacation abroad this summer. Media attention was "overly" focused on increased shark sightings and (rare) tornados
That's right: to deflect attention from its own disastrous policies for the past 106 years, the Fed will now blame killer sharks and strong wind.
Finally, as Bloomberg notes, like the Sept. 4 Beige Book, this report, which was prepared by the Cleveland Fed, will be used to provide ammunition for another Fed rate cut on Oct 30, now that the whole concept of a "midcycle correction" is dead and buried and the Fed has capitulated to demands by banks for more liquidity, launching QE4 earlier today.
Finally, here are some of the most notable Beige Book anecdotes from the various regional Feds, as picked by Bloomberg:
- Boston: Cape Cod had an unexpectedly challenging summer tourist season. Bookings for overnight accommodations were down, though day travel to the Cape was up, judged by an increase in passenger traffic on the bridges and weekend train service. One theory was that the strong US dollar prompted more Americans to vacation abroad this summer. Media attention was "overly" focused on increased shark sightings and (rare) tornados.
- New York: Broadway theaters reported that attendance and revenues picked up noticeably in the second half of September, following a sluggish spell in August and early September. A local real estate expert noted that, while the city’s "mansion tax" (effective July 1) has curtailed high end sales, the price declines have occurred across the spectrum
- Philadelphia: A Delaware shore contact reported strong visitor traffic, aided by excellent weather, and noted record levels of spending at local shops and restaurants, even as three new restaurants opened. Atlantic City casino revenues continued growing modestly
- Cleveland: Apparel and general merchandise retailers reported upward pressure on clothes and food costs, pressure which was exacerbated by the September 1 tariff increases. Despite the recent softness, contacts were more optimistic than during last period that freight volumes will pick up in the near future
- Richmond: On the outer banks of North Carolina, hotels and restaurants saw strong business and increased receipts despite a temporary disruption from Hurricane Dorian evacuations
- Atlanta: Retailers remained concerned that heightened uncertainty among consumers due to the geopolitical environment would negatively impact consumer confidence and spending behavior during the upcoming holiday season. The USDA designated several counties within the District as natural disaster areas due to damages and losses attributed to several inclement weather events this year
- Chicago: One auto supplier facing a decline in sales due to the GM strike planned to cut workers’ hours rather than making layoffs because he felt that in the tight labor market, it would be too difficult to find new workers after the strike ended. Contacts said that the strike at GM hadn’t yet hurt new vehicle sales, but believed that it would if the strike continued into November
- St. Louis: Contacts from Louisville and Little Rock reported that landlords have become less inclined to renovate older buildings because of rising labor and material costs. An Arkansas grocer reported that the state’s increase in the minimum wage has forced them to rethink the number of employees they can deploy per store
- Minneapolis: Despite steady delivery of new units, multifamily housing vacancy rates in Minneapolis-St. Paul remained among the lowest in the country for major metropolitan regions, leading to rent increases
- Kansas City: In contrast to other areas of the U.S., a slight increase in corn production was expected throughout the region and could contribute to a slight improvement in revenues. In addition, the distribution of 2019 USDA trade relief payments could provide additional short-term support to farm cash flows
- Dallas: According to contacts, the attacks on Saudi Arabian oil facilities did not change capital spending expectations in the oil and gas sector -- it would take a lasting increase in the price of oil to influence those plans
- San Francisco: In eastern Washington, rising demand for industrial space from the cannabis industry boosted leasing rates. In California, newly enacted legislation about the designation of independent contractors as employees is expected to increase labor costs for impacted companies significantly in the new year
The bottom line: the Beige Book will further support the decision by the Fed to stay "patient" on future interest-rate hikes amid a healthy, but slight-to-modest economic expansion.