There was only bad news in the latest Fed Beige Book.
After years of "modest" and "moderate" growth across the US, in the latest Fed Beige Book released this afternoon, the assessment of the economy downgraded sharply with the Fed reporting that "Economic activity contracted sharply and abruptly across all regions in the United States as a result of the COVID-19 pandemic" with the hardest-hit industries—because of social distancing measures and mandated closures— were leisure and hospitality, and retail aside from essential goods.
To be sure, this will hardly come as a surprise to anyone who has looked at the latest US macro surprise index, which just suffered its biggest 4-week crash on record.
Looking at specific industries, most Districts reported declines in manufacturing, but cited significant variation across industries, according to the report. Producers of food and medical products reported strong demand but faced both production delays, due to infection-prevention measures, and supply chain disruptions. Other manufacturing industries, such as autos, mostly shut down. The energy sector, suffering from low prices, reduced investment and output.
All Districts reported highly uncertain outlooks among business contacts, with most expecting conditions to worsen in the next several months.
One particularly ominous observation was that all districts reporting on loan demand said it was high, both from companies accessing credit lines and from households refinancing mortgages. This is hardly a surprise at a time when a record $300+ billion in revolvers were drawn down and as small and medium business rushed to obtain funding in lieu of cash flow. This manifested itself in a record $500 billion surge in loans and leases in just the past two weeks.
Contrary to some superficial observations, this is not a "good" thing as it means that hundreds of billions in new loans may soon turn sour unless the economy recovers quickly, and with banks credit loss provisions already surging, those numbers are only going to increase in the coming weeks, further impairing US banks.
Some other observations from the Beige Book, first on employment and wages, which declined across the board:
- Employment declined in all Districts, steeply in many cases, as the COVID-19 pandemic affected firms in many sectors. Employment cuts were most severe in the retail and leisure and hospitality sectors, where most Districts reported widespread mandatory closures and steep falloffs in demand. Many Districts said severe job cuts were widespread, including the manufacturing and energy sectors. Contacts in several Districts noted they were cutting employment via temporary layoffs and furloughs that they hoped to reverse once business activity resumes. The near-term outlook was for more job cuts in coming months. No District reported upward wage pressures. Most cited general wage softening and salary cuts except for high-demand sectors such as grocery stores that were awarding temporary "hardship" or "appreciation" pay increases.
A similar picture emerged in prices where deflation was rampant:
- The general direction of price inflation was down for both selling prices and non-labor input prices, as Districts reported either slowing price growth, flat prices, or modest to moderate declines in prices on balance. These trends were seen as reflecting weaker demand for many goods and services in the wake of the COVID-19 pandemic. Four Districts also reported further declines in energy prices. It wasn't all deflation however, and supply chain disruptions and shifts in the composition of demand led to significant price increases for some essential services—such as freight—and some agricultural commodities and consumer goods. While expectations concerning agriculture prices were mixed, the outlook calls for further downward pressure on prices on average.
Amusingly, the biggest bogeyman of the Beige Book for much of 2019 - tariffs - was gone and forgotten, without a single mention of the term in the entire report. That however, was replaced by mentions of "coronavirus" and/or "Covid" which saw a whopping 878 instances, up notably from the 57 instances in March when the terms made their first ever appearance. Finally, slowness prevailed, literally, with no less than 41 mentions of the "slow" in the Beige Book.
And speaking of coronavirus, here are some specific ways in which the pandemic affected the country:
- "In general, there is great uncertainty and concern about the duration of the coronavirus pandemic and its economic effects."
- "Bankers were also asked, in light of the coronavirus pandemic, if they had adopted more lenient policies on loan repayments. The vast majority said they had done so on residential mortgages, compared with about half on commercial & industrial loans, and a somewhat over half on commercial mortgages." - we know that this is an outright lie, at least for JPM which has shuttered new non-PPP loan issuance.
- "A law firm said that they saw an increase in business as clients were looking for help understanding recently passed coronavirus aid legislation."
- "Consumption of services fell precipitously, particularly in the hospitality, entertainment, and food service sectors as the coronavirus crisis led to reduced travel and prohibitions of large gatherings. Vehicle sales fell sharply and dealerships across the District closed"
- "Most manufacturing contacts had not revised their employment plans as a result of COVID-19. A packaging firm said headcount fell but that was planned long before the pandemic."
- "One contact said that only sales that were under contract before the beginning of the coronavirus crisis were being completed."
- "Income prospects for the agricultural sector deteriorated substantially as the spread of the coronavirus led to a dramatic fall in many commodity prices. A large drop in ethanol prices led ethanol plants to cut production and corn consumption, which pushed corn prices lower"
- "Builders reported a higher-than-normal cancellation rate, though some said they had managed to meet their March sales goal due to strong demand in the earlier half of the month. Showings dipped as many sellers took their homes off the market. Several new land and lot deals were on pause, and builders were renegotiating existing lot contracts. Outlooks weakened considerably, with sales and starts expected to slow because of the coronavirus outbreak."
- "A drug company said that the COVID-19 pandemic led it to cancel a planned price increase. Despite pockets of softness in demand, software and IT services contacts said they currently had no plans to alter selling prices."
- "Some companies still hiring have postponed pre-employment background checks like drug tests and finger printing, largely in an effort to reduce physical contact"
And so on. The full report can be found here.