One month after the October Beige book found "little change" in the US economy even as the outlook turned decidedly gloomier, moments ago the Fed released the latest, November, Beige Book in which we find just why the outlook darkened: according to the Fed, economic activity in the US "slowed" since the previous report, with four Districts reporting modest growth, two indicating conditions were flat to slightly down, and half (or six) noting slight declines in activity. The slowdown was visible across both Fed mandates: price increases moderated across districts (though prices remained elevated) the Beige Book notes, while demand for labor continued to ease, as most Districts reported flat to modest increases in overall employment.
According to Bloomberg, "taken at face value, that’s two-thirds of districts citing conditions that are ostensibly consistent with a mild recession." In other words, the various regional Feds confirm that the trigger for a Fed rate cut is that much closer.
Some more details, starting with overall economic activity:
- Retail sales, including autos, remained mixed; sales of discretionary items and durable goods, like furniture and appliances, declined, on average, as consumers showed more price sensitivity.
- Travel and tourism activity was generally healthy. Demand for transportation services was sluggish.
- Manufacturing activity was mixed, and manufacturers' outlooks weakened.
- Demand for business loans decreased slightly, particularly real estate loans.
- Consumer credit remained fairly healthy, but some banks noted a slight uptick in consumer delinquencies.
- Agriculture conditions were steady to slightly up as farmers reported higher selling prices; yields were mixed.
- Commercial real estate activity continued to slow; the office segment remained weak and multifamily activity softened.
- Several Districts noted a slight decrease in residential sales and higher inventories of available homes.
Not surprisingly, the economic outlook darkened even more, with the report warning that the outlook "for the next six to twelve months diminished over the reporting period."
Turning to labor markets, we find that demand for labor continued to ease, as most Districts reported flat to modest increases in overall employment. Which is to be expected with the US heading fast for recession. Not surprisingly, wage growth slowed further, while layoffs rose and an even higher unemployment rate next week is virtually assured. Here are some more details:
- The majority of Districts reported that more applicants were available, and several noted that retention improved as well.
- Reductions in headcounts through layoffs or attrition were reported, and some employers felt comfortable letting go low performers. However, several Districts continued to describe labor markets as tight with skilled workers in short supply.
- Wage growth remained modest to moderate in most Districts, as many described easing in wage pressures and several reported declines in starting wages. Some wage pressures did persist, however, and there were some reports of continued difficulty attracting and retaining high performers and workers with specialized skills.
Looking at the regional anecdotes, one stood out: "a New York City-area company noted a reduction in starting salaries for recent college graduates as tech workers have become easier to find." Translation: forget about wage growth, actual wage cuts are on deck.
Turning to prices, no surprise that here to increases "largely moderated" (even though prices remained elevated).
- Freight and shipping costs decreased for many, while the cost of various food products increased.
- Several noted that costs for construction inputs like steel and lumber had stabilized or even declined.
- Rising utilities and insurance costs were notable across Districts.
- Pricing power varied, with services providers finding it easier to pass through increases than manufacturers.
- Two Districts cited increased cost of debt as an impediment to business growth. Most Districts expect moderate price increases to continue into next year.
Turning to the specific regional Feds, we found these summaries notable
- Boston: Economic activity was flat or down slightly. Employment was stable but labor demand showed weakness. Results were quite mixed among manufacturers, some of whom have recently experienced an extended period of weak activity. Contacts noted an increase in loan defaults for office properties and expected further distress moving forward.
- New York: Regional economic activity continued to weaken. Though still solid, labor market conditions cooled, and consumer spending slowed. Inflationary pressures were little changed after moderating in recent months. There were some signs of housing markets becoming more balanced in some parts of the District, though inventory remained exceptionally low.
- Philadelphia: Business activity continued to decline slightly during the current Beige Book period. Wage and price inflation subsided significantly – but price levels remain high for many items. Consumers became yet more price sensitive, and real consumer spending declined. Employment grew modestly as labor availability improved further. Expectations for economic growth remained subdued.
- Cleveland: The District's economy contracted slightly in recent weeks after a long period of stability. Accompanying slower business activity, labor demand eased further, and employers reported returning to more normal wage increases and schedules. Input costs continued to trend down. Moreover, some firms noted that pricing power was reduced by weakening demand and competition.
- Richmond: The regional economy grew slightly in recent weeks mainly due to modest increases in consumer spending. Manufacturers reported mixed activity. Underlying volumes in the transportation sector were low. Residential real estate continued to be constrained by limited inventory. Commercial real estate activity and lending demand declined. Employment increased modestly and price growth moderated slightly.
- Atlanta: Economic activity grew slowly. Labor markets cooled, and wage pressures eased. Some nonlabor input costs, mostly in construction, decreased. Retail sales softened. New auto sales remained strong. Leisure and group travel were solid. Housing demand slowed. Banking conditions were stable. Transportation activity weakened. Energy demand rose. Agricultural conditions improved somewhat.
- Chicago: Economic activity was up slightly. Employment increased moderately; business spending was up slightly; nonbusiness contacts saw little change in activity; consumer spending and construction and real estate activity decreased slightly; and manufacturing was down modestly. Prices and wages rose moderately, while financial conditions tightened slightly. Expectations for farm incomes in 2023 were little changed.
- St. Louis: Economic activity has slowed slightly since our previous report. Retailers and freight transport contacts reported slowing consumer demand, particularly for high-end goods. Construction activity slowed, with multifamily in particular seeing projects delayed or cancelled due to higher rates.
- Minneapolis: District economic activity was down slightly. Employment grew modestly but labor demand softened. Wage pressures were stable but still above average, and price pressures were modest. Consumer spending was flat as shoppers sought low-priced options, while construction and manufacturing sectors both faced challenges. Farm incomes were also lower.
- Kansas City: Economic activity in the Tenth District declined slightly in recent weeks. Consumers were increasingly likely to "share a roof and share meals" to manage household budget challenges. Wage growth remained steady, but job gains were modest. Most firms reported plans to raise prices in coming months and noted heightened uncertainty about the outlook for commodity prices. Renewable energy activity continued to expand at a moderate pace.
- Dallas: The Eleventh District economy expanded at a slower pace than in the previous reporting period, as growth in services stalled out, retail and home sales fell, and loan volumes declined at a faster rate. Job growth softened, and wage growth continued to normalize. Price pressures were above average in the service sector but modest in other sectors. Outlooks worsened, and uncertainty remained elevated with numerous contacts citing geopolitical instability and high interest rates as headwinds.
- San Francisco: Economic activity softened slightly. Labor market tightness eased moderately. Wage and price pressures moderated. Retail sales were flat, and demand for manufactured products remained largely unchanged. Conditions in agriculture were mixed, while real estate activity softened somewhat. Financial sector conditions weakened further. Local communities faced high demand for support services.
And one particular highlight: The Kansas City Fed notes that "bankers cited higher debt service costs and declining borrower cash flow as key risks facing their CRE books, particularly for loans maturing in the near term. Rising funding costs persisted as deposit balances continued to shift to higher-yielding accounts, with contacts reporting strength in time deposit products."
In other words, the Fed is now on notice that unless it cuts rates, a CRE accident is just waiting to happen.
Finally, taking a visual approach to the data, we find that the mentions of inflation were the fewest since Jan 2022.
Perhaps the only silver lining in today's data is that while we would expect mentions of "slowing" to jump in keeping with the broader report theme, what actually happened was a drop decline in the use of that word to a 5 month low, suggesting that a soft landing is still possible but only if the Fed is careful and eases into it.
More in the full Beige Book (link).