Overheating Arrives: Beige Book Finds Prices, Wages Rising In Most Districts

(Wage) inflation is here.

That's the message from the just released, March, Beige Book, in which the Fed found that not only did "prices increase in all districts", but that "most districts also saw employers raise wages", a clear harbinger of an overheating economy.

While overall economic activity expanded at a "modest to moderate" pace across the 12 Federal Reserve Districts in January and February, with districts reporting modest growth in home sales and construction with the latter constrained by labor and materials shortages, and the Super Bowl boosting hotel usage in Philadelphia ("a Philadelphia contact noted that hotels benefited from several large conventions, Eagles’ home playoff games, and the Super Bowl itself, which drew local fans for downtown hotel stays in anticipation of the evening celebration"), it was the commentary on employment, wages and prices that took center stage.

Here, the Fed said that even as employment grew at a moderate pace, "across the country,  contacts observed persistent labor market tightness and brisk demand for qualified workers, as well as increased activity at staffing placement services."

The Beige Book further noted that "several Districts reported continued worker shortages across most sectors, with contacts often mentioning shortages in the construction, information technology, and manufacturing sectors."

And the punchline: "Most Districts saw employers raise wages and expand benefit packages in response to tight labor market conditions" with contacts in a few Districts conveyed "reports of modest increases in compensation following passage of the Tax Cuts and Jobs Act." In other words, Trump tax cuts are already filtering through to the economy, to wit:

  • "One large retailer planned to pass along half its savings from the corporate tax cut to selected workers in the form of higher wages, while a smaller retailer said it planned to raise salaries a bit to match the wage increases announced by some prominent retail chains as a result of the tax cuts."
  • "Contacts speculated that savings resulting from the Tax Cuts and Jobs Act (TCJA) will, in part, support pay increases over the short to medium terms "
  • "few contacts expect the tax cuts to lead to more robust hiring. "

And while wages increased in "most" districts, prices did so everywhere: "prices increased in all Districts, and most reports noted moderate inflation."

Curiously, the Fed highlighted that four Districts saw a marked increase in steel prices, due in part to a decline in foreign competition. Is the Fed suddenly also advocating for no trade tariffs? 

Here are the details on the rising steel prices:

  • Overall -  Prices increased in all Districts, and most reports noted moderate inflation. Four Districts saw a marked increase in steel prices, due in part to a decline in foreign competition.
  • Cleveland - A steel producer observed that every time his firm gets close to having a full staff, someone quits.
  • Atlanta -  Firms reported that input costs continued to rise, specifically steel, brass, and copper
  • Chicago -  Steel production increased at a moderate pace in response to solid end-user demand and the rebuilding of inventories at steel service centers
  • St.Louis -  Steel prices increased moderately throughout the District, and contacts in Louisville and Little Rock reported upticks in trucking freight rates.
  • Dallas -  Transportation firms noted an increase in fuel costs, manufacturers noted increases in steel and petroleum product prices

Additionally, the Fed also said that price growth for building materials such as lumber picked up, stemming from an uptick in construction activity. Several Districts reported moderate increases in broad transportation costs, caused primarily by higher fuel costs that boosted freight rates. Home and commercial lease prices rose across most of the country.

Overall Economic Activity suggested that a March hike is guaranteed:

  • Production increases were broad based across manufacturing with all but one District noting at least modest growth in activity
  • Tourism was ‘broadly solid’ with Atlanta and Richmond recording ‘robust’ growth
  • Consumer spending was mixed as non-auto retail sales increased in just over half of the Districts; auto sales declined or were flat in every District
  • Districts reported modest growth in home sales and construction with the latter constrained by labor and materials shortages

Finally, here are selected key anecdotes from the Beige book, courtesy of Bloomberg:

  • Boston: Only one of the ten First District manufacturers contacted this cycle reported lower sales -- a gun maker. Otherwise, all manufacturing contacts reported higher sales than a year ago.
  • New York: A major New York City agency indicated that labor demand has remained brisk, while qualified candidates have been in increasingly short supply - particularly for jobs requiring technical skills. One contact noted that drug testing and background checks have disqualified many job applicants.
  • Philadelphia: A Philadelphia contact noted that hotels benefited from several large conventions, Eagles’ home playoff games, and the Super Bowl itself, which drew local fans for downtown hotel stays in anticipation of the evening celebration.
  • Cleveland: Contacts speculated that savings resulting from the Tax Cuts and Jobs Act will, in part, support pay increases over the short to medium terms
  • Richmond: A North Carolina company reported demand of about two truckloads for every available truck. Trucking companies have continued to turn away business because of driver shortages and expect this problem to worsen in coming months as shipments pick up seasonally in the spring.
  • Atlanta: The January forecast for Florida’s orange crops was down further from the previous report as the effects of the Hurricane Irma continued to be felt.
  • Chicago: Contacts noted that subsoil moisture was very depleted in many areas because of drought conditions last year, making timely spring and summer rains more important for crop health this coming growing season.
  • St. Louis: Contacts expressed optimism about near-term farm income as area farmers were able to turn strong yields into profits in 2017, although some expressed concern about the downside risks of NAFTA renegotiations.
  • Minneapolis: The number of job seekers registered with state workforce offices in January was 11 percent lower in North Dakota and 29 percent lower in Montana compared with a year earlier.
  • Kansas City: The number of active oil and gas rigs continued to edge higher, primarily in New Mexico and Wyoming.
  • Dallas: Contacts in tourism areas along the Gulf Coast said business continues to struggle after the devastation of Hurricane Harvey.
  • San Francisco: A health-care provider in the Mountain West reported a jump in insurance premiums, partly due to a reduction in federal subsidies for low-income families.