Beige Book Signals "Modest Improvement" In US Economy

Back in April, the Fed downgraded its assessment of the US economy through its Beige Book surveys, characterizing the economic growth as only "slight-to-moderate." Now, in the latest Beige Book release, published moments ago, the Fed signaled a "slight improvement" in the economy, describing economic activity expanding at a "modest pace overall" from April through mid-May, and dropping the "slight" classifier.

Almost all Districts reported some growth, indicating they're handling the headwinds to the economy well, including the tariffs and a lack of available workers, while a few saw moderate gains in activity.

Manufacturing reports were generally positive, but some Districts noted signs of slowing activity and a more uncertain outlook among contacts. Residential construction and real estate both showed overall growth, but both sectors saw wide variation in sentiment across Districts. Reports on consumer spending were generally positive but tempered. Tourism activity was stronger, especially in the Southeast, but vehicle sales were lower, according to reporting Districts. Loan demand was mixed but indicated growth.  Agricultural conditions remained weak overall, but a few Districts reported some improvements. The outlook for the coming months was solidly positive but modest, with little variation among reporting Districts.

Most districts saw modest or moderate growth in jobs and wages, though regions including Richmond and San Francisco cited difficulties finding workers or highlighted tight conditions. Wage pressures remained “relatively subdued” with some employers boosting benefits, contrary to widespread reports of continued labor shortages.

Inflation remained non-existent, at least according to the Fed, with overall prices increasing at a "modest pace" in most districts since the previous report. While several districts noted faster growth in input prices than in final selling prices, firms generally reported input cost increases in the modest-to-moderate range indicating that so far American consumers are not paying for the trade war with China.

What is perhaps most surprising is that the various regional Feds did not paint a gloomier economic picture in response to escalating trade war fears and rising tariffs. Even so, after three consecutive Beige Books in which "tariffs" saw few references, the latest report saw a doubling in the use of "tariffs", although variants of the phrase "slow" surprising declined from 38 in April to just 26, from a recent high of 65 in January.

While they received less prominence than in late 2018, trade and tariffs were mentioned in several regions including Philadelphia, which cited uncertainty as delaying business investment. Dallas also said trade uncertainty was weighing on business sentiment. Some of that may be affecting manufacturing. Richmond, for example, said factory shipments and new orders declined. The picture for commodity inputs was varied across the nation, with some sources spotting lower steel prices while others said costs remained elevated.

Unlike today's dismal ADP print, the report painted a generally positive, if not uniformly so, signal ahead of crucial data Friday on employment in May. As recent high frequency indicators have indicated, there has been some notable weakness across the US economy, including weak reports on retail sales, factory orders and home purchases which have sparked concerns about slowing growth as President Donald Trump's trade war with China weighs on businesses.

As Bloomberg notes, in one example of labor pressures highlighted in the report, several restaurants in Charleston, South Carolina, closed because they were so short-staffed. One business moved to counter service and switched to disposable utensils to stay open.

Meanwhile, as noted here extensively in recent weeks, farms reported struggles across the U.S. In the Minneapolis district, a wet spring threatens the planting season, with some growers saying they might not be able to plant at all this year. Anecdotes from Chicago echoed these troubles, with farmers challenged by poor weather and low crop prices.

Below are selected anecdotes from the Fed’s Beige Book, as compiled by Bloomberg:

  • Boston: Manufacturing contacts cited tariffs as their main pricing issue, indicating that they were generally able to push price increases to customers. One reported that they added a surcharge to cover the tariff on goods from China, which customers accepted; once they found an alternative supplier, they removed the surcharge
  • New York: A number of businesses in New York State have noted ongoing challenges from the recent minimum wage increase; some reported that they are investing more in automation
  • Philadelphia: Tariffs remained a key concern for many manufacturers. Contacts noted that much of the impact from the initial 10 percent tariffs was absorbed along the supply chain before reaching the consumer. However, they expect much more of the impact from the 25 percent tariffs to be passed through to the consumer
  • Cleveland: Many contacts are concerned that the increased tariffs on goods traded with China will further exacerbate softening manufacturing activity in China, leading to less demand for American products from Chinese manufacturers
  • Richmond: Several restaurants in Charleston, SC, closed because they couldn’t find enough staff. Moreover, one restaurant moved to counter service and disposable utensils in order to remain open with a smaller staff
  • Atlanta: Regarding trade policy uncertainty, some transportation contacts developed contingency plans to reduce capital expenditures and headcount to offset tariff-related revenue shortfalls
  • Chicago: Contacts indicated that it would soon be too late to plant corn in some areas and that switching to soybeans, while possible, would be costly due to wasted fertilizer and the low price of soybeans
  • St. Louis: Contacts reported that larger firms were offering higher pay to attract workers, particularly for entry-level positions, but that small businesses were struggling to raise wages at the same rate
  • Minneapolis: A Minnesota manufacturer increased hourly wages for welders from $18 to $22 to better compete for labor
  • Kansas City: Regional contacts indicated that farm income decreased modestly and farm loan repayment rates slowed slightly since the last survey period
  • Dallas: Several agricultural producers in southern New Mexico expressed concern over the lack of labor force growth and the strain that immigration restrictions have imposed on their current workforce. They also mentioned that the recent authorization of hemp production provides an opportunity as an alternative to pecan production, as the pecan industry has been negatively impacted by tariffs.
  • San Francisco: A contact in the California utility sector observed that some price inflation resulted from wildfire-related costs

The bottom line is that absent significant deterioration in the economy and/or trade war, this report will not help those both inside the Fed and outside, who are now eager for a rate cut as the economy simply is not in such a dire state as to need it (yet).