Back in July, just weeks before the first Fed rate cut in a decade, there was some confusion in the Fed's July 17, Beige Book, because instead of painting a gloomy picture of a US economy on the verge of recession, and thus in urgent need of rate cuts, the Fed instead described economic activity as "continuing to expand at a modest pace overall" with output generally stable and certainly not in need of urgent Fed intervention.
Well fast forward to today when one month after the Fed did indeed cut rates for the first time since the financial crisis, and two weeks before the market expects Powell to cut as much as 50bps again, the Fed released its latest Beige Book, and once again instead of some dire picture of rapid economic contraction, reports from various Fed Districts suggested that "the economy expanded at a modest pace through the end of August", hardly a state one would associate with an urgent 25bps, let alone 50bps rate cut. And while "concerns regarding tariffs and trade policy uncertainty continued", the "majority of businesses remained optimistic about the near-term outlook." Furthermore, while reports on consumer spending were mixed, auto sales for most Districts grew at a modest pace, while "home sales remained constrained in the majority of districts due primarily to low inventory levels, and new home construction activity remained flat", once again - hardly the stuff multiple rate cuts are made of.
Among the various indicators suggesting a solid, stable, expanding economy, the Beige Book noted that:
- Overall, districts indicated that employment grew at a modest pace, on par with the previous reporting period
- While employment growth varied by industry, some districts noted manufacturing employment was flat to down
- Districts continued to report strong upward pressure on pay for entry-level and low-skill workers, as well as for technology, construction, and some professional services positions
- On net, districts indicated modest price increases since the last report
- District reports on the impact of tariffs on pricing were mixed, with some districts anticipating that the effects would not be felt for a few months
So with all those things going for the US economy, the Fed is surely set to keep rates unchanged (if not, hike) right? Why of course not - after all the S&P remains a tragic 3% below its all time highs. To prevent that, ideally in perpetuity, as even the shoeshine boy knows by now the big debate on September 18 is whether the Fed cuts 25 bps or 50bps. And that's in a time when literally nothing is broken with the economy; one can't wait to see just how negative the Fed will push rates if and when the US economy does finally slide into contraction.
Or perhaps the summary assessment provided by the report's authors was a little on the overly rosy side? Well, no, because a quick summary of the number of instances of "tariff" and "slow" also saw a decline relative to the July beige book, with the former sliding from 49 to 29 and the latter from 58 to 50, respectively. So, yes, stabilization here too. And yet - up to 50bps of rate cuts, here we come.
Why is this noteworthy? Because as Reuters' reporter Jeoff Hall writes, "in the Beige Book, there is a strong correlation between mention of tariffs and the appearances of the root word slow, especially when the former leads the latter by two releases. Perhaps as businesses adjust to uncertainties from tariffs, the economy is less likely to slow in Q4"
Additionally, despite increases in the incidence of the words "strong" and "strength" from the last Beige Book to today's, there were also increases in the usage of "modest" and the root word "weak", leaving IFR Markets' Beige Book Diffusion Index little changed between the last two versions. Which, in any case, hardly indicates a US economy fit for more rate cuts, thus forcing Powell to once again blame further easing on trade war, and prompting more angry op-eds from Bill Dudley that the Fed is underwriting Trump's trade war.
So where in this pile of "modestly" growing words is the secret coded message of doom, we don't know. But whatever the answer, it doesn't matter - as the Fed has demonstrated, it is only "data dependent" when the data is moving in the predetermined direction that justifies the Fed's existing policy thinking. As such, all positive economic news will be summarily ignored until the fed funds rate is somewhere in the mid-1% range, and/or Trump stops tweeting @ Jerome Powell.
Finally, and as always most entertaining, here are the most amusing economic anecdotes compiled from the various regional feds.
- Boston: One respondent in the electrical equipment business said that the tariffs had led them to invest more in automating factories in the U.S. as opposed to moving them to Mexico
- New York: An employment agency noted that one factor holding back hiring has been a wide gap between job candidates’ salary demands and employers’ offers
- Philadelphia: A large Philadelphia broker noted a slight boost in refinancing activity following the FOMC’s rate cut
- Cleveland: One technology contact reported softening demand from clients in Asia, and another noted an overall reduction in the volume of large-scale deals
- Richmond: An executive at a Virginia resort reported strong demand but nevertheless had to close some pools due to a labor shortage, which was expected to be persistent
- Atlanta: A number of contacts reaffirmed that while construction on industrial megaprojects, largely chemicals manufacturing and oil and gas refining expansion, slowed in 2019, planned investment along the Gulf Coast picked up during this reporting period
- Chicago: One contact said that the effect on retail prices of the scheduled new tariffs on Chinese imports wouldn’t be felt until early 2020
- St. Louis: One contact in Little Rock reported that new graduates applying to jobs at an engineering firm were expecting $10,000 to $15,000 more than their offered starting salary
- Minneapolis: A Montana insurance contact said that renewals for workers’ compensation policies showed that firms widely expected higher employment levels over the coming year
- Kansas City: Regional contacts reported weak farm income in the most recent survey period, but expected slower deterioration in the coming months
- Dallas: One contact said that increased wait times and security at the Texas-Mexico border had reduced the number of Mexican nationals visiting San Antonio
- San Francisco: Some local governments in California and Hawaii have started considering bans on vacation home ownership as a possible response to increased affordability concerns