US: Beige Book

Wed Sep 06 13:00:00 CDT 2017

Modest to moderate is yet again the conclusion of the Beige Book which offers early assessments of Hurricane Harvey. The report says Harvey created wide disruptions in the Dallas and Atlanta regions and that 1/5 of oil and natural gas production in the Gulf is shut in. Petroleum supply is expected to remain tight and the report notes that freight prices have jumped.

But inflation overall is described as no better than modest as increases in input costs are only showing limited pass through to selling prices. Warnings of tight conditions in the labor market continue with worker shortages cited as well as higher wages in several of the 12 districts. Nevertheless job growth itself is described as slowing.

The key category of consumer spending, which slowed in the last report, gets a limited upgrade to rising. But the report highlights trouble for auto sales which are described as mixed with concerns cited that sales may be in for a long slowdown. On the plus side, housing is strengthening with home prices getting a lift from low inventories.

Yet even after the second quarter's solid 3 percent showing for GDP, the Beige Book remains mostly downbeat and is not pointing to any urgency for Federal Reserve policy makers to withdraw additional stimulus, at least anytime soon. Note that data in the report were collected on or before August 28 and that the assessments of Harvey's impact were made primarily before landfall.

This book is produced roughly two weeks before the monetary policy meetings of the Federal Open Market Committee. On each occasion, a different Fed district bank compiles anecdotal evidence on economic conditions from each of the 12 Federal Reserve districts.

This report on economic conditions is used at FOMC meetings, where the Fed sets interest rate policy. These meetings occur roughly every six weeks and are the single most influential event for the markets. Market participants speculate for weeks in advance about the possibility of an interest rate change that could be announced upon the end of these meetings. If the outcome is different from expectations, the impact on the markets can be dramatic and far-reaching.

If the Beige Book portrays an overheating economy or inflationary pressures, the Fed may be more inclined to raise interest rates in order to moderate the economic pace. Conversely, if the Beige Book portrays economic difficulties or recessionary conditions, the Fed may see the need to lower interest rates in order to stimulate activity. Since the past recession, traders worry about the impact of the Beige Book on the timing of tapering quantitative easing.

Since the Beige Book is released two weeks before each FOMC meeting, investors can see for themselves at least one of the many indicators which Fed officials will use to determine interest rate policy, and can position their portfolios accordingly.

Eight times a year