US: Beige Book

Wed Oct 18 13:00:00 CDT 2017

Modest to moderate is once again, as it has been all year, the Beige Book's assessment of economic growth. The report does cite some wage pressures but concerns over inflation are limited.

Short-term hurricane disruptions in the 3 southern districts -- Richmond, Dallas, Atlanta -- are described as significant though no lasting impact is expected. The report does warn, however, that hurricane recovery may worsen labor shortages in the regions.

The labor market in general is described as tight and job growth, as it was in the last Beige Book, is no better than "modest." And in a new warning, the report says labor shortages are restraining business growth in many regions.

But the shortages are not strengthening wages, at least in most districts where wage growth is also modest to moderate. Yet, in a refrain echoed most of the year, the report does note that wages are going in up some districts. But modest is the description for inflation in general. The report notes that input costs are up but that pass through to selling prices is limited.

Consumer spending gets a downgrade to slow growth despite strength in auto sales that included a hurricane replacement surge in Dallas' district. And housing sales continue to be hurt by low inventories of homes which, like the low supply of labor, is constraining growth.

The risk of dislocations tied, not to hurricanes, but to full employment is of special interest in today's report, especially the warning that lack of labor is holding the economy back. The month-end FOMC may not see a rate hike but debate at the meeting, centered on the tight labor market, is certain to be lively. Compiled by the Minneapolis Fed for the October 31 & November FOMC, the report's cut-off date was October 15.

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