US: Beige Book

Wed Jan 17 13:00:00 CST 2018

There are plenty of signs of strength but they don't include today's Beige Book where "modest-to-moderate" is once again the description of the economy, that is in 11 out of 12 districts with the exception of Dallas where growth is called "robust".

But the bulk of the report is remarkably subdued with job growth getting a downgrade to "modest" from the modest-to-moderate ranking in the last Beige Book in November. Consumer spending, despite the strength of the December and November retail sales reports, is not highlighted with auto sales called no better than mixed. The report does note that "some retailers" reported higher-than-expected holiday sales.

Despite all the strength seen in anecdotal and regional reports like the ISM and Philly Fed, the Beige Book describes manufacturing growth, in an echo of today's industrial production results, as "modest" which is actually a downgrade from November when growth was described as moderate. Nonresidential growth is described as "slight" and despite strong gains in recent home sales reports, residential real estate activity is described as "constrained". Lack of homes on the market is once again cited as a negative for home sales.

Price growth is called modest to moderate and wages are no threat in this report, with increases called "modest" though lack of skilled workers is once again cited. Loan demand is described as steady.

One upbeat note is that the general outlook for 2018 is at least called "optimistic". This is a soft report judging by which FOMC members won't be pressing to increase the number of rate hikes this year which are currently penciled in at three.

Compiled by the Atlanta Fed for the January 30 and 31 FOMC, the report's cut-off date was January 8.

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