Last month, we summarized the May Beige Book by saying that shortly after the March inflationary panic, the one thing, perhaps the only thing, that was fascinating companies was the continuing threat of trade wars. In fact, we said that the “quick and dirty summary” for the May Beige Book, when economic activity continued to expand “at a modest to moderate pace across the 12 Federal Reserve Districts”, would, in a word literally, be “tariffs” and here’s why:
- March Beige Book instances of word “tariff”: 0
- April Beige Book instances of word “tariff”: 36
- May Beige Book instances of word “tariff”: 22
Fast forward to today when fears of trade wars have unmoderated (no pun intended) and there were no less than 31 instances of the “word” tariff in the just released, July Beige Book.
“Manufacturers in all districts expressed concern about tariffs and in many districts reported higher prices and supply disruptions that they attributed to the new trade policies,” according to the report, which indicated another increase in anxiety among American companies over the potential impact of trade disputes initiated by Trump. The taxes have pushed up lumber and metals prices, though there was only a “slight to moderate” passing along of those costs to consumers.
Meanwhile, as trade war fears returned with a vengeance, the various regional Feds found that the 10 of the Fed districts reported “modest to moderate” growth although with little indication of overheating… as was the case in late 2007 and early 2008. The outliers were the Dallas District, which reported strong growth driven in part by the energy sector, and the St. Louis District where growth was downgraded to “slight.”
And while manufacturers in all districts expressed concern about tariffs, all districts also reported that labor markets were tight and many said that the inability to find workers constrained growth.
Some more details:
Employment continued to rise at a modest to moderate pace in most Districts. Labor markets were described as tight, with most Districts reporting firms had difficulty finding qualified labor. Shortages were cited across a wide range of occupations, including highly skilled engineers, specialized construction and manufacturing workers, IT professionals, and truck drivers; some Districts indicated labor shortages were constraining growth. Districts noted firms were adding work hours, strengthening retention efforts, partnering with local schools, and converting temporary workers to permanent, as well as raising compensation to attract and retain employees.
And yet “wage increases were modest to moderate.” Which is odd: one would think employers are familiar with the concept of pushing up their wages to attract talent. Judging by the continued stagnation in average hourly earnings, most missed this particular course in basic econ.
In an amusing anecdote, the NY Fed said that one business contact “observed that almost all job-seekers are already employed.” Furthermore, a New York City employment agency noted that clients have had difficulty adjusting to a city law prohibiting prospective employers from asking about salary history or using it as a guide to compensating new hires. Separately, the San Fran Fed reported that “shortages of plumbers, electricians, and other specialized workers drove wage pressures for these positions and led to construction project delays in some cases.”
Meanwhile, despite a sheer panic about tariffs which are expected to boost import prices, the Beige Book said that prices increased in all Districts at a pace that was also modest to moderate on average, even as the prices of key inputs rose further, including fuel, construction materials, freight, and metals; Tariffs were said to contribute to the increases for metals and lumber.
There was some good news: where the May Beige Book reported that whereas two months ago, some resourceful employers found a way to bypass the negative effect of labor shortages by avoid drug tests and background checks altogether, and proceeded to hire criminals and drug dealers, this time there were no anecdotes about employers hiring workers in prison.
Instead, employers were even more resourceful: in the Cleveland region, one commercial builder stated that the firm boosted spending to use drones for surveying to make up for the shortage of workers.
Finally, the St. Louis Fed said that contacts noted that the continuing shortage of commercial truck drivers has led to higher demand for railroad shipping.
But the overall picture is clear: there are 95 million Americans not in the labor force, and they just don’t want to return, with the Kansas City Fed noting that contacts noted difficulty “finding retail sales staff, skilled IT workers, commercial drivers, and restaurant workers”, while the Minneapolis Fed revealed citing a Montana staffing firm reported that “hiring demand and job orders are up, but [worker] candidates are down.”
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Below, courtesy of Bloomberg, are selected anecdotes from the latest Beige Book:
- Boston: Hotels contacts reported that traditional lodging providers, such as hotels and bed-and-breakfast establishments, were encountering increased competition from online platforms offering short-term rentals. This shift in consumer preferences was expected to continue.
- New York: One business contact observed that almost all job-seekers are already employed. A New York City employment agency noted that clients have had difficulty adjusting to a city law prohibiting prospective employers from asking about salary history or using it as a guide to compensating new hires.
- Philadelphia: Retailers were generally more optimistic than in recent periods due in part to the corporate tax rate reduction; operators of brick-and-mortar stores were further cheered by the recent Supreme Court decision to allow states to tax online sales.
- Cleveland: One commercial builder stated that the firm boosted spending to use drones for surveying to make up for the shortage of workers.
- Richmond: A Maryland can manufacturer said he could not get the quality of steel needed domestically and anticipated losing business to foreign competitors who are not faced with steel tariffs.
- Atlanta: Contacts in New Orleans reported an uptick in the number of conventions being held in the city over the summer.
- Chicago: Livestock farmers continued to struggle overall, with some reports of asset sales by hog producers and closures of dairy operations. Contacts throughout the District expressed heightened concerns about the impact of trade disputes and tariffs on the agricultural industry.
- St. Louis: Contacts noted that a continuing shortage of commercial truck drivers has led to higher demand for railroad shipping.
- Minneapolis: A Montana staffing firm reported that “hiring demand and job orders are up, but [worker] candidates are down.”
- Kansas City: Contacts noted difficulty finding retail sales staff, skilled IT workers, commercial drivers, and restaurant workers.
- Dallas: Texas farmers were concerned because the drought will likely suppress crop yields, and crop prices are lower due to trade restrictions and strong U.S. production prospects.
- San Francisco: Shortages of plumbers, electricians, and other specialized workers drove wage pressures for these positions and led to construction project delays in some cases.
Needless to say, as long as employers continue to complain about lack of skilled workers instead of hiking wages, the status quo in which the Fed will remain confused by the “mysterious” lack of inflation, will continue.
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