Last month ago, we summarized the September 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
- July Beige Book instances of word “tariff”: 31
- September Beige Book instances of word “tariff”: 41
Fast forward to today when fears of trade wars have unmoderated (no pun intended) and there were no less than 51 instances of the word “tariff” in the just released, October Beige Book.
Despite the ongoing tariff fears, the U.S. economy is expanding at a “modest” to “moderate pace”, and echoing previous reports, the Fed warned of tight labor market conditions and rising input costs partly due to trade disruptions as uncertainties over trade and labor shortages put pressure on firms. New York and St. Louis indicated slight growth, overall, while Dallas reported robust growth driven by strong manufacturing, retail, and nonfinancial services activity.
“Several districts indicated that firms faced rising materials and shipping costs, uncertainties over the trade environment and/or difficulties finding qualified workers” the report said.
Several Fed districts reported that firms faced rising materials and shipping costs, uncertainties over trade and difficulty finding qualified workers. Employment expanded modestly/moderately across the US, as employers throughout the country continued to report tight labor markets and difficulties finding qualified workers, including highly skilled engineers, finance and sales professionals, construction and manufacturing workers, IT professionals, and truck drivers.
And while wage growth was characterised as “modest to moderate”, paradoxically, the Beige Book, based on anecdotal information collected by the 12 regional Fed banks through Oct. 15, continued to show that companies are generally not responding to the tightening labor market with significantly higher wages. Almost as if the labor market slack is far, far greater than the BLS or the administration will want us to believe.
In lieu of higher wages, some firms offered signing bonuses, flexible hours and more vacation time in order to attract and retain workers.” Most businesses also expected wage gains to remain “modest to moderate” over the coming six months.
The report also pointed to widespread labor shortages that were “linked to wage increases and/or constrained growth.” In the Philadelphia district, one firm noted difficulty launching a third shift because of a lack of workers while another was planning to add robots. In fact, there were two mentions of the word “robots” in this beige book.
To underscore the severity of the labor shortage, the St. Louis fed notes that “one contact reported the launch of programs that teach foreign-born workers English to prepare them for jobs in the medical field and in manufacturing.“
Falling back to the generic concerns, the Beige Book highlighted anxiety among U.S. firms over the ongoing trade dispute with China with manufacturers reporting they were raising prices out of necessity as tariffs drove up the cost of raw materials, including metals.
“New car prices are also expected to increase significantly to cover the burden of recently implemented tariffs,” the Boston Fed reported.
Separately, anecdotes on housing were mixed with homebuilders in Cleveland reporting a modest fall in demand because of decrease in affordability.
The Dallas district, which includes many areas benefitting from higher energy prices, continued to be a particularly bright spot with “solid” growth in manufacturing, retail and nonfinancial services.
Below, courtesy of Bloomberg, are selected anecdotes from the latest Beige Book:
- Boston: Three manufacturing firms faced higher input prices due to tariffs on Chinese goods and services that were not readily substitutable, and the firms expected to pass on (or had already passed on) to consumers at least some of the tariff burdens
- New York: Broadway theaters reported continued growth in both attendance and revenues, both of which were running well ahead of comparable 2017 levels
- Philadelphia: Several key industrial suppliers believe their clients placed excessive orders to boost inventories in advance of tariffs and now expect that demand will be lower over the next six months to a year
- Cleveland: Auto retailers noted that new vehicle sales have declined slightly because of rising interest rates and increased unit prices
- Richmond: Farmers in North Carolina lost crops and livestock to flooding from Hurricane Florence
- Atlanta: Contacts remained concerned about tariffs and trade conflicts although there was some optimism concerning the newly agreed upon United States-Mexico-Canada Agreement
- Chicago: Residential and commercial construction contacts said that a lack of workers was slowing the completion of projects: One contact reported a delay of 6 weeks because they couldn’t find an elevator installer.
- St. Louis: One contact reported the launch of programs that teach foreign-born workers English to prepare them for jobs in the medical field and in manufacturing
- Minneapolis: A producer of dry beans reported that a large regular annual order from European Union countries was cancelled due to tariffs
- Kansas City: A majority of respondents reported higher commercial vacancy rates for the first time since the end of 2016
- Dallas: Most staffing firms reported surging demand for their services over the reporting period, noting strength in all markets, both geographically and by industry
- San Francisco: Contacts in Northern California reported that sales of semiconductors were brisk, driven in part by strong global demand.
Needless to say, as long as employers continue to complain about lack of skilled workers instead of materially hiking wages, the status quo in which the Fed will remain confused by the “mysterious” lack of inflation, will continue.
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