U.S. Federal Reserve Beige Book (April to mid-May 2020)

Ksenia Bushmeneva, Economist | 416-308-7392

Date Published: May 27, 2020

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Beige Book shows economic collapse in April as measures to tame the pandemic intensify

  • Today's Beige Book reaffirmed that economic activity fell sharply in April across all Federal Reserve Districts as a result of COVID-19 and the measures to contain it. However, there were nascent signs of slight improvement in May.  
  • The report confirmed that activity slumped across most sectors of the economy, something that we already knew from data releases. Consumer spending fell precipitously, as did sales of autos and residential homes. Manufacturing, energy and construction activity also declined sharply. Leisure & hospitality were hit the hardest as a result of social distancing measures, and mandated closures of nonessential business. 
  • Employment continued to fall in all Districts. The Beige book notes that Paycheck Protection Program (PPP) loans helped many businesses to limit or avoid layoffs, although employment continued to fall sharply in the retail and leisure and hospitality sectors. Additionally, firms willing to bring workers back also reported challenges doing so due to "workers’ health concerns, limited access to childcare, and generous unemployment insurance benefits". As a result, wages increased in high-demand and essential sectors, while wages were flat or declining in other sectors.
  • Inflationary pressures were mixed, but overall price level was steady to lower on balance. Due to supply-chain disruptions, prices were higher for some grocery items, such as meat and fresh fruit, as well as for personal protective equipment. However, prices were lower for apparel and travel. Commodity prices were also down. 
  • Demand for consumer loans declined, but banks reported strong demand for business loans as firms continued to draw down existing lines of credit in addition to strong demand for PPP loans. Meanwhile, commercial real estate survey respondents mentioned that a large number of retail tenants had deferred or missed rent payments. 
  • Relative to the previous report, concerns about the coronavirus outbreak eased off somewhat (perhaps as companies came to terms with the new reality) but remained stark in the report. The words "COVID-19" and "coronavirus" were mentioned 54 (down from 85 times in the previous report) and pandemic was mentioned 28 (down from 41 times). Many businesses were hopeful that overall activity will pick up once they re-open, but remain uncertain and pessimistic about the rate of recovery. 

Key Implications

  • The latest Beige Book painted a dire picture of plunging economic activity across the U.S. since mandatory shutdowns and social distancing measures came into effect in the second half of March. With all states starting to partially reopen in May, tentative signs of economic stabilization are also beginning to emerge. 
  • However, the economy is still in a very deep hole, with over 25 million people unemployed. While the worse in terms of shutdowns is likely in the rear-view mirror, navigating the economy out of the crisis will take some time as the rate of recovery will differ across states and industries. Some of the hardest-hit industries, such as, retail, hospitality and travel, will be slow to rebound, likely operating below capacity for months, leading to permanent job losses. 
  • Policymakers have moved swiftly to support households and businesses at the peak of the crisis, but their work will need to continue in order to expedite economic recovery and limit the scarring. As we wrote in our recent report, monetary policy will remain highly accommodative for some time to come, with the policy rate staying at the rock-bottom level until early-2022. More will need to be done on the fiscal front, and policy makers are currently discussing at number of options, however none have yet been agreed upon.