U.S. Federal Reserve Beige Book

Ksenia Bushmeneva, Economist | 416-308-7392

Date Published: December 5, 2018

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Labor market is hot, housing market is not and manufacturing is OK  

  • Today's Beige Book showed the economy expanding at a modest to moderate pace from mid-October through late November in most Federal Reserve districts, unchanged from the previous release, although Dallas and Philadelphia districts reported slower growth relative to the prior period. St. Louis and Kansas City noted just slight growth.
  • Tariffs remained a point of concern for manufacturers, but they have not yet significantly dented activity, with most districts reporting moderate growth in the sector. This view was also collaborated by the recent ISM manufacturing report. 
  • Inflationary pressures remained contained, with prices rising at a modest to moderate pace, however reports of tariffs-induced price increases have broadened to industries beyond manufacturing, such as retail trade and restaurants. That being said, several districts also noted falling oil and fuel prices, which offered some reprieve for businesses and consumers alike. Businesses were passing some of the higher costs to consumers, however, input costs continued to rise faster than final goods prices, squeezing profit margins. 
  • As has been the case for a while now, labor markets remained tight across the country with labor shortages being felt  "across a broad range of occupations". Tight labor markets were restraining employment growth "to the slower side of a modest to moderate pace" while wage growth tended "to the higher side of a modest to moderate pace". 
  • While fireworks continued to fly in the labor market, activity in the housing market can best be described as lukewarm. New home construction and resale activity was holding steady or declining across Districts. Performance was somewhat better on non-residential side, with construction and leasing reported to be rising or holding steady.  

Key Implications

  • The latest Beige Book kept the characterizing of economic activity unchanged to the previous releases, but there were still some notable changes. Labor market pressures appear to have intensified relative to the previous release. This is the first time the Beige Book has characterized wage growth as coming in on "the higher side of a modest to moderate pace." Average hourly earnings data supports this notion, breaching 3% for the first time since the recession, and suggesting employers have to increasingly ramp up wages. 
  • Manufacturing activity appears to be holding up reasonably well despite the tariff concerns. The weekend deal between the U.S. and China to hold off on additional tariffs for at least 90 days may help to alleviate some worries and even boost business sentiment in the short-term. That being said, weaker foreign demand, a high U.S. dollar and the remaining trade uncertainty may continue to weigh on longer-term business investment decisions.