U.S. Federal Reserve Beige Book

Ksenia Bushmeneva, Economist | 416-308-7392

Date Published: January 16, 2019

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Beige Book points to economic activity slowing at the end of 2018

  • Today's Beige Book showed that economic activity increased at a modest to moderate pace in eight out of twelve Federal Reserve Districts from mid-November through December. Relative to the previous survey period, the pace of expansion was downgraded in New York, Richmond, St. Louis and Dallas.
  • Manufacturing activity continued to expand across most Districts but at a slower pace, especially in the auto and energy sectors. Moderating activity in manufacturing was also corroborated by the ISM manufacturing report earlier this month, which showed that activity expanded at a materially slower pace in December. A few districts noted that service sector activity has also slowed.  
  • Inflationary pressures remained contained, with prices rising at a modest to moderate pace. Firms have indicated that overall input costs have risen, particularly for materials and freight, but that fuel costs have come down. Tariffs were mentioned as one of the factors behind rising input costs. Firms were mixed on their ability to pass higher costs to consumers. 
  • The tight labor market remained a pressure point for businesses. Businesses were reported to be struggling finding workers "at any skill level". Some firms were turning down business because they could not find workers, while others maintained overstaffed payrolls out of concern that they may not be able to find workers in the future. Tight labor market conditions was putting pressure on wages, with compensation increasing across skill levels, but several Districts highlighted rising wages for entry-level workers.
  • While sparks continued to fly in the labor market, activity in the housing market remained tepid with both construction and home sales little changed. This report caps a disappointing year for the housing market, with existing home sales declining for the first time since 2014.
  • Business sentiment has deteriorated. Firms have become less optimistic with financial market volatility, rising short-term interest rates, falling energy prices, and elevated trade and political uncertainty among key factors weighing on the outlook.

Key Implications

  • Today's report is a reminder of what a difference one month can make. The December Beige Book reads decidedly more somber than the previous release, making it quite clear that economic activity slowed at the end of last year amid rising input costs and capacity constraints. Both manufacturing and service sectors were expanding at a more moderate pace, and low oil prices were taking a toll on the energy sector, denting capex intentions. Heightened trade and political uncertainty along with financial market volatility also took a toll on business confidence.
  • Although the government shutdown was mentioned only twice in this report, it will certainly feature more prominently in the next one. The cost of the impasse rises with each passing day, and does not help to shore up business and consumer confidence.  
  • The U.S. labor market appears to be reaching a boiling point with payroll gains likely to slow in coming months. Firms are struggling to find workers at any level of skill or experience, and are increasing raising wages for entry-level employees in hopes to pull people back into labor force. On a year-over-year basis wages were up 3.2% in December, marking the third straight month of above 3% growth.