The Fed Says the Economy's Still Expanding
The Federal Reserve publishes a "soft" data report on the state of the United States economy 8 times a year based on anecdotal evidence known as the "Beige Book." In its most recent March 6th update, the Fed concluded "Economic activity continued to expand in late January and February."
As an influential work of soft data- that is, not based on hard numbers such as payroll or employment data- we wanted to take a closer look at some of the narrative within the report. It is, after all, a narrative commentary. This month's report gave some insights into the "trade war" and general trend of higher inflation worth looking at.
Quick Glance at the Numbers
What is the Fed Beige Book?
Traders and investors alike follow hard data reports primarily. When a company provides its earnings reports, Wall St. is tuned in. When employment data comes out, it usually moves the market. This is all categorized as “quantitative” information- any data that can be measured in numbers.
There are a number of influential soft data reports, however, which provide a qualitative description of business conditions that Wall St. also pays attention to. The Fed Beige Book is one such report. In real terms, the Beige Book is a summary of interviews conducted by the Federal Reserve branches with key business and industrial contacts, market commentators, economists, and academics.
The “book” itself is broken into two major components: a National summary of data and the Regional reports that compose the core of the fact finding underlying the broader report. Depending on what kind of investor one is, the regional reports can provide the kinds of narrative insights on business conditions in specific areas that might otherwise be hard to come by (unless you happen to have a massive inter-industry contact list).
National Summary: The Big Picture
The main take-away from the Fed’s March Beige Book report is that the economy is continuing to expand. 10 out of the 12 surveyed regions reported slight to moderate growth. This is about what everyone expected.
Notably, 2 regions reported flat economic conditions: Philadelphia and St. Louis. St. Louis is important because it is a major regional center of finance for the Midwest. According to the St. Louis branch, “District bankers reported a slight decrease in loan volumes in the first quarter.” Given that interest rates have been steadily on the rise, this is not shocking. It may signal a regional halt in the credit expansion phase of the credit cycle we’ve been in for many years.
The Government Shutdown
One interesting thing about this most recent Beige Book is that it covered the fall-out from the Government shut-down. Unsurprisingly, the Fed found evidence that the Government shutdown did have negative economic impacts.
The sectors of the economy most impacted by the shutdown according to the Fed were:
- Retail
- Real Estate
- Tourism
- Manufacturing
- Staffing Services
San Francisco and Richmond were the two regional Federal Reserve branches reporting the most details on the impacts of the shutdown. Tourism in the Mountain West was impacted by uncertainty around the closure of national parks. Restaurants and Real Estate in Virginia and South Carolina were also negatively impacted.
TRADE WAR COLLATERAL
Manufacturing
The only region to call the Trade War by name was the Philadelphia Fed, who noted:
Factors cited for the slowdown included weak global demand and uncertainty because of trade wars and the government shutdown. Nevertheless, employment continued to grow at a modest pace, although the labor market remained tight and upward wage pressures remained moderate
Philadelphia is noteworthy because it covers Pennsylvania’s manufacturing region. It was one of two regions reporting weak growth this month.
On the other hand, most regions reported good news for manufacturing. In Kansas City, manufacturing grew at a faster pace. In Richmond, demand for manufacturing grew as well as port activity (noteworthy for import-export). Minneapolis and Dallas also had good news from manufacturers. Overall, the regions reporting strong results from manufacturing are also regions whose economies heavily rely upon it, which is very encouraging.
The conclusion we’re drawing from the Fed is that though some anticipated growth in manufacturing has been tamped down by tariffs and uncertainty from purchasing managers, manufacturing has indeed grown in recent months through the tariff war. Given that this was one of the stated policy objectives of the tariffs in the first place, this would seem to indicate that so far, the policy is meeting its goals- albeit less rapidly than some had hoped for.
Prices
The reason investors should care about the prices reporting here is that it means inflation. Inflation has been low for an extended period, but since the Trump administration took office, it has increased. This is not at all a bad thing (yet), as economists spent nearly 10 years fretting about low inflation.
This most recent report has some interesting things to say about pricing, especially as it pertains to the Trade War and manufacturing:
Looking ahead six months, the percentage of manufacturing firms that expect to pay higher prices for inputs fell to 40 percent from 60 percent. Those firms expecting to receive higher prices for their own goods fell to 30 percent from near 50 percent.
In short, a solid majority of producers expected inflation in the prices it pays for the goods and labor needed to produce. That fell to less than a majority this month. Couple with expectations of higher prices received, which also fell about 20% this time, this could indicate a slowing in the growth of the inflation rate in the near future.
Conclusion
In our opinion, anecdotal and soft data such as the Fed Beige Book should prompt only a measured reaction. Drawing sharp conclusions from such reports can be difficult and possibly unwise. With that said, this report adds contour and complexity to our understanding of how the current administration’s policies are affecting the economy: this time, we had evidence of negative impacts from the Government Shutdown yet mixed or positive results in prices and manufacturing. That seems to reflect other reports we’ve seen in recent months. Our overall impression is that once again, we are continuing to see economic growth, but observers are extremely cautious in their optimism.
Thanks for joining us in our discussion of the Federal Reserve’s Beige Book. We frequently look at these, as well as other soft data reports. We’ll be posting more Oregon and Pacific Northwest related news and analysis next up as well. As always, your comments, questions, and concerns are welcome.
All data and information used from publicly available information from the Federal Reserve Board of Governors.
Meet the Author & Portfolio Manager
Victor Schramm is a Certified Fund Specialist (CFS®), with expertise in Mutual Funds & Variable Annuity Separate Accounts. He focuses on long term investing geared toward our annuity clients as a Fee Only Investment Advisor. He lives in Portland, OR.
Victor Schramm, CFS®Analyst & Portfolio Manager
Disclaimer:
This information is solely a representation of publicly available facts intended for educational use only. This is not a solicitation to buy or sell any public or private Security, in any city named in the article or elsewhere. The Federal Reserve’s Beige Book (or any other soft data report) is not a market timing tool for buying or selling any security, and should not be used as the sole criterion of investment selections.