Today’s Beige Book showed the economy expanding at a moderate pace through the end of August throughout most Federal Reserve districts. Dallas remained an outlier, reporting brisk growth, meanwhile performance was below average in Philadelphia, St. Louis, and Kansas districts.
Businesses, particularly manufacturers, continued to express concern about trade tensions, with some reportedly scaling back or postponing capital investment. As for manufacturing activity itself, it expanded at moderate rate across the country, with only Richmond district reporting a decline.
Tariffs were also contributing to rising input costs, particularly for construction materials and freight transportation. Overall input costs continued to rise faster than selling prices with businesses passing only a fraction of cost increases to customers. As a result, inflation remained in check with prices of final goods and services reported to be rising at modest to moderate pace, with even some signs of deceleration.
To little surprise, labor markets remained tight across the country with shortages of both high- and low-skilled workers. A dearth of workers is constraining employment growth in some districts. While overall wage growth remained modest to moderate, a number of districts reported steep hikes for construction workers. Companies were also ramping up benefits and increasing training to attract and retain employees.
On the housing front, activity was somewhat mixed, with new construction rising modestly across most districts, while home sales were reported to be softer on balance.
Key Implications
The latest Beige Book provided similar commentary to the last several editions. Activity continues to expand at a robust pace in most districts. And while tariff worriers appear to be restraining investment activity and putting upward pressure on prices in some spots, the impact to date appears to be a small dent rather than a major speed pump. (Still, it’s important to keep in mind that enacted tariffs are only the tip of the iceberg. If all tariffs under consideration were enacted, growth could be knocked back by a full percentage point a few quarters down the road).
Tight labor markets are apparent everywhere you look, so businesses’ complaints about labor shortages in this Beige Book are nothing new. With the number of job openings surpassing the number of unemployed, it not surprising that businesses are struggling to fill positions. While for now companies are finding new ways to lure new applicants, such as through increased benefits and perks, we expect that labor shortage will continue to boost wages in the months ahead.
Overall, today’s report is consistent with continued rate hikes by the FOMC, with the next likely to come at the end of this month. Rising trade uncertainty is a clear downside risk that the Fed is watching closely, but for now, the risk is not strong enough to forestall further hikes.
