Today’s Beige Book showed 10 of 12 districts reporting moderate or modest growth over the late May to early July period. As was the case in the last report, Dallas remained an outlier, with strong growth driven in part by the energy sector. Now, however, activity in the St Louis district is described as slight.
New in the July Beige Book were concrete impacts from import tariffs, described as follows: “Manufacturers in all Districts expressed concern about tariffs and in many Districts reported higher prices and supply disruptions that they attributed to the new trade policies”.
Reports of higher input costs and shrinking margins were also featured. Trucking capacity was a specific issue in six districts and attributed it to a shortage of commercial drivers.
Price increases were characterized as modest to moderate on average, but upticks occurred in several districts. Key input prices rose further including fuel construction materials, freight, and metals. Tariffs contributed to the increases for metals and lumber. However, the extent of pass-through from input to consumer prices remained slight to moderate. Pricing pressures are expected to intensify further in some Districts, while in others the outlook is for stable price increases at a modest to moderate pace.
The assessment of wage increases was upgraded slightly from modest in the last Beige book, to “modest to moderate” in the July report, with a couple of districts cited a pickup in the pace of wages (likely Philadelphia and Minneapolis). Some districts cite that labor shortages are constraining growth.
Several Districts reported slow growth in existing home sales, but were not overly concerned about rising rates.
Key Implications
The assessment of overall economic activity in the July Beige Book remained broadly unchanged, but wage and price pressures appear to have increased. This suggests an economy at the mature stage of the economic cycle, with several pockets running up against capacity constraints. At the same time, concerns about import tariffs have become more widespread, and the impacts more concrete, with higher prices and supply disruptions reported.
Market reaction to this release will likely be limited, given markets had already heard from Fed Chair Powell in his two days of testimony before Congress. In an otherwise upbeat assessment of the U.S. economic outlook, he addressed the risks from protectionism, but noted that impacts are highly uncertain. Powell is also leaving the door open to the possibility that over time, the administration’s tough-love strategy on tariffs could result in more open trade with the U.S.’s partners and therefore benefit economic activity.
Overall, today’s report is consistent with continued rate hikes by the FOMC, with the next likely to come at the end of September. Rising trade protectionism is a clear downside risk that the Fed is no doubt watching closely, but for now, the risk is not strong enough to forestall further hikes.
