Today’s Beige Book showed that economic activity increased at a slight-to-moderate pace in ten out of twelve Federal Reserve Districts from late-January through February. This was a slight upgrade from eight districts reporting growth in the previous report. Economic activity was reported be flat in Philadelphia and St. Louis.
Manufacturing activity strengthened relative to the previous report, but manufacturing firms remained concerned about weakening global demand, higher input costs due to tariffs, and trade policy uncertainty. Service-sector activity expanded at a modest to moderate pace in most districts – an upgrade relative to previous assessment in which it was reported to be slowing.
Inflationary pressures remained contained, with prices rising at a modest to moderate pace. A few firms have mentioned that the price of steel, impacted by tariffs, has stabilized or fallen recently. Energy costs have also declined. Still, firms continued to cite pressure on profit margins, as input prices were rising faster than selling prices, and firms’ ability to pass higher costs to consumers varied greatly by region and industry.
The tight labor market for all skill levels remained a pressure point for businesses, and was said to be restricting employment growth in some areas. It was also pressuring university enrollment rates in some Districts, as potential students were increasingly choosing to work rather than to study. Wages continued to increase across most Districts and skill levels.
Activity in the housing market remained subdued. Residential construction was steady or slightly higher, while home sales were lower. Inventory of houses on the market was reported to have increased, but was still at low levels, while home price growth continued to moderate.
The government shutdown was reported to have slowed activity in a number of industries in about half of the Districts. In addition to the partial government shutdown, harsh winter weather and higher costs of credit were said to have weighed on consumer spending at the start of the year.
Key Implications
Economic data flow has been disappointing at the start of the year, but this Beige Book shows signs of modest improvement relatively to the past report. Still, we are expecting economic growth to downshift to near 1% (annualized) due in part to the government shutdown and trade policy uncertainty noted in this report. Economic activity should rebound above 2% in Q2 as the impact from temporary headwinds fades, but annual growth is unlikely to match a high water mark seen in 2018.
The tight labor market continues to draw people from the sidelines and encourages more high-school graduates to opt for a job rather than a university degree. Still, the U.S. labor market appears to be reaching a boiling point with payroll gains likely to slow in coming months. Some firms are already reporting that an inability to find workers is weighing on hiring.
