- Today’s Beige Book showed that economic activity increased at a modest pace across Federal Reserve Districts in July and early August, unchanged from the previous reporting period.
- Delving into the details, manufacturing activity pulled back since the previous report, and transportation activity softened, with respondents attributing this to slowing global demand and elevated trade tensions.
- Consumer spending was mixed across Districts, however auto sales increased and tourism activity remained solid in most Districts.
- The labor market remained tight, with shortages of workers across skill levels, unchanged relative to the previous reporting period. Overall payrolls continued to increase at modest clip, but some Districts noted flat and shrinking manufacturing payrolls. Compensation growth was unchanged, with strong upward pressure on pay for entry-level and low-skilled workers, as well as for IT and construction workers, and those employed in high-skilled professional occupations.
- The assessment of activity in the residential sector was unimpressive. Homebuilding was reported as “flat” and lack of inventory was said to be restraining home sales. This assessment matches the actual data: both home sales and homebuilding have been recovering since the start of the year, but gains have been muted, leaving activity nearly flat relative to year-ago levels.
- Inflationary pressures have picked up modestly since the last report, with retailers and manufacturers in some Districts reporting slight increases in input costs. Local reports on the impact of tariffs on prices were mixed, with some Districts anticipating that it could take several months for the impact to be felt.
- Trade uncertainty remained top of the mind for survey respondents: “tariffs” were mentioned 29 times (vs. 33 times previously) in the report, and “uncertainty” was mentioned 33 times (vs. 21 times previously). However, despite substantial concern among respondents about the trade-related risks,”the majority of businesses remained optimistic about the near-term outlook”.
Key Implications
- Similar the previous report, trade uncertainty remained an overarching theme in the latest Beige Book. While, the bulk of domestic economy remains on the “modest” growth path, sectors exposed to trade, such as manufacturing and transportation are looking increasingly under pressure.
- With no end in sight to the trade dispute, it’s not surprising that manufacturing activity continued to cool. This was also corroborated earlier this week by the ISM manufacturing index, which fell into contractionary territory for the first time since August 2016.
- All in all, the American economy remains on two tracks: resilient consumers, but waning business confidence, marked by falling business investment and slowing manufacturing activity. From the Fed’s standpoint, such unevenness amid rising and broadening tariffs, gives ample cause for further precautionary easing. As such, we expect the Fed to make another insurance cut in September.
