Today’s Beige Book indicated that economic activity across all twelve Federal Reserve Districts expanded at a moderate pace in late April and early May. The Dallas district was an exception, with economic activity and employment growth characterized as solid.
Manufacturing activity has picked up the pace. More than half of the Districts reported stronger industrial activity, with particular strength in fabricated metals, heavy industrial machinery, and electronic equipment. Increased production led to higher demand for shipping and transportation services. While the near-term outlook has remained upbeat, businesses expressed concern about uncertainty in trade policy with tariffs mentioned 22 times.
Somewhat unexpectedly, consumer spending was characterized as soft. Non-auto retail sales have moderated and auto sales were flat. This runs somewhat contrary to the last two retail sales report, which pointed to robust consumer spending on non-auto items.
Employment continued to rise, with modest to moderate gains reported across most districts. Labor market conditions remained tight, with firms reporting difficulty finding people across broad skill levels. Truck drivers, sales personnel, carpenters, electricians, painters, and IT professionals in particular were in short supply. Firms were responding to labor shortages by beefing up their wages and compensation packages, however, on aggregate wage increases remained modest in most districts.
Homebuilding and home sales continue to rise at a modest pace, in line with higher frequency indicators such as housing starts and existing home sales.
Prices rose at a moderate pace on aggregate, however reports of rising material costs were becoming more common. Price increases for steel, aluminum, oil derivatives, lumber, and cement were especially notable. Higher input costs have put pressure on prices in the transportation, construction and manufacturing sectors. It was also suggested that companies were passing along higher prices to consumers more successfully than in the past.
Key Implications
Many of the themes highlighted in this Beige Book, such as a tight labor market and rising input prices have been mentioned previously and thus have become old news by this point. Still, it is evident that these pressures have intensified over the last few months, with labor shortages spreading to more industries and firms more willing to pass higher input costs to consumers. This will continue to shift the inflation needle higher in the coming months.
Similar to the previous release, concerns about tariffs were once again front and central in today’s report. Unfortunately, rather than subsiding, trade tensions have only intensified since the last release. Tariffs on $50 billion of goods from China are back on the table, there’s also a risk of new tariffs on imported autos and parts, the deadline on steel and aluminum goods is about to kick in this coming Friday, and the NAFTA negotiations are still in a stalemate. Clearly, this is having an impact on raw material costs, the costs of lumber and steel have risen by 34% and 40% since the start of the year. At the end of the day American consumers will pick up the bill for tariffs, as companies are increasingly passing higher costs on to consumers.
If was encouraging to see a pickup in manufacturing activity and stronger demand for machinery and electronic equipment, which signals continued strength in business investment. While the domestic macroeconomic environment remains ripe for healthy business investment, trade policy uncertainty poses a risk to business confidence and can delay expansion plans.
