The Federal Reserve’s Beige Book out today goes a long way of explaining Chair Powell’s change of plans for the FOMC to discuss an accelerated timeframe for its bond purchase tapering at its upcoming December 14-15 meeting. He’s been a vocal proponent of the report since heading the Fed and we’ve seen it influence his views on monetary policy before. There’s good reason for that given the Beige Book’s predictive findings. For example, the September edition noted a “downshift” in US economic activity over the Summer, capturing the sharp slowdown in Q3 economic growth.
Here is an update on hot button issues we measure by tallying how many mentions they receive in each Beige Book edition to gauge if they are improving or worsening:
Virus-related terms: 16 mentions of the virus in this month’s report, down from 30 and 25 in October and September respectively. That’s the lowest count since 9 in July.
Vaccine: 17 references of “vaccine/vaccination/vaccinated”, up from 10 and 3 in October and September respectively. Today’s mention count was even higher than 13 in June.
Rising/elevated prices or price pressures/inflation/price hike: 18 citations here versus 15-20 in each edition from April to October versus just 12 at the start of this year.
Supply disruptions/supply chain disruptions: 25 mentions versus 26 in October, 29 in September and 15-17 in March through July.
Labor shortage/s: 26 references versus 25-26 in September/October, 22 in July, 12 in June, and just 3 in April/March.
Three points on this data:
- There were fewer virus-related terms as the outlook for the Delta variant improved, but this will likely worsen as the new variant takes hold. There was an increase in vaccine-related terms mostly in reference to concerns about the vaccine mandate’s impact on an already tight labor supply.
- Inflation-related terms have remained elevated throughout 2H 2021. The same goes for references to supply chain disruptions, especially since September. These issues are persistent, if not worsening, rather than going away anytime soon.
- Labor shortages are not easing, another challenge that the new variant will likely complicate further. The top reasons: ongoing virus worries, childcare, retirements, and a lack of urgency to work amid fiscal stimulus and pandemic savings.
Now, let’s move on to our key takeaways from the Fed’s regional contacts’ “on-the-ground” color:
#1: US economic activity remained unchanged from the last report, growing at a “modest to moderate pace” in most Fed districts in October and early November. Labor shortages and supply chain disruptions continue to hold back the US economy. For example:
- Several districts said both issues “constrained” growth despite “strong demand”.
- Consumer spending “increased modestly”, but sales were limited by low inventories, especially for light vehicles.
- Construction activity rose, but was “held back by scarce materials and labor”.
- Manufacturing growth was “solid”, but “materials and labor shortages limited expansion”.
- “High freight volumes continued to strain distribution systems”.
One note of caution: most districts said there was a rise in leisure and hospitality activity as the Delta variant subsided in many areas, but that could change quickly. This reporting period does not capture the new variant. So, while most districts still reported a positive outlook, some remain concerned about uncertainty over when labor shortages and supply disruptions will improve.
#2: Employment growth was characterized as “modest to strong”, but employers continued struggling to hire and retain workers. Leisure and hospitality as well as manufacturing contacts said they still had to cap operating hours due to not enough workers, while other sectors blamed labor shortages on not meeting demand. As a result, almost all districts described wage growth as robust. Businesses are also trying to incentivize workers through bonuses and more flexible work arrangements.
#3: Prices increased at a “moderate to robust pace” and price hikes were “widespread across sectors of the economy”. Input costs climbed from “strong demand for raw materials, logistical challenges, and labor market tightness”. Businesses were mostly able to pass on prices to consumers “with little pushback” as long as contracts allowed it.
Bottom line: Chair Powell clearly sees that inflation continues to build and more supply chain disruptions from the new virus variant will likely put further upward pressure on prices. In turn, these challenges, along with labor shortages, will continue to constrain economic growth. That’s why the Fed suddenly wants to consider speeding up tapering its bond buying, so the FOMC can more quickly get to raising near-term rates to dampen demand and therefore inflation. This will be a tough needle to thread next year as the FOMC tries to not hurt the US/global economic recovery. At the same time, consumers seem fine so far with paying higher prices, a positive for corporate pricing power and therefore earnings.