Fed Beige Book: Window on Main Street by LPL Financial
- The latest Beige Book reflects a picture of the U.S. economy that has, thus far, been largely unaffected by current geopolitical headlines.
- The latest Beige Book again described “modest to moderate economic growth” in the U.S. economy and employment expansion at a pace similar to that noted in the previous Beige Book (September 3, 2014).
- Optimism regarding the economic outlook far outweighed pessimism, as it has for the past 18 months or so.
- Over the past three Beige Books, the BBB has averaged +94, in-line with the highest readings over any three consecutive Beige Books since at least 2005, suggesting that global growth concerns have had little impact on the U.S. economy as of early October 2014.
Beige Book: Window on Main Street
No Signs of Global Growth Scare Impacting Main Street As Modest-to-Moderate Economic Growth Continues
The Beige Book is a qualitative assessment of the U.S. economy and each of the 12 Federal Reserve (Fed) districts. We believe the Beige Book is best interpreted quantitatively by measuring how the descriptors change over time. The latest edition of the Fed Beige Book, released last Wednesday, October 15, 2014, ahead of the October 28?–?29, 2014, Federal Open Market Committee (FOMC) meeting, was timely, given the increasing concerns in global financial markets about a slowdown in global growth. The qualitative inputs for the October 2015 Beige Book were collected through October 6, 2014, and thus captured at least three weeks or so of the elevated market concerns around global growth centered around Europe, the rise of the Islamic State in Iraq and Syria (ISIS), the social unrest in Hong Kong, and the concerns about the spread of Ebola to the United States.
In our view, the latest Beige Book reflected a picture of the U.S. economy that was largely unaffected by any of the concerns noted above, and again described “modest to moderate economic growth (in the U.S. economy) at a pace similar to that noted in the previous Beige Book” (September 3, 2014) and that “employment continued to expand at about the same pace as that reported in the previous Beige Book.” However, as it has over the past year or so, the October 15, 2014, Beige Book noted that “some employers had difficulty finding qualified workers for certain positions” and that some reported “upward wage pressures for particular industries and occupations, such as skilled labor in construction and manufacturing.” In the past, these characterizations of labor markets have been a precursor to more prevalent economy-wide wage increases. In general, optimism regarding the economic outlook far outweighed pessimism, as it has for the past 18 months or so. The “modest to moderate” description of the overall economy has now been used in the last 12 Beige Books and in 13 of the past 14 dating back to March 2013.
To provide a snapshot of the sentiment behind the entire Beige Book collage of data, we created our proprietary Beige Book Barometer (BBB) [Figure 1]. In October, the barometer ticked down to +82, down from a +97 reading in September and the +102 readings seen in both June and July. The +82 reading in October was well above the weather-impacted +62 reading in March earlier this year. Over the past three Beige Books, the BBB has averaged +94, in-line with the highest readings over any three consecutive Beige Books since at least 2005. In short, the October Beige Book did not confirm the financial markets’ fear that the global growth scare had reached U.S. shores as of early October 2014.
The rebound in our Beige Book Barometer over the past several months is consistent with the Fed’s view that the drop in economic activity in the first quarter of 2014?—?real gross domestic product (GDP) contracted at a 2.1% annualized rate for the quarter?—?was mostly weather related. The +94 reading on the BBB over the past three Beige Books is also consistent with the above-trend pace of GDP growth seen in the second quarter of 2014 and what is likely to be reported for the third quarter of 2014. (Third quarter GDP will be reported on October 30, 2014.) In addition, we found the word “weak” or its variants appeared just 16 times in the latest Beige Book and just 18 times, on average, in last 3 Beige Books (July, September, and October 2014), less than half of the long-term average of 50 mentions and the fewest since mid-2005. This suggests to us that the negative headwinds that have held the U.S. economy back over the past seven years may finally be abating, and as of early October 2014, the global growth concerns have had little impact on the U.S. economy.
Weather was a big driver of the weakness in the Beige Book in the winter of 2013?–?14, but the arrival of more “normal” weather this spring and summer held the weather mentions to just five in the latest Beige Book, the fewest mentions since the December 2013 Beige Book, which preceded the onset of the harsh winter of 2013?–?14. In the 4 Beige Books released over the winter of 2013?–?14, weather was mentioned, on average, 62 times in each. Over the last three Beige Books (July, September, and October 2014), weather was mentioned, on average, just seven times per report. This further reinforces our view that the 2.1% drop in real GDP in the first quarter of 2014 was almost entirely weather related.
We expect the improvement in the economic data to continue throughout the second half of 2014 and into 2015. We continue to expect the U.S. economy, as measured by real GDP, may grow at 3.0% in 2014?—?accelerating from the sub-2.0% growth rate of 2013?—?based on the drags from 2013 reversing (tax hikes, government spending cuts, European recession) and a modest improvement in business spending. The data released thus far for the second and third quarters of 2014 suggest the economy is likely expanding at a pace well above its long-term average, a snapback from the weather-induced weakness in the first quarter of 2014. The GDP report for the third quarter of 2014 is due out at the end of October 2014. Please see our Mid-Year Outlook 2014 publication for details about our forecast for the second half of 2014.
Uncertainty Fading, Healthcare Still a Concern, and Optimism Way Up, but Few Signs of a Global Growth Scare
The uncertainty and lack of confidence around fiscal policy (fiscal cliff, debt ceiling, sequester, government shutdown) that dominated the Beige Book for most of 2013 is now clearly fading, and despite the hand-wringing in the financial markets and in the media, these words were used just three times in the October 2014 edition of the Beige Book [Figure 3]. In the 7 Beige Books released so far in 2014 (including the October edition), the words noted above were mentioned a total of 67 times, or around 10 mentions per Beige Book. In contrast, these words were mentioned 65 times, on average, in each of the 8 Beige Books released in 2013. As we wrote in our Outlook 2014: