Two month ago, we summarized the July Beige Book by saying that shortly after the March inflationary panic, the one thing, perhaps the only thing, that was fascinating companies was the continuing threat of trade wars. In fact, we said that the "quick and dirty summary" for the May Beige Book, when economic activity continued to expand "at a modest to moderate pace across the 12 Federal Reserve Districts", would, in a word literally, be "tariffs" and here's why:
Fast forward to today when fears of trade wars have unmoderated (no pun intended) and there were no less than 41 instances of the word "tariff" in the just released, September Beige Book.
Despite the ongoing tariff fears, the U.S. economy is expanding at a "moderate pace" with tight labor market conditions and rising input costs partly due to trade disruptions. Furthermore, consumer spending continued to grow at a modest pace since the last report while businesses generally remained optimistic about the near-term outlook, though most districts noted concern and uncertainty about trade tensions. A number of districts noted that such concerns had prompted some businesses to scale back or postpone capital investment.
That said, the Beige Book - which was based on anecdotal information collected by the 12 regional Fed banks through Aug. 31 - noted, although the biggest risk to the economy was clear:
"Tariffs were reported to be contributing to rising input costs, mainly for manufacturers,” the Fed report said.
The Beige Book also said that labor markets were "characterized as tight throughout the country," and, despite trade tensions, "businesses generally remained optimistic about the near-term outlook."
While construction workers, truck drivers, engineers, and other high-skill workers remained in short supply, a number of districts also noted shortages of lower-skill workers at restaurants, retailers, and other types of firms.
Inflation remained brisk, as all districts noted fairly widespread input price pressures, particularly for construction materials and freight transportation. Tariffs were reported to be contributing to rising input costs, mainly for manufacturers.
Meanwhile, despite the now legendary labor shortage, wage growth was mostly characterized as modest or moderate, though a number of districts cited steep wage hikes for construction workers. One wonders how long it will take employers to realize that they can easily overcome said shortages by simply hiking wages.
Fed districts also weighed in with detail on how trade disputes are impacting businesses:
"Nearly two-thirds of the firms that offered general comments noted that price hikes and/or supply disruptions had already occurred or were anticipated because of tariffs,” the Philadelphia Fed said in its section of the report. “Some typical responses were that tariffs ‘have put us out of business' on certain products and are a ‘cloud on every facet of our business planning."
Despite the prevailing optimism, most districts reported concerns and uncertainty about trade tensions. “A number of districts noted that such concerns had prompted some businesses to scale back or postpone capital investment,” according to the report.
It was not clear if tariffs were also preventing companies from buying back their stock in record amounts...
Below, courtesy of Bloomberg, are selected anecdotes from the latest Beige Book:
Needless to say, as long as employers continue to complain about lack of skilled workers instead of materially hiking wages, the status quo in which the Fed will remain confused by the "mysterious" lack of inflation, will continue.