The latest edition of the Federal Reserve’s (Fed) Beige Book, released Wednesday, January 17, 2018, continued to deliver a positive view of the U.S. economy. The Beige Book is a qualitative assessment of the domestic economy and each of the 12 Fed districts individually. The report is prepared eight times a year ahead of each Federal Open Market Committee (FOMC) meeting – the next of which is set to take place from January 31 to February 1, 2018. We believe that the Beige Book is best interpreted by measuring how key words change over time. The qualitative inputs for the January 2018 Beige Book were collected in the weeks prior to January 8, 2018.
We created a proprietary Beige Book Barometer (BBB) to evaluate the sentiment behind the entire Beige Book collage of data. The BBB is a diffusion index measuring the number of times the word “strong” or its variants appear in the Beige Book less the number of times the word “weak” or its variants appear. When the BBB is declining, it suggests that the economy is deteriorating; when it is advancing, it suggests the economy is improving.
In January 2018, the barometer climbed from a November reading of +53 to +62, close to the +64 average for all of 2017. This movement brings the barometer back to the middle of the range it has held since 2012. The number of weak words declined, nearly hitting a low for the expansion, which drove most of the improvement. Meanwhile, strong words remain well off the peak hit in the middle of 2015. Historically, a solid base of strong words has been sufficient to indicate steady expansion as long as weak words are low, with a spike in strong words often indicating an acceleration off of a period of weakness.
The United States felt the devastating impact of Hurricane Harvey in late August and Hurricane Irma in early September, marking the first time two Category 4 or stronger magnitude hurricanes have made landfall within the country in the same year. The hurricanes remain an important story as regional recovery and rebuilding provides a small boost to the economy, but the attention given to the impact has slowly declined. The words “hurricane” or “weather” appeared in the Beige Book 65 times in October, 37 times in November, and 15 times in the most recent version. Meanwhile taxes, which usually go unmentioned, appeared 4 times in the November Beige Book and 23 times in the most recent edition as Main Street tries to gauge the impact of the new tax law.
Market participants continue to monitor inflation and wages closely since they gauge not just when, but how far and how fast the Fed might raise rates in the next year and beyond. Each Beige Book provides an economy-wide assessment of wages and prices. On wages, the January 2018 Beige Books observes:
Most Districts cited on-going labor market tightness and challenges finding qualified workers across skills and sectors, which in some instances, was described as constraining growth. Several Districts noted elevated demand for manufacturing and construction labor. Most Districts said that wages increased at a modest price.
On price pressures, it observes:
Most Districts reported modest to moderate price growth since the last report… Reports of pricing pressures were mixed across the country although several Districts noted increases in manufacturing, construction, or transportation input costs. Firms in some Districts noted an ability to increase selling prices. Retailers in some Districts reported modest price increases and there were reports of rising home prices across most of the country. Agriculture and energy commodity prices were mixed.
We monitor wage and price pressures with our Inflation Barometer, which is a simple count of the number of times wage/inflation words (“wage,” “skilled,” “shortage,” “widespread,” and “rising”) appear in the Beige Book. Consistent with the moderate price growth noted in the Beige Book’s overview, words related to inflation climbed modestly in January to +121. The count of wage/inflation words has held at this level following a brief spike to +136 in July. The current level remains meaningfully above the 2015-2016 average, signaling that we are seeing some wage pressure but that the impact on price levels remains modest.
The level of the January 2018 Beige Book Barometer has been historically associated with continued economic expansion. The count of weak words came in near expansion lows, while positive words held steady. The attention given to Hurricanes Harvey and Irma has declined, although the hurricanes remain momentous events for the impacted regions, while Main Street exhibited an overall positive response to the new tax law. We may need positive sentiment to rise if we are to see acceleration beyond the barometer’s current level, but the overall positive tone in the context of a low level of negative words reflects continued optimism on Main Street.
The views expressed are provided for information only and are not to be used or considered as an offer or solicitation to buy or sell securities or investment products. To determine which investment(s) may be appropriate for you consult your financial advisor.
- The economic forecast set forth in this presentation may not develop as predicted, and there can be no guarantee that strategies promoted will be successful.
- Data provided by LPL Financial.
- All investing involves risk including loss of principal.