Pessimism has rapidly infiltrated Main Street’s outlook according to the Federal
Reserve’s (Fed) latest edition of the Beige Book. By our measure, sentiment in the
March 6 Beige Book, a qualitative assessment of the domestic economy and each of the
12 Fed districts, fell to its lowest point in seven years. On the surface, the Beige Book’s
negative tone is striking compared to recent versions, but context around
especially noteworthy in this edition.
Economic reports are important for clues on
Beige Book provides a window into Main Street’s perspective, offering valuable color on
how larger trends are affecting U.S. businesses. In the Beige Book, the Fed presents
qualitative observations made by community bankers and business owners about
economic (housing, labor market, manufacturing, nonresidential construction, prices,
tourism, wages) and banking (lending conditions, loan demand, loan quality) conditions.
The latest Beige Book, which is produced eight times a year, was compiled in the weeks
before February 25 and published March 6.
We maintain a straightforward but informative indicator called the Beige Book
Barometer (BBB), which helps us gauge Main Street’s sentiment by looking at how
frequently
the difference between the number of times the word “strong” or its variants appears in
each Beige Book, and the number of times the word “weak” or its variants
the BBB is declining, it suggests the economy may be deteriorating; when it’s advancing,
it suggests the economy is likely improving.
The BBB has fallen to 15 in March, the lowest level since October 2011 (the peak of the
European debt crisis). Strong words fell by 20, while weak words climbed by 21,
resulting in the biggest drop for the BBB since March 2016. In the January edition, we
noted that oil districts heavily contributed to a lower BBB reading, but that wasn’t the
case this time. Excluding the oil districts, the BBB dropped to 15 in March from 48 in
January. Sentiment declined in 10 of 14 Fed districts, with New York, Boston, and
Richmond posting the worst declines.
A broad-based decline in sentiment is of some concern. However, about half of the 34
references to weakness were concerns about
agriculture, manufacturing, and port activity. These concerns are legitimate and have
been reflected in economic and market data for a few months now amid the U.S. - China
trade dispute. Gauges of U.S. manufacturing health fell to multiyear lows in February.
The U.S. trade gap has widened notably, and agriculture prices have dropped about 20%
since the first tariffs were implemented a year ago.
clearly bleeding into Main Street’s operations, but we expect these impacts to subside once the United States and China reach an agreement. We’ve seen positive momentum
on the trade front recently and resolution may come soon.
The BBB reading was also unusually low because of the low number of strong words, not
because of the high number of weak words. Strong words have declined by 44 since the
BBB reached a 2.5-year high in July 2018, while weak words have increased by 22 over
the same period. Since 2005, the average BBB reading has been 55 when there have
been 30 to 40 mentions of weakness.
Main Street is also increasingly uncertain about the economic outlook. Total strong and
weak words have hovered around the lowest level since 2005, while mentions of
uncertainty
respondents are finding it more difficult to characterize current economic conditions and
set expectations, so they’re just increasingly citing uncertainty.
To us, this reflects the multiple headwinds weighing on U.S. businesses, including one
that has already been resolved: the most recent government shutdown. The survey period
captured the second half (and the aftermath) of a historic 35-day government shutdown,
which clearly dampened sentiment. The word “shutdown” appeared 22 times in the latest
Beige Book, compared to the two times it showed up in the previous Beige Book. About
half of the Fed districts cited the government shutdown for slowing economic activity,
and Richmond, which includes D.C. area businesses, had one of the biggest declines in
sentiment among Fed districts.
We’re in the middle of a complicated economic environment. U.S. businesses and
consumers are contending with conflicting trade and political headlines, and many recent
economic reports have missed consensus estimates, some by unusually wide margins.
Still, the bulk of economic data we’ve seen recently has been sound, business and
consumer sentiment have started to recover, and leading indicators we track still indicate
low odds of a recession. Because of this, we see lower Beige Book sentiment as a
product of lingering uncertainty more than definitive weakness. Based on recent signals,
we wouldn’t be surprised to see softer-than-expected growth during the first quarter.
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
• 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.
Economic & Market Commentary, March 2019
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March 25, 2019