BEIGE BOOK SUGGESTS CONTINUED MODEST ECONOMIC GROWTH
The latest edition of the Federal Reserve’s Beige Book, released Wednesday, April 19, 2017, continued to deliver a positive view of the U.S. economy. The Beige Book is a qualitative assessment of the U.S. economy and each of the 12 Fed districts individually. The report is prepared eight times per year, ahead of each of the eight Federal Open Market Committee (FOMC) meetings. We believe the Beige Book is best interpreted by measuring how the key words change over time. The qualitative inputs for the April 2017 Beige Book were collected in early March 2017 through April 10, 2017.
We created our proprietary Beige Book Barometer (BBB) [Figure 1], 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 variations appear in the Beige Book less the number of times the word “weak“ or its variations appear. When the Beige Book Barometer is declining, it suggests that the economy is deteriorating. When the Beige Book Barometer is advancing, it suggests that the economy is improving.
In April 2017, the barometer moved down to +77, after a +53 reading in March 2017, and a +63 reading in January 2017. At +77, April’s Beige Book Barometer reading was the strongest since January 2016. Improvement in the April 2017 Beige Book versus March 2017 was broad based, with similar improvement in the three Fed districts in the nation’s oil patch (Minneapolis, Dallas, and Kansas City) compared with other districts.
Our Oil States Barometer (the barometer for the three Fed districts that include the top oil-producing states) moved from +9 in March 2017 to +14 in April 2017, the largest positive change since July of 2016 and only the second time in the last 10 Beige Books, dating back to March 2016, the reading has been above +10. Not to be outdone, the +63 reading on the barometer excluding the oil states is the highest value in a year.
WATCHING WAGES & INFLATION
As noted in our Outlook 2017: Gauging Market Milestones publication, our view is that the Fed will raise rates one to two more times in 2017. Expectations for a rate hike at the May meeting are low, given we are just one meeting out from the March 2017 hike, which was already the second in approximately three months.
Still, market participants continue to monitor inflation and wages closely, as they gauge not just when, but how far and how fast, the Fed may raise rates this year and beyond. Each Beige Book provides an economy-wide assessment of wages and prices. On wages, the April 2017 Beige Book observed, “Modest wage increases broadened, and reports noted bigger increases for workers with skills that are in short supply.” In discussing price pressures, the April 2017 Beige Book highlighted: “On balance, prices rose modestly since the previous report. Input prices generally increased at a modest rate and outpaced gains in selling prices, which rose only slightly…Businesses mostly expected mild to moderate price growth to persist in the next several months.”
We monitor wage pressures via the data in Figure 2, which show the recent trend in the number of wage/inflation words in the Beige Book. We counted the number of times the words “wage,” “skilled,” “shortage,” “widespread,” and “rising” appeared in recent editions of the Beige Book. In April 2017, these words appeared 119 times, higher than any Beige Book since December 2015, but still similar to the average of 116 mentions in the prior four Beige Books.
By comparison, in the first half of 2016, these wage/inflation words appeared, on average, just 108 times per Beige Book. These words appeared, on average, 109 times per Beige Book in 2015. In all of 2014—when deflation, not inflation, was a concern—those words appeared an average of just 98 times per Beige Book. The increase in the number of inflation words signals that some pick-up in wage pressure has started to become a modest but manageable concern.