John Lynch Chief Investment Strategist, LPL Financial
Beige Book Suggests Continued Moderate Economic Growth
The Federal Reserve (Fed) was in the news last week, as markets digested the March 20–21 Federal Open Market Committee (FOMC) meeting statement. The outcomes of the meeting were broadly in line with market expectations, with the Fed hiking interest rates by 0.25%, and upgrading its economic forecasts as the impact of tax reform was included for the first time. The law had not yet passed when the Fed released its previous forecasts on December 13, 2017. The Fed’s forecast of the future path of interest rates (commonly known as dot plots) showed an expectation of three rate hikes in 2018 (in line with LPL Research’s view), and another three to four in 2019, which was higher than the Fed’s previous expectation of two. But the latest FOMC meeting statement wasn’t the only noteworthy release; the Fed also published its latest Beige Book on March 7, which continued to deliver a positive view of the U.S. economy.
At LPL Research, we created our proprietary Beige Book Barometer (BBB) to evaluate the sentiment behind the Beige Book collage of data. The BBB measures 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’s advancing, it suggests that the economy is improving.
The barometer continued its steady climb in March 2018, moving from a January reading of +62 to +68—in line with our view of continued steady growth for the U.S. economy. The number of weak words increased by just 1 (from 16 in January to 17 in March), remaining near expansion lows. However, an increase in strong words was able to push the overall barometer higher. 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 acceleration off a period of weakness.
Weather, Tax Reform, and Trade
Weather continued to be a popular topic in the March Beige Book, but the focus shifted from 2017’s hurricanes to colder than normal weather in early 2018. The areas hardest hit by the hurricanes continued to mention the impacts of the storms including a weaker orange crop in Florida and tightness in the construction labor market related to rebuilding. Colder than usual weather was a leading theme though, and was mentioned as a headwind for retail, construction, and leisure industries in some regions.
Taxes maintained their relevance as well, appearing 20 times in the most recent edition, as Main Street continues to gauge the impact of the new tax law. In addition, even though most of the data was collected before the recent tariff announcements, the potential for trade disruptions was mentioned. Several districts brought up steel specifically, with the Cleveland Fed indicating, “Steel producers reported raising selling prices because of a decline in market share for foreign steel and expectations about potential outcomes of pending trade cases.”