John Lynch Chief Investment Strategist, LPL Financial
BEIGE BOOK SUGGESTS CONTINUED MODERATE ECONOMIC GROWTH
The latest edition of the Federal Reserve’s (Fed) Beige Book, released Wednesday, April 18, 2018, sustained 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 per year, ahead of each Federal Open Market Committee (FOMC) meeting—the next of which is set to take place May 1–2, 2018. We believe the Beige Book is best interpreted by measuring how key words change over time. The qualitative inputs for the April 2018 Beige Book were collected in the weeks prior to April 9, 2018.
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 fell to +55 in April, down from its March reading of +68, but still within its recent range. A reading at this level remains in line with our expectation of continued steady growth for the U.S. economy. The number of weak words increased by just 1 (from 17 in March to 18 in April), remaining near expansion lows. A decrease in strong words was the major driver behind this month’s weaker reading. 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 after a period of weakness.
TRADE CONCERNS RISING
Taxes, a popular topic in recent months, had fewer mentions in April. The word “tax,” which was mentioned 20 times last month, was cited just 6 times in the latest release. However, the word “trade” was mentioned 14 times, versus 11 in March. The word “tariff,” which wasn’t stated at all in the March Beige Book, was referred to 39 times in the latest release—a sign that the topic is on the minds of Main Street. Trade concerns were just starting to ramp up during the collection period for the March beige book (which ended February 26), but most of the headlines about new proposed tariffs happened in March, as did the implementation of steel and aluminum tariffs. (The April Beige Book was the first to capture Main Street’s view on tariffs.) Several districts also pointed out increased steel and aluminum prices, though much of the commentary on tariffs was related to concerns and uncertainty, rather than actual impact. The St. Louis District noted that “some steel and aluminum manufacturers announced plans to reopen facilities and call back workers.”
WATCHING WAGES & INFLATION
Market participants continue to monitor inflation and wages closely, as they gauge not just when, but how far and how fast the Fed might raise rates 160 140 120 100 80 60 40 20 0 ‘05 ‘07 ‘09 ‘11 ‘14 ‘15 ‘17 Strong Words Weak Words Source: LPL Research, Federal Reserve 04/23/18 2 A DECLINE IN STRONG WORDS PUSHED BAROMETER SLIGHTLY LOWER IN APRIL WEC 03 Member FINRA/SIPC in 2018 and beyond. Each Beige Book provides an economy-wide assessment of wages and prices.