The latest Beige Book (released today, April 13) suggests that the U.S. economy is still growing near its long-term trend, and that the drag on U.S. manufacturing and exports from a stronger U.S. dollar and weaker energy prices may be fading a bit.
The spillover from the weakness in manufacturing to other parts of the economy was evident in the first two Beige Books of 2016, and has nearly disappeared in this edition. In addition, our analysis of the Beige Book confirms that some of the pessimism in the oil-producing regions of the country has ebbed somewhat in the past six to eight weeks, as oil prices have rebounded by nearly 60%. Finally—and perhaps most importantly as it relates to potential Federal Reserve (Fed) rate hikes later this year—the comments in the Beige Book also continue to indicate that some upward pressure on wages is beginning to emerge and the use of inflation words remained elevated.
To evaluate the sentiment behind the entire Beige Book collage of data, we created our proprietary Beige Book Barometer (BBB) [Figure 1]. In April 2016, the barometer ticked up to +73 from the +39 reading in March 2016. The March 2016 reading was the lowest reading since November 2012 (+30), which came in the aftermath of Superstorm Sandy’s impact on the East Coast.
Despite the bounce in April, at +73, the BBB remains well below its mid-2015 peak (+106 in July 2015), which followed a 40% bounce in oil prices from March to June 2015. The July reading was the highest since April 2013, and the second highest reading in over 10 years. The downshift in the BBB from +106 in July 2015 to +39 in March 2016 traces, but doesn’t exactly match, the 50% drop in oil prices from June 2015 to early 2016. Oil’s nearly 60% rise off its early 2016 lows occurred over the collection period for the data in this Beige Book, so it’s no surprise to see improvement in the overall BBB.
We monitor wage and pressures in the Beige Book via the count of wage/inflation words. We counted the number of times the words “wage,” “skilled,” “shortage,” “widespread,” and “rising” appeared in recent editions of the Beige Book. In April, these words appeared 104 times, down from the 113 in March 2016, and close to the 109 average seen in all the 2015 Beige Books. The average reading in the number of inflation words in 2015 and early 2016 (105-110) stands in sharp contrast to 2011–2013, a period when heightened risk of deflation was evident. During that period, inflation words appeared, on average, 80 times per Beige Book.
What Is the Beige Book?
The Beige Book is a qualitative assessment of the U.S. economy and each of the 12 Fed districts individually. We believe the Beige Book is best interpreted by measuring how the descriptors change over time. The latest edition of the Fed’s Beige Book was released earlier today, April 13, ahead of the April 26-27 Federal Open Market Committee (FOMC) meeting. The qualitative inputs for the April 2016 Beige Book were collected from late February 2016 through April 7, 2016.
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