Yesterday, July 13, 2016, the Federal Reserve (Fed) released the latest edition of its Beige Book. The Beige Book compiles qualitative observations made by community bankers and business owners about economic (labor market, prices, wages, housing, nonresidential construction, tourism, manufacturing) and banking (loan demand, loan quality, lending conditions) conditions in each of the 12 Fed districts (Boston, New York, Philadelphia, Kansas City, etc.). This local color that makes up each Beige Book is compiled by 1 of the 12 regional Fed districts on a rotating basis—the report is much more “Main Street” than “Wall Street” focused. It provides an excellent window into economic activity around the nation using plain, everyday language.
The report is prepared eight times per year, ahead of each of the eight Federal Open Market Committee (FOMC) meetings. The next FOMC meeting is July 26–27, 2016. The data for this edition of the Beige Book was collected through July 1, 2016, so it only incorporates about a week of data after the United Kingdom’s (U.K.) unexpected vote to leave the European Union (EU) on June 23, 2016. There were 9 mentions of Brexit, the U.K., and the EU in this edition of the Beige Book—a significant number—and we’d expect more mentions in the Beige Books in the next few months.
The Beige Book Barometer is a diffusion index that measures 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 rising, it suggests that the economy is improving.
To evaluate the sentiment behind the entire Beige Book collage of data, we created our proprietary Beige Book Barometer (BBB) (see the figure below). In July 2016, the barometer ticked up to +61 after the +44 reading in June 2016. At +61, the July 2016 reading is now back in the middle of the range it has been in since early 2012. Most of the improvement versus June’s Beige Book came in the three Fed Districts in the nation’s oil patch (Minneapolis, Dallas, and Kansas City). Aided by rising oil prices—and despite the ongoing decline in oil production—our barometer for the oil-producing regions moved from -3 (the lowest reading since at least early 2014) to +21, putting sentiment in these districts back to a level not seen since prior to the peak in oil prices in June 2014.
Now that the Fed has initiated its first rate hike cycle since 2006, FOMC members and market participants, who are trying to gauge what the Fed may do next, will be watching inflation closely. Each Beige Book provides an economy-wide assessment of wages and prices. The July 2016 Beige Book noted that “wage pressures remained modest to moderate in most Districts, with the strongest pressures linked to skilled workers and difficult-to-fill positions” and “employment continued to grow modestly since the previous report.”
We monitor wage pressures via the data in the figure below, 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 July, these words appeared 109 times, above the 104 in April 2016 and the 2016 low of 100 in January. 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. So, after a brief drift back toward deflation worries in the January 2016 edition, the last four Beige Books show a pickup in the number of inflation words. For reference, during 2011–13, also a period when heightened risk of deflation was evident, inflation words appeared 80 times per Beige Book, on average.
For more of our thoughts on the U.S. economy and markets as we look ahead to the rest of 2016 and beyond, please see our recently released Midyear Outlook 2016: A Vote of Confidence.