Beige Book Observations

At 2 p.m. ET today, the Federal Reserve (Fed) released the latest edition of the Beige Book.

The Beige Book compiles qualitative observations made by community bankers and business owners about economic and banking conditions in each of the 12 Fed districts. The report is much more “Main Street” than “Wall Street” focused, and provides an excellent window into economic activity around the nation using plain, everyday language.

LPL’s John Canally noted that: “We agree with the market’s assessment that the odds of a Fed rate hike at the November meeting are low—in part because the November meeting (November 1-2, 2016) comes less than a week before the U.S. Presidential election (November 8, 2016)—but today’s Beige Book keeps the Fed on track to hike rates at its final meeting of 2016 on December 13-1 4, 2016.”

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 November 1-2, 2016. The data for this edition of the Beige Book was collected through October 7, 2016, which includes the first presidential debate on September 19, 2006 and the vice-presidential debate on October 4, 2016, and of course the nonstop media coverage of the campaign. There were 10 mentions of the upcoming presidential election and/or politics in the October Beige Book, almost all in a negative context, versus eight in the September Beige Book. We expect the election to continue to be a part of the Beige Book set to be released in late November ahead of the mid-December FOMC meeting, as respondents react to the election outcome.

Sentiment Snapshot

To evaluate the sentiment behind the entire Beige Book collage of data, we created our proprietary Beige Book Barometer (BBB) (see the figure below), which 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.
10-19-16_blog_fig1_1-3
In October 2016, the barometer ticked down to +41 after the +55 reading in September and the +61 reading in July 2016. At +44, the September 2016 reading is now back at the low end of the range it has been in since early 2012. All of the deterioration in the current Beige Book versus September’s came outside of the three Fed Districts in the nation’s oil patch (Minneapolis, Dallas, and Kansas City), where sentiment got a much needed boost from a pickup in oil production in the past few months. Our Oil States Barometer moved from +7 in September to +9 in October 2016, in line with the +8 reading seen, on average, in the 12 Beige Books ending in June 2016, which coincided with the worst of the declines in oil prices and production. The +9 reading on our Oil States Barometer in October was even more disappointing given that the +21 reading in July 2016 put sentiment in these districts back to a level not seen since prior to the peak in oil prices in June 2014. Sentiment outside the oil patch dipped from +48 in September to just +32 in October, the lowest reading in more than two years.

The “inflation words” in the Beige Book (wage/skilled/shortage/widespread/rising) totaled 117 in October, up from 108 on average per Beige Book in the first half of 2016, 98 in 2015, and 80 in 2011-2014. In short, while the uptick in inflation words in the latest Beige Book is not an indicator of runaway inflation, it does provide the Fed cover to act soon to lift rates off the near-zero levels they have been at since 2008.10-19-16_blog_fig2_1-3

Please see our Weekly Economic Commentary (September 12, 2016) for more insights into the Beige Book.

IMPORTANT DISCLOSURES

Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

This research material has been prepared by LPL Financial LLC.

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