The outbreak of COVID-19 caused considerable deterioration in the economy and left many wondering when we might expect conditions to improve. As historic stimulus measures were implemented to backstop the economy from outright collapse, many also wondered if this would be enough to restore sentiment to a level where economic activity would follow. We are now seeing the first stages of improving sentiment based on the results of the most recent Federal Reserve (Fed) Beige Book.
In the Beige Book, the Fed presents qualitative observations made by community bankers and business owners—or “Main Street”—about economic (housing, labor market, manufacturing, nonresidential construction, prices, tourism, wages) and banking conditions (lending conditions, loan demand, loan quality). At LPL Research, we maintain an indicator called the Beige Book Barometer (BBB) to gauge Main Street’s sentiment by looking at how frequently key words and phrases appear in the text.
As the LPL Chart of the Day shows, the Beige Book Barometer has flipped into positive territory for the first time since the beginning of the recession, suggesting sentiment is firmly on the rise.
Strong words rose by 34, the second most increase since we began tracking the data in 2005, while weak words declined by 13. The notable rise in strong words mainly referenced the improvement in manufacturing activity and the residential real estate market, which continues the theme shown by recent new home sales and housing starts data. Broader economic activity grew at a modest pace along with a pick up in consumer spending—though still below pre-pandemic levels.
However, while the general outlook was mostly optimistic, survey results pointed toward continued uncertainty in the path of the pandemic, and its effect on consumer and business activity was echoed across the country. We continue to see caution in the labor market, which despite further improvement, may point toward an uneven recovery should economic demand falter. As weekly jobless claims data has ebbed and flowed, this Friday’s nonfarm payrolls report should be key to determining the health of the labor market. Stay tuned to the LPL Research blog for updates.
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