Thursday, June 3, 2021
The U.S. economy is opening up and overall sentiment on Main Street is the strongest it’s been since our earliest analysis in 2005, according to LPL Research’s proprietary Beige Book Barometer (BBB). The result is based on our analysis of the Federal Reserve’s Beige Book, a publication released two weeks before each Fed policy meeting that captures qualitative observations made by community bankers and business owners—what we like to think of as “Main Street” rather than “Wall Street.” The BBB gauges Main Street’s sentiment by looking at how frequently key words and phrases appear in the text.
In the most recent Beige Book, “strong” words were near their highest since we first began tracking data in 2005 while weak words were their lowest on record, resulting in the strongest overall sentiment reading since inception. The strong reading is likely driven more by a change in direction than in overall activity, but even that is a welcome shift.
“The country and the economy are going through a disruptive but positive change as most COVID-related restrictions are lifted and the economy reopens,” said LPL Financial Chief Market Strategist Ryan Detrick. “Sentiment is up and that’s a great sign for the direction of the economy.”
This was an important Beige Book in other ways. Mentions of COVID-related words (virus, COVID, pandemic) fell to their lowest level since the March 2020 Beige Book, when the words first started to appear. More concerning, words related to inflation also rose to their highest level since our earliest analysis. The downside of the economy’s rapid acceleration has been a mismatch between demand, which can ramp up quickly, and supply, which comes on line more slowly, while labor markets have also been slow to keep pace with reopening.
Overall, the fundamental backdrop for the economy remains positive. Supply chain disruptions can slow the pace of the economic rebound but are likely temporary, while we expect reopening to be enduring. There is still some risk around variants, however, and full supply chain relief will likely need support from accelerated global vaccine distribution. US economic acceleration will probably peak in the second quarter, but there’s still plenty of scope for growth to moderate and still remain above average. Much of the positive news is already priced in for equity markets, which are forward looking, and gains may not come as easily, but we still see solid potential for upside as the economy continues to rebound.
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