All eyes will be on Fed Chair Powell today as he speaks at a Wall Street Journal virtual event ahead of the March 16-17th policy meeting. The central bank’s latest Beige Book out today offers a window into the business conditions that the Fed’s contacts have faced since the start of the year, so it will likely inform his commentary. Chair Powell remains a vocal proponent of the report and we’ve already seen it influence his views on monetary policy.
Therefore, we’ll do our usual review of the latest edition, first giving an update on two hot button issues we measure by tracking how many mentions they receive:
Virus-related terms: There were only 46 references to the virus in this month’s report, down from 58 mentions in January and the second lowest since they first showed up last March. The high was 93 last April and the low was 41 this past October.
There were also 43 mentions of “pandemic” versus 50 in January. The high was 61 last September and the low was 28 last May.
Vaccine: There were 19 references to “vaccine” in the latest report, almost double from 10 in January and 5 in December.
Takeaway: a notable drop in mentions of the virus coupled with a pickup in references to the vaccine captures the report’s overall hopeful tone for the back half of this year. More specifically, “most businesses remain optimistic regarding the next 6-12 months as vaccines become more widely distributed.” As for the most recent environment, here are our 3 main takeaways:
#1: Economic Growth: Most districts “expanded modestly from January to mid-February”. Restrictions continued to constrain the leisure and hospitality sector, but a “few districts reported slight improvements in travel and tourism activity”. Hospitality contacts in Boston even said they “were optimistic for the first time since the pandemic began” with the expectation that more vaccine distribution and warmer weather will “release pent-up demand in the spring and summer.”
Most districts also reported a moderate increase in manufacturing activity despite “supply chain disruptions”, while transportation activity “grew modestly for many districts”. Additionally, “districts reporting on energy observed a slight uptick in activity related to oil and gas production and energy consumption.”
As for real estate, “historically low mortgage interest rates continued to spur robust demand for both new and existing homes in most Districts, and home prices continued to rise in many areas of the U.S.” There was just one district – Dallas – to list “an unexpected rise in mortgage rates” as a concern, but this may grow in the next report as the latest edition only extends through mid-February before the rate scare. The “industrial segment continued to strengthen”, but commercial real estate remained weak, especially for hotels, offices and retail.
Lastly, consumer spending and auto sales were mixed, although stimulus checks were credited with helping the former in a few districts. As we continue to warn, however, markets understand these incremental stimulus checks do not create sustainable demand. For example, in Kansas City: “Sales rose moderately in retail, restaurant, and health services sectors in January as additional stimulus payments were distributed, but then declined in February.”
#2: Employment: Most districts reported gains in employment, but said it was slow which makes sense given the weaker than expected private payrolls figures out today. Employers still struggled to find qualified workers, with labor supply shortages particularly for “low-skill occupations and skilled trade positions”. Virus concerns, childcare and unemployment benefits continued to add to the labor supply issue. Childcare responsibilities have especially kept women out of the labor force, as noted by the Philadelphia and Richmond districts.
Consequently, “several Districts reported modest wage increases for high-demand positions with many also noting upward pressure on wages to attract and retain employees.” Going forward, many districts expect wage increases to “persist or to pick up somewhat over the next several months”.
#3: Inflation: “nonlabor input costs rose moderately over the reporting period, with steel and lumber prices increasing notably.” That compares to just “modest price increases” in the last report. This was largely due to “supply chain disruptions” and “strong overall demand”.
Rising fuel costs and capacity constraints also caused transportation costs to climb. As for pricing power, retailers and manufacturers gave mixed reports on their ability to pass on higher input costs.
Looking ahead, “several districts reported anticipating modest price increases over the next several months.”
Bottom line: businesses continue to look forward to the back half of this year as more Americans get inoculated, but the pace of hiring is tepid and price pressures are building. Therein lies the tension of Chair Powell balancing his dual mandate of trying to maximize employment, while still managing inflation and the long end of the curve. The former requires further accommodation in the form of low near-term rates, while the latter is why markets anticipate a potential change in the Fed’s quantitative easing program such as another “Operation Twist”. All the more reason to watch Chair Powell’s speech starting at 12:05pm EST.