Beige Book: Through the Valley, Huge Mountain Ahead

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Beige Book: Through the Valley, Huge Mountain Ahead

If you think the recent rally in US equities might encourage the Federal Reserve to slow or even start to unwind its accomodative policies, just read the central bank’s Beige Book out today. Chair Powell has been a vocal proponent of this report since taking on the role of Fed Chair and we’ve seen it influence his views on monetary policy many times. The latest edition hits at the core of Powell’s main concern: widespread unemployment due to the economic fallout and business shutdowns from the COVID Crisis.

Remember when the Fed announced an unexpected emergency rate cut of 50 basis points back in early March? It was likely no coincidence the Beige Book, released just one day later, showed a spike in mentions of the virus. No doubt its continued presence in the latest report out today still concerns Chair Powell. Here is our usual word count analysis, which vividly shows this point:

  • There were 54 mentions of “COVID-19”, “coronavirus” and “virus” in the latest report compared to 93 in April’s edition and 59 in March’s report.
  • There were 16 references to “layoff/s” versus 27 in the prior report.
  • “Furlough/s/ed” also showed up 18 times, the same number as the April report.
  • There were 16 mentions of “rent”, up from 8 in the last report. Most were related to deferred or missed payments.

Bottom line: there was a nominal improvement in today’s Beige Book, with fewer references of the virus and layoffs, likely reflecting the reality that the worst has passed but it is equally clear that many large challenges remain. For example, there is lingering financial stress as reflected in the rise in mentions about rent collection. By way of historical comparison, remember when trade wars were the market’s biggest issue? The peak in the number of “tariff/s” was 51 in October 2018, fewer than mentions of the virus in the latest report. Even with US-China tensions heating up, “tariff/s” showed up zero times in today’s report.

As for US economic conditions overall and the Fed’s dual mandate – stable prices and maximum employment – here are our key takeaways from the report:

  • “Economic activity declined in all Districts – falling sharply in most – reflecting disruptions associated with the COVID-19 pandemic.” Consumer spending continued to fall given that most retail establishments were closed during most of the survey period, particularly in leisure and hospitality and travel and tourism. Many districts reported an improvement in auto sales, but they were still “substantially lower than a year ago”.

    Other areas of weakness included “sharp drops in manufacturing activity”, a “plunge” in residential home sales and a decline in construction activity. Commercial real estate contacts also “mentioned that a large number of retail tenants had deferred or missed rent payments”, while energy activity “plummeted as firms announced oil well closures, which led to historically low levels of active drilling rigs.” Lastly, “agricultural conditions worsened, with several districts reporting reduced production capacity at meat-processing plants due to closures and social distancing measures.”

    Looking ahead, the Fed’s contacts remain “highly uncertain” and most “were pessimistic about the potential pace of recovery”. Of course, “bankers reported strong demand for PPP loans.”
  • “Employment continued to decrease in all Districts, including steep losses in most Districts.” The retail and leisure and hospitality sectors were hit hardest, but the Fed did note PPP loans helped “many businesses to limit or avoid layoffs”. The challenges of getting employees to come back to work include: “workers’ health concerns, limited access to childcare, and generous unemployment insurance benefits”. Some firms even gave temporary wage increases to “compete with unemployment insurance”.
  • “Pricing pressures varied but were steady to down modestly on balance.”

The upshot: even as the US economy continues to reopen, substantial economic hardship and business uncertainty remains. The extra $600/week unemployment insurance stimulus ends on July 31st, so that should help employers persuade workers to get back on payroll. Many people who work in the service sector will struggle finding news jobs amid business closures, however, and we’ll start to see the spillover effects into other industries. That inflation remains low will enable Fed Chair Powell to continue implementing accommodative policies, and today’s Beige Book shows these will be needed for some time.