Beige Book: “Coronavirus” Is The New “Tariffs”

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Beige Book: “Coronavirus” Is The New “Tariffs”

Out with “tariffs” and in with two new reasons for US business uncertainty: the coronavirus and US presidential election. That’s the upshot of the Federal Reserve’s latest Beige Book out today. Regular readers know we always review this report because it captures the qualitative factors that impact the US economy and informs each Fed president about their regional economies. That’s especially useful now as it will take some time for the coronavirus’ impact to show up in traditional economic datasets.

We’d also argue that for those who were surprised by the Fed’s 50 basis point rate cut yesterday, it’s likely no coincidence that the latest edition of the central bank’s Beige Book came out the very next day and he must have read the draft late last week. Fed Chair Jerome Powell is a vocal proponent of the report and we’ve seen it influence his views on both trade on monetary policy. Now, it’s caught his attention relative to the coronavirus.

For example, we’ve tracked the number of times the Beige Book has used the word “tariff/s” in each report for almost two years, as it has accurately reflected US business sentiment on the matter. The more trade uncertainty, the more mentions it would get in the Beige Book and rate cuts would follow. Conversely, it showed up much less after the US-China trade deal and the Fed stood pat on rates (until yesterday for a different issue). We’ll apply that same analysis to the two new potential risks of the coronavirus and US presidential election, while using the history of references to “tariff/s” for context:

#1: Let’s first start with references of “Coronavirus”:

  • There are 48 mentions of “coronavirus” in the Fed’s latest Beige Book compared to none in the prior report out in mid-January (which makes sense because the report captures the prior 6 weeks of economic activity and the coronavirus was not yet a known threat).

    There are also 9 mentions of “COVID-19”, the scientific name for the virus.
  • By comparison, “tariff/s” first showed up 36 times in April 2018’s report, and there were 8 mentions of “trade” related to policy.

    The peak for “tariff/s” references was 51 in October 2018; there were also 13 mentions of “trade” related to policy.
  • In the latest Beige Book, “tariff/s” only appears 11 times, the fewest mentions since it first showed up in April 2018 and down from 20 in January’s report. References to trade were relatively positive on the policy front given the US-China Phase One trade deal, but were followed up by concerns about the coronavirus in many districts particularly in the agriculture industry.

The upshot: rising US business optimism driven by better trade relations with China have now soured again because of concerns about the coronavirus. Here’s how the coronavirus is concerning businesses:

  • Overall: “There were indications that the coronavirus was negatively impacting travel and tourism in the U.S… Manufacturing activity expanded in most parts of the country; however, some supply chain delays were reported as a result of the coronavirus and several Districts said that producers feared further disruptions in the coming weeks.”
  • Prices: “Some firms, particularly manufacturers, were optimistic that the Phase One trade deal with China would reduce goods prices, but some still struggled with tariffs and were concerned about how the coronavirus might affect prices.”
  • New York: “One manufacturing contact noted problems with supply disruptions and shipment delays related to the coronavirus… A few contacts reported that the coronavirus has deterred visitors, though New York City hotels have continued to report good business.”
  • Chicago on agriculture: “Contacts expressed frustration that Chinese purchases of US agricultural goods had not yet materialized following the announcement of the Phase One trade deal and were concerned that the coronavirus outbreak would be used as an excuse for missing future trade targets.”
  • Dallas: “Overall retail outlooks weakened slightly, with some contacts voicing concern over the coronavirus and its impact on supply chains and overall demand… [Energy] contacts noted that the coronavirus has pushed oil prices down and is a big source of uncertainty.”
  • San Francisco: “Tourism was mixed, with some decline in airline travel associated with the COVID-19 outbreak.”
  • Cleveland on manufacturing: “Many contacts commented on general sluggishness in the global economy and voiced concern about the outlook given the spread of COVID-19 and the resulting effective shutdown of many commercial centers in China.”

These are just a few examples, but let’s…

#2: …Move on to mentions of “election”:

  • “Election” shows up 9 times in the latest Beige Book, up from 3 in mid-January. Nowhere near the levels of “coronavirus”, and perhaps a peak now that middle-of-the-road candidate Joe Biden appears to be in the lead for the Democratic nomination.
  • The election was mentioned as a potential risk factor in everything from manufacturing, retail, and transportation to the auto and nonfinancial services industries.

Bottom line: “Outlooks for the near-term were mostly for modest growth with the coronavirus and the upcoming presidential election cited as potential risks.” That neatly sums up the report: COVID-19 has clearly introduced new uncertainty across a slew of industries, as well as the presidential election as we get closer to voting on November 3rd. But we would add that this report only includes information collected up to February 24th, or before heightened concerns about the spread of the virus and elevated equity market volatility materialized.

Therefore, we can understand why Fed Chair Powell wanted to get out ahead of the fallout before the central bank’s next meeting on March 18th. The coronavirus as a risk factor to US businesses has only ramped up since the Beige Book’s reporting period. We don’t see this changing in the coming weeks given the uncertainty about both the timing of containing the spread of the virus and how much it will hurt global economic growth.