Fed's Beige Book Confirms Economy Is Slowing

Ever since April, the otherwise drab and colorless Fed Beige Book, was notable for one specific trend: a rising frequency of the word "tariff" with every subsequent report, confirming that in addition to the usual concerns businesses voiced to the regional Fed such as labor and prices, one of the growing worries amid local companies was the impact of trade war on future business. And, as we noted last month, with the Trump-Xi summit fast approaching, the Beige Book confirmed that with no less than 51 mentions of the word "tariff", most companies were on edge over future trade prospects.

  • March Beige Book instances of word "tariff": 0
  • April Beige Book instances of word "tariff": 36
  • May Beige Book instances of word "tariff": 22
  • July Beige Book instances of word "tariff": 31
  • September Beige Book instances of word "tariff": 41
  • October Beige Book instances of word "tariff": 51

Today, the December Beige Book was released, and in a notable development, we saw the first decline in mentions of "tariffs" since May, with the word used "only" 39 times, a steep drop from October's 51.

And while superficially this may be taken as a good sign, another, perhaps more ominous trend has emerged.

But first, a quick glimpse at what else today's Beige Book revealed: a casual glance of the summary page revealed few surprises. Indeed, according to the Federal Reserve, most regions reported growth at an overall modest to moderate pace, and while the overall near-term growth outlook remained positive, some contacts cited tariffs, rising interest rates, and labor market constraints as reasons for waning optimism. Employment growth slowed, partly because of labor shortages from increasingly tight labor markets. A majority of Districts noted capacity constraints due to difficulty in attracting and retaining workers.

In further good news for workers and wage growth, the Beige Book noted that "wage growth tended to the higher side of modest to moderate", even as employment gains ebbed "due in part to worker shortages" while most districts had examples of boosts in nonwage benefits." Overall, this is a welcome development for American workers, if not so much for markets, which are on edge ahead of Friday's report on average hourly earnings, which - if this report is any indication - may print above the 3.1% Y/Y consensus and spark more concerns that the Fed will have no choice but to remain hawkish.

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