Released eight times per year, the Federal Reserve’s Beige Book summarizes the general economy as reported in 12 regions across the United States. Each publication of the Beige Book comes two Wednesdays before the upcoming Federal Open Market Committee meeting. Members of the FOMC use the Beige Book as one of the sources of economic data when they establish interest rate policies.
Investors look at the information in the Beige Book for indicators of the health of the U.S. economy and possible implications for interest rate policies. Based on these views of the economy, investors can formulate policy expectations for the upcoming FOMC meeting.
For the latest reporting period ending in mid-April, the Beige Book suggests average economic activity in the U.S. is expanding at a moderate pace. Strengths in economic activity were reported in most of the 12 districts in manufacturing. Weakness was reported in several districts in defense-related sectors, due to concerns about government cutbacks in this area.
Strengths in employment demand were reported in the professional services, manufacturing, residential construction and information technology sectors. Although selected business sectors reported labor shortages in areas such as engineering and information technology, overall wage pressure remained relatively subdued.
Where commodities and other production inputs are reported to be increasing somewhat in price, companies appear to be absorbing much of the price increases of these inputs, rather than raising prices to the end customers. The inability of companies to pass input price increases along to customers is causing some pressure on corporate profitability.
Consumer spending appears to have been somewhat moderated as a result of higher gas prices at the pump and the expiration of the payroll tax cut. Automobile sales remained a bright spot, as consumers across most of the 12 districts expressed confidence in the economy through their car purchases.
Improvement was reported in most districts in residential real estate activity. Both apartment and single-family home activity were reported positive in most areas of the U.S. In some areas of strength in the residential real estate market, tight inventories of available for sale properties were reported.
Given the somewhat positive economic activity reported by the most recent Beige Book, the ongoing containment of wage pressures and limited input price increases, one possible conclusion from this report might be the FOMC is less likely to change the current interest rate strategy as a result of these data points. The FOMC’s dual mandate is to grow U.S. employment with stable prices. This latest Beige Book report would seem to indicate the current interest rate policies are facilitating these two goals.
Kirby Brown is the CEO of Beneficial Financial Group in Salt Lake City.