Beige Book: September 2015

The latest Beige Book characterizes the economy as expanding moderately or modestly and notes that labor markets are tightening. Energy-related cutbacks and slowing factory output were oft cited soft spots.

The Further You Get From China, The Better Things Look 

The Fed’s Beige Book continues to characterize the economy as expanding at a “moderate” or “modest” pace, although quite a few districts noted cutbacks in energy-related activity and others noted that the stronger dollar was restraining manufacturing. Agriculture and mining were other notable soft spots. Manufacturing activity was characterized as mostly positive in the country as a whole but mixed in the Cleveland, St. Louis, Minneapolis and Dallas districts. New York and Kansas City both characterized manufacturing activity as declining. 

The weakness in energy production, mining, agriculture and manufacturing is reminiscent of the 1980s, when the U.S. economy was widely seen as enduring a series of rolling recessions in parts of the country, but continued to grow solidly on an overall basis. We see a similar outcome today. There is clearly more carnage ahead for the energy sector, as production has not yet been rationalized to the new price environment. The agriculture and mining sectors also face more difficulty, while manufacturing activity is decelerating, as evidenced by yesterday’s weaker Institute for Supply Management report. On the plus side, motor vehicle sales are booming and home sales, new home construction and commercial development are gaining momentum. The Fed’s interest rate decision rarely hangs on the tenor of the Beige Book. The latest report is a bit hawkish, with considerable focus on districts’ tightening labor markets and strengthening wage pressures. Commonly used modifiers include “intensifying”, “increasing” and “robust”. We counted 26 such references. Slightly more references, 28 by our count, said that wages were “stable”, “rising modestly”, or were “flat” since the July report. 

While the Beige Book does not make a stronger case for a September lift-off, it does not rule one out. Rolling recessions did not prevent the Fed from raising interest rates in the late 1980s, although rate hikes did take a brief hiatus immediately following the 1987 stock market crash. The current environment is also somewhat similar to the late 1990s, another period when the Federal Reserve raised interest rates. 

We have been one of the dwindling forecasters that have held onto our belief that the Fed will boost rates in September and continue to believe that. Such a move, however, would likely be accompanied by a lowering of the dots, which represent the forecast for the federal funds rate by each Federal Reserve Bank president and Federal Reserve Board Governor. Such lowering would make it clear that the September hike is a one-and-done kind of move. This would strike a rare balance, providing both a sense of relief that lift-off has finally been achieved and also reduce forward guidance, which would help ward off a repeat of the taper tantrum.