50 Shades of Beige
The Federal Reserve's Beige Book, published yesterday, offers a sobering assessment of the US economy, suggesting that the recent 50 basis point interest rate cut may not be enough to avert a downturn. The report, a collection of anecdotal evidence from the Fed's 12 districts, reveals a marked slowdown in activity, with only three districts reporting growth and three actually contracting. This paints a starkly different picture from the robust growth seen earlier this year, and better than expected employment data recently, raising concerns about the resilience of the US economy in the face of persistent inflationary pressures and global headwinds.
The manufacturing sector, a key driver of economic growth, appears particularly vulnerable. The Beige Book highlights declining output across several districts, with businesses citing weakened demand and supply chain disruptions as key factors. This weakness in manufacturing is mirrored by a softening in consumer spending, with evidence of consumers "trading down" to cheaper alternatives. Such behaviour is often a harbinger of broader economic malaise, as consumer spending constitutes a significant proportion of US GDP.
While the recent rate cut has injected some optimism, the Beige Book suggests that businesses remain hesitant to invest, despite the lower cost of borrowing. This reluctance reflects a deep-seated uncertainty about the economic outlook, which is further compounded by volatility in energy prices and uncertainty surrounding the upcoming Presidential elections. The housing market also presents a mixed picture, with high mortgage rates continuing to deter buyers despite increased inventory.
One of the few bright spots in the report is the labour market, with most districts reporting stable to modestly increasing employment. However, even here there are signs of softening demand, with some businesses implementing hiring freezes and others reporting an increase in the number of applicants for open positions. Wage growth remains moderate, although there are pockets of upward pressure, particularly for skilled workers.
The Beige Book's regional breakdown reveals a mixed picture, with some districts showing greater resilience than others. The Boston and New York districts, for example, reported little change in overall economic activity, while the Philadelphia and Minneapolis districts experienced slight declines. The Richmond district was a notable exception, reporting modest growth driven by increased consumer spending and manufacturing activity. However, this positive development was tempered by the impact of Hurricane Helene, which caused significant disruption to businesses and residents in parts of the district.
The report presents a worrying picture. Although the Fed's shift towards rate cuts improves the outlook, the risk of recession persists, particularly with interest rates still above neutral. As the Fed has already embarked on a rate cutting cycle, we think a recession should be avoided, but it is not yet a certainty.
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