- Also Finds ‘Leveling Off’ of Wages and ‘Moderating’ Price Hikes Some Places
By Steven K. Beckner
(MaceNews) – The economy was showing more signs of slowing through the third week of May, according to the Federal Reserve’s latest survey of economic conditions around the nation, released Wednesday.
And while labor markets remained tight, employment grew more moderately, and wage pressures “leveled off” in some regions.
Furthermore, the so-called “beige book,” whose survey of business and banking contacts in the 12 Fed districts was summarized by the Federal Reserve Bank of Philadelphia, found evidence of “moderating” price hikes in some places as consumers “pushed back.”
But the Fed report’s anecdotal gleanings on inflation were uneven. In half of the Fed districts, firms reported they still had “pricing power” – that is the ability to pass on higher costs in the prices they charge for goods and services.
The beige book, based on information gathered by the Federal Reserve Banks through May 23, was prepared for review at the June 15-16 meeting of the Fed’s rate-setting Federal Open Market Committee.
After leaving the zero lower bound with a 25 basis point rate hike at its March 15-16 meeting, the FOMC picked up the pace of monetary tightening by raising the federal funds rate by 50 basis points to a 75 to 100 basis point target range on May 4. It also announced balance sheet shrinkage would commence in June.
After the meeting, Chairman Jerome Powell said further 50 basis point moves would be “on the table” at the June 14-15 and July 26-27 FOMC meetings. More recently, he said rate hikes may need to become more aggressive if inflation doesn’t show “clear and convincing evidence” of moderation by the time of the Sept. 20-21. He allowed for a slower pace of tightening if such evidence does appear. Other Fed policymakers have supported that approach.
In making the case for continued, fairly aggressive monetary tightening since the May meeting, Powell has called the economy “very strong” and the labor market “extremely tight.” But the beige book survey findings are not entirely consistent with his pronouncements.
There are notable changes in the language used to describe economic and labor market conditions in the latest report.
The beige book released on April 20 declared that “economic activity expanded at a moderate pace since mid-February.”
By contrast, the latest beige book says “all twelve Federal Reserve Districts have reported continued economic growth” but adds that “a majority” indicated “slight or modest growth,” while four Districts “indicated moderate growth.”
“Modest” growth is usually thought of as being slower than “moderate” growth.
“Four Districts explicitly noted that the pace of growth had slowed since the prior period,” the new beige book adds.
Powell has repeatedly pointed to strong consumer spending as undergirding continued expansion, but the June beige book says “retail contacts noted some softening as consumers faced higher prices, and residential real estate contacts observed weakness as buyers faced high prices and rising interest rates.”
In addition to “labor market difficulties” and “supply chain disruptions,” the new report says “rising interest rates, general inflation, the Russian invasion of Ukraine and disruptions from COVID-19 cases (especially in the Northeast) round out the key concerns impacting household and business plans.”
“Eight Districts reported that expectations of future growth among their contacts had diminished,” it goes on. “Contacts in three Districts specifically expressed concerns about a recession.”
In describing labor market conditions, the latest beige book says “most Districts reported that employment rose modestly or moderately in a labor market that all Districts described as tight.”
“One District explicitly reported that the pace of job growth had slowed, but some firms in most of the coastal Districts noted hiring freezes or other signs that market tightness had begun to ease,” the report continues. “However, worker shortages continued to force many firms to operate below capacity.”
The latest beige book says “firms reported strong wage growth” “in a majority of Districts,” but says “most others reported moderate growth,” and “in a few Districts, firms noted that wage rate increases were leveling off or edging down.”
“Moreover, while firms throughout the country generally anticipate wages to rise further over the next year, one District indicated that its firms’ expected rate of wage growth has fallen for two consecutive quarters,” it adds.
The previous beige book described labor market conditions and in turn wage pressures as being generally stronger around the country. It said employment was growing “moderately,” not “modestly,” and said “demand for workers continued to be strong across most Districts and industry sectors. But hiring was held back by the overall lack of available workers.”
Far from finding signs of wage pressures “leveling off,” the April beige book said “persistent labor demand continued to fuel strong wage growth, particularly for footloose workers willing to change jobs.” And it added, “Firms reported that inflationary pressures were also contributing to higher wages, and that higher wages were doing little to alleviate widespread job vacancies.”
The April beige book did say “some contacts reported early signs that the strong pace of wage growth had begun to slow,” but the latest beige book seems to have found more such signs.
On the price inflation front, the April survey found that “inflationary pressures remained strong since the last report, with firms continuing to pass swiftly rising input costs through to customers.” And it said “firms in most Districts expected inflationary pressures to continue over the coming months.”
The latest beige book seems to take a softer tone with regard to price behavior.
“Most Districts noted that their contacts had reported strong or robust price increases – especially for input prices,” it said, but disclosed that “three Districts observed that price increases for their own goods or services had moderated somewhat.”
The June report says “about half of the Districts observed that many contacts maintained pricing power – passing costs on to clients and consumers, often with fuel surcharges.”
“However, more than half of the Districts cited some customer pushback, such as smaller volume purchases or substitution of less expensive brands,” the latest beige book goes on. “Surveys in two Districts pegged year-ahead increases of their selling prices as ranging from 4 to 5 percent; moreover, one District noted that its firms’ price expectations have edged down for two consecutive quarters.”
The Fed carefully watches both anecdotal and statistical data on inflation.
There have been some hopeful signs on the latter. For instance, after rising by 6.6% year over year in March, the price index for personal consumption expenditures (PCE), the Fed’s preferred inflation gauge, rose 6.3% in April. The core PCE has flattened and started decelerating on a year-over-year basis. That index rose 0.3% for the third straight month in April, and was up 4.9% from a year ago, down from 5.3% in February. The core CPI also dipped.
However, Fed policymakers have indicated they need to see more signs of moderation. Powell and others have said they will consider a slower pace of rate hikes in September, if there is “clear and convincing evidence” that inflation is heading down to the Fed’s 2% target, but have also said they may have to act more aggressively if inflation does not come down.
The Fed is also hoping for signs of less tightness in labor markets and, in turn, less upward pressure on wages. Earlier Wednesday, the Institute for Supply Management reported that the employment component of its manufacturing index dipped from 50.9 to 49.6 – a contractionary reading on hiring in the manufacturing sector.
The ISM survey also showed some apparent cooling of inflation pressures, as its prices index dipped from 84.6 to a still high 82.2.
Contact this reporter: steve@macenews.com
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