The Federal Reserve’s Beige Book, released yesterday, is politely referred to as an anecdotal evidence document on the state of the U.S. economy.
In today’s context, that anecdotal evidence has perhaps a little more importance than normal with concerns about the pace of first-quarter U.S. economic activity as the data seem to be cursed with a "seasonable adjustment" phenomenon.
Anyway, the Beige Book seems, at least today, to be a better guide than usual to underlying economic momentum and economic growth as a whole.
The Beige Book reports that economic activity increased in all of the 12 Federal Reserve Districts between mid-February and the end of March, with the pace of expansion equally split between modest and moderate. Meanwhile, employment expanded across the nation and those increases ranged from modest to moderate during this period.
Labor markets remained tight, and employers in most Districts had more difficulty filling low-skilled positions while modest wage increases broadened, while the report also says that bigger increases for workers with skills that are in short supply and increased labor costs occur and restrain growth in some sectors like manufacturing, transportation and construction.
This is perhaps the most notable change of the last 12 months.
It was about a year ago that large numbers of lower-skilled workers started to get wage gains for the first time since the financial crisis.
That said, on balance we see that prices rose modestly since the previous report. Input prices generally increased at a modest rate.
Non-Financial Services generally continued to expand steadily while Manufacturing continued to expand at a modest-to-moderate pace.
However, the report also suggests that the real economic data is once again being plagued by first-quarter seasonable-adjustment problems.
It is also important to note that the Fed’s Beige Book report is certainly not as upbeat as the business and consumer confidence data (PMIs) would have us believe.
It's no secret that business and consumer confidence data is widely exaggerated.
Meanwhile, the reported tightening in the housing market, due to a lack of inventory, restricts overall home sales. And that factor may have a bearing on future inflation. Investors should keep an eye on this because housing is calculated in the consumer price inflation (CPI) measure in a peculiar way.
It’s a fact that a housing shortage pushes up market rents and that could have, in the context of the U.S., a disproportionate impact on reported consumer price inflation (CPI) without actually changing the real cost of living that most people face.
The recent drop in the oil prices is something that lowers the inflation rate that people actually pay, but housing is considered as roughly eight times as important as oil in the consumer price inflation basket if you just look at the direct weightings.
It could be helpful also to recall that the consumer price index (CPI) is not a complete cost-of-living-index. A cost-of-living index is a conceptual measurement goal that is not a straightforward alternative to the CPI. A cost-of-living index measures changes over time in the amount that consumers need to spend to reach a certain utility level or standard of living.
For all this, it is understandable that so many people get really confused by the CPI numbers because they think it is a cost-of-living-index, which it isn’t.
Fed Vice Chair Stanley Fischer also gave an interesting prepared speech about International Effects of Recent Policy Tightening, saying: “U.S. exports grew substantially against the backdrop of a brisk expansion in foreign activity and a stable or even slightly depreciating dollar … even if monetary policy divergence remains substantial, there is good reason to think that spillovers to foreign economies will be manageable.”
In simple words, it seems to become clearer by the day the Fed will further tighten its monetary policy in its own way by shrinking the Fed’s balance sheet and rising rates at their pace. That same prediction can't be said of the ECB, and that will lead to a continued divergence between U.S. and euro area interest rates.
In simple words, under today’s conditions, a relative strong dollar remains fully on the cards.
Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.
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