• Today’s Beige Book showed that economic activity increased at a modest pace across the twelve Federal Reserve Districts from April to mid-May, a slight improvement over the previous period. Almost all Districts reported some growth and a few saw moderate improvement in activity.
  • Reports on manufacturing activity were generally positive, but some Districts noted signs of slowing activity (Boston, Cleveland and Richmond) and a more uncertain outlook due to trade tariffs. Notably, “tariffs” were mentioned 37 times in the report –  up from 19 in the previous issue, and “uncertainty” was mentioned 19 times – up from 12.
  • Its characterization of the labor market remained unchanged relative to prior issues of Beige Book. Businesses continued to report significant labor shortages, which was keeping a lid on employment growth in some Districts and industries.
  • Both inflation and wage pressures remained relatively subdued. In terms of prices, some Districts cited an easing in prices of steel, metal and lumber, but noted higher freight prices. Prices of agricultural commodities remained low relative to historical levels. Retailers were reportedly keeping their prices flat or increasing slightly. Despite tight labor markets, the majority of Districts reported modest-to-moderate wage growth, but employers continued to ramp up non-wage benefits in order to attract and retain employees.
  • Activity in the residential construction and real estate was said to be expanding, but there were large variations in sentiment across Districts. Reports on consumer spending were positive but tempered, while auto sales were said to be lower.

Key Implications

  • Similarly to the previous report, this Beige Book continued to paint the picture of modest economic activity in the second quarter of the year. One notable change was a significant increase in the number of times tariffs were mentioned. Both the current tariffs and the lingering trade uncertainly were clearly top of the mind for businesses. Several contacts mentioned that they have been developing contingency plans to reduce capital spending and payrolls to offset tariffs. Others have mentioned that they expected much more of an impact on consumers from the recent 25% tariff on some Chinese imports relative to the initial 10% increase, which was largely “absorbed along the supply chain”.
  • Trade tensions are also front and center on the Fed’s risk radar. Earlier this week, Fed Chairman Jerome Powell reaffirmed that the Fed was closely monitoring the impact of trade developments on the U.S. economy, and was ready to “act as appropriate to sustain the expansion.”
  • Overall, we expect economic growth to moderate in Q2, and today’s edition of the Beige Book appears to be consistent with this view. As the temporary factors that boosted headline growth in Q1 reverse course this quarter, growth is likely to slow below 2%.


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