Inflation: Fed’s Beige Book shows resilient companies — with cracks emerging

·3 min read

The job market continued to remain solid in October, according to the Federal Reserve’s Beige Book, alongside elevated prices for materials used to make products across a number of industries.

The Beige Book, an anecdotal compilation of evidence on the economy across the Federal Reserve’s 12 bank districts, detailed how some businesses are touting solid pricing power over the past six weeks — while others said passing on costs was becoming more difficult as customers pushed back.

In Boston’s district, most contacts expected to hold prices firm moving forward based on having made significant price hikes earlier in 2022 while a few said that their prices still lagged relative to their costs and planned to make at least modest increases in the coming months. In Richmond’s district, prices rose strongly in recent weeks, but at a slightly slower pace compared to recent months.

The job market, which feeds into how much consumers can afford to swallow higher prices, saw signs of cooling, but remains strong overall. Several districts reported a cooling in demand for workers, with some noting that businesses were hesitant to add to payrolls amid increased concerns of an economic downturn. There were also scattered mentions of hiring freezes. Half of the districts noted some easing of hiring and/or retention difficulties.

At the same time, competition for workers has led to some companies poaching workers from competitors or offering higher pay. Contacts generally expected wage growth to continue as higher pay remains essential for retaining talent in the current environment. In the Richmond district, one firm implemented productivity incentives to retain workers that could pay out up to $36,000 a year. In Boston, a clothing retailer paused wage increases — having implemented substantial raises earlier in the year — but expects to offer signing bonuses to attract more seasonal hires.

“There are definite signs of easing on inflation, but a stickiness still with many prices,” Peter Boockvar, Chief Investment Officer, Bleakley Financial Group, wrote in a note to clients. “On labor, the sense of slowdown is apparent but labor shortages and the need for more skilled labor is apparent in certain industries.”

Overall, the economy expanded modestly on net since September. However, conditions varied across industries and districts. St Louis and New York saw a decline, while Cleveland and Philadelphia’s districts saw flat growth.

Manufacturing held steady or expanded in most districts, thanks to easing in supply chain disruptions, though there were a few reports of output declines. In the Dallas district, manufacturers outlooks were more pessimistic than optimistic, with contacts pointing to rising interest rates and a weaker business climate as headwinds. In New York, manufacturing firms have grown increasingly pessimistic and do not expect much of a pickup in the months ahead, though they do expect supply disruptions to ease further.

One sign of caution for the economy: Loan growth is showing signs of declining in some districts. In New York’s district, conditions in the broad finance sector deteriorate while regional banks reported widening loan spreads and weakening loan demand. Regional bankers reported declines in loan demand across all loan segments. In Richmond, loan demand weakened modestly across all commercial loan types. In Cleveland, overall growth in lending stalled during the reporting period.

Photo taken on Dec. 2, 2020 shows the U.S. Federal Reserve in Washington, D.C. (Photo by Liu Jie/Xinhua via Getty)
Photo taken on Dec. 2, 2020 shows the U.S. Federal Reserve in Washington, D.C. (Photo by Liu Jie/Xinhua via Getty)

Consumer spending was mostly flat. In the Dallas district, a luxury product manufacturer said they expect sales to fall as customers cut discretionary spending. Outlooks across districts grew more pessimistic amidst growing concerns about weakening demand.

Fed officials will take this information into consideration along with many other datapoints at their next policy meeting in two weeks. They are widely expected to raise their benchmark interest rate by another 75 bp for the fourth meeting in a row.

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