Beige Book Finds Modest Economic Slowdown: Strong Dollar “Headwinds” Cited

The Fed’s latest Beige Book released Wednesday found seven regional Fed districts reporting economic activity as growing at a modest or moderate pace, a decline from 11 in the last report, with strong dollar headwinds among one of the more frequently cited reasons for the weakness.

While the Beige Book information was collected up until Nov. 18, 10  days after the U.S. elections, uncertainty about the influence on politics on economic activity was cited eight times in the report. 

“Reports from the twelve Federal Reserve Districts indicate that  the economy continued to expand across most regions from early October  through mid-November,” the Current Economic Conditions report known as  the Beige Book said. The report will be presented at the upcoming  Federal Open Market Committee meeting Dec. 13-14.

The Beige Book did shed light on some issues the FOMC will take into consideration as they chart the path of the fed funds rate into the coming year.

The report showed “demand for manufactured products was mixed during the current reporting period, with the strong dollar being cited as a headwind to more robust demand in a few districts.”

Of note, echoing recent comments by Fed officials, the strong dollar was cited as a headwind to more robust demand in a few districts. Some more examples:

  • Outlooks were generally positive, although the strong dollar continued to depress exports of manufactured goods in some Districts
  • For steel, demand fell in the Cleveland District and production weakened in the San Francisco District, where contacts noted that the elevated dollar, strong global production, and weak economic growth held back exports.
  • The strength of the dollar reduced spending by international customers in the Boston, Atlanta, and Dallas Districts. Reports on automobile sales were mixed.
  • One contact had poor results in stores near the Canadian border because of the strong U.S. dollar but experienced mid-to-upper single digit sales increases in locations where the exchange rate was not a factor.
  • Factors tempering output growth for other manufacturing industries include lower business fixed investment, the strong dollar, and weakness in the energy sector.
  • A transportation source reported that truck and railroad services experienced sluggishness due to excess capacity and the strong dollar.
  • District retailers reported relatively flat sales growth compared with the same time period last year. Some contacts noted that international customers were spending less due to the strength of the dollar.
  • Contacts continued to point to lower exports as a headwind, citing challenges with international demand due to the strong dollar.
  • Gulf Coast chemical producers saw mixed demand, in line with the headwinds of a strong dollar and moderating international demand.
  • Contacts noted slowing sales growth in border cities due to the sustained impact from the strong value of the dollar, and one contact noted continued sales declines at stores in the oil patch.
  • E-commerce sales continued to boost domestic shipping volumes, while demand from the export sector remained weak due to the elevated dollar.
  •  Steel production weakened over the reporting period as the elevated dollar, strong global production, and weak global economic growth held back exports
  • On balance, the elevated dollar continued to slow most exports, particularly for raisins, where global inventories remain elevated.

Elsewhere, Richmond and St. Louis contacts suggested “softening vehicle sales might be attributed to uncertainty surrounding the presidential election,” the report said. A staffing firm in the Cleveland district cited election uncertainty as a reason placement was down, while Cleveland area retailers are looking for sales to improve “with the presidential election behind them and the holiday shopping season approaching.”

The Federal Reserve also Wednesday announced changes to the report’s format beginning in January. The changes are designed to “standardize specific core topics included in each of the 12 Federal Reserve Bank District reports, provide a more consistent presentation of the national summary, and enhance the design of the publication,” the Fed said in a separate press release.

A tightening in labor market conditions was reported by seven Districts, with modest employment growth on balance

Here are select anecdotes from various districts covered by the beige book:

Boston: Contacts expressed some uncertainty about whether the strong international travel numbers will continue in 2017, especially for leisure travelers, if the U.S. dollar remains strong against other major currencies. A specialty chemical manufacturer, said that finding hourly workers was exceedingly difficult. This contact said that only one out of every three or four hourly hires works out; the problem is absenteeism, with many workers unable or unwilling to work five days in a row. Another respondent said that eight out of ten potential hourly hires either cannot pass a drug test or cannot pass a simple math test.

New York: New York City’s rental market has been mostly steady, except at the high end, where the inventory has risen and rents have drifted down. Landlord concessions have grown increasingly prevalent, especially in Manhattan and Brooklyn

Philadelphia: Mountain resort areas reported strong bookings for the remainder of the year, while convention bookings are reported as strong for the first quarter of next year.

Cleveland: Two contacts said that firms are postponing investment decisions until more is known about the tax policies of the incoming president.Input costs rose since our last report primarily because of increasing prices for raw materials and employee health insurance.

Richmond: A port official said that flooding in the Carolinas caused by Hurricane Matthew had delayed some agricultural exports. Since the opening of the new Panama Canal locks, some ports reported a decline in vessel calls while container volume increased. The general manager at an inland hotel reported that all hotels in town were fully booked during the hurricane and remained booked with FEMA personnel several weeks after the storm.

Atlanta: Contacts from the medical field noted accelerating nursing shortages. In response to the challenges finding workers, a number of firms continued to engage in partnerships with community colleges and workforce development organizations to develop customized training programs and internship opportunities, or to invest in automation to replace difficult-to-fill jobs.

Chicago: Contacts continue to indicate that the labor market is tight and that it is getting more and more difficult to fill positions at any skill level.

St. Louis: Over half of contacts reported wages were higher or slightly higher than during the same period last year, and 60 percent reported increasing wages and salaries to attract or retain employees, particularly those in professional and technical, production, and administrative positions.

Minneapolis: Tourism activity was strong overall for this transitional season. In Helena, Mont., big game hunting licenses sold out for nonresident hunters, a change from previous years. The increase was attributed to higher numbers of deer and elk, along with improvements in the overall economy, according to a state official.

Kansas City: Due to weaker agricultural credit conditions and increased risk in the farm sector, District contacts reported notable increases in collateral requirements and slight increases in interest rates on farm loans.

Dallas: Energy firms noted that layoffs were mostly done, however there is little hope for recovery in employment levels in 2017 if oil prices do not increase above $50.

San Francisco: Contacts reported that demand for health-care services remained strong, but the election outcome had greatly increased uncertainty around the Affordable Care Act and raised concerns about the possibility of slower industry growth and cutbacks in the near term.In response to recent minimum wage increases, some restaurants in Southern California are actively considering replacing tips with a mandatory service charge that would be distributed equitably among staff. Contacts expect real estate investment by foreign buyers to pick up in the Pacific Northwest following the recent enactment of a tax on foreign buyers in Vancouver, Canada.


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