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Fed's Beige Book: Sheer Panic Over Tariffs As Wage Growth Fizzles

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Last month, we summarized the March Beige Book by saying that "(Wage) inflation is here", at least on paper because according to the Fed, "most Districts saw employers raise wages and expand benefit packages in response to tight labor market conditions." Or maybe not, because in the latest just released April Beige book, fears about sharply higher wages, which launched the February volatility explosion, are dead and buried as "upward wage pressures persisted but generally did not escalate" and "most Districts reported wage growth as only modest."

So what would be the quick and dirty summary for the April Beige Book, when economic activity continued to expand "at a modest to moderate pace across the 12 Federal Reserve Districts"? In a word, literally, "tariffs" and here's why:

  • March Beige Book instances of word "tariff": 0
  • April Beige Book instances of word "tariff": 36

But before we get to that, here are some big picture observations by the Fed on overall economic activity in March and early April:

  • Outlooks remained positive, though contacts in various sectors including manufacturing, agriculture, and transportation expressed concern about the newly imposed or proposed tariffs
  • Residential construction and real estate activity expanded further, although low home inventories continued to constrain sales in several Districts
  • Contacts in the energy sector cited a pickup in activity, except in the Richmond District, where coal production was flat and natural gas production dipped slightly

Inflation was also muted, with prices increasing across all Districts, but at a moderate pace, although there were widespread reports that steel prices rose, sometimes dramatically, due to trade tensions. The Fed also notes that
businesses generally anticipated further price increases in the months ahead, particularly for steel and building materials.

On wages and labor, as noted above, "most Districts reported wage growth as only modest" while "reports of labor shortages over the reporting period were most often cited in high-skill positions, including engineering, information technology, and health care, as well as in construction and transportation." And while the Fed believes that "businesses were responding to labor shortages in a variety of ways, from raising pay to enhancing training to increasing their use of overtime or automation", we would note here that the right answer is d: automation, despite the following vivid anecdote from the Dallas Fed: "Contacts reported that some rural employers were busing in workers from nearby cities because their local labor pool was tapped out."

So going back to the top issue worrying the Fed this month, namely tariffs, here's some context:

  • "There were widespread reports that steel prices rose, sometimes dramatically, due to the new tariff."
  • "Prices grew moderately, overall, but steel and aluminum prices rose sharply and were expected to rise further as a result of the tariffs."
  • "Numerous contacts expressed concern about new tariffs and trade policy uncertainty, although outlooks overall were still positive."
  • "two contacts brought up the proposed China tariffs and said they represent a major risk" - Boston Fed
  • "contact argued that 'these tariffs are now killing high-paying American manufacturing jobs and businesses'." - Boston Fed.
  • "Of the 22 manufacturing firms that offered general comments, seven mentioned impacts from recent tariffs or proposed tariffs – most noted rising prices or anticipated rising prices; just one firm anticipated greater demand." - Philly Fed
  • "According to contacts, recently imposed tariffs have accelerated price appreciation of steel products, in some cases at double-digit rates." - Cleveland Fed
  • "One steel manufacturer mentioned that customers are attempting to stock up as prices rise because of increased demand and tariffs on primary metals imports" - Cleveland Fed
  • "There is concern about the sustainability of increasing volume because of newly enacted tariffs and potential outcomes from NAFTA negotiations." - Cleveland Fed
  • "Steel and aluminum prices rose sharply and were expected to rise further as a result of recently-imposed tariffs." - Richmond Fed
  • "A Virginia display case manufacturer reported stockpiling steel in anticipation of higher prices resulting from the new tariffs" - Richmond Fed
  • "Some contacts noted rising prices for transportation, as well as steel as tariff rhetoric increased." - Atlanta Fed
  • "Manufacturers facing higher steel and aluminum costs because of the new tariffs expected to pass on about half of the increased costs to their customers on average" - Chicago Fed
  • "Steel imports spiked in anticipation of the 25% tariff imposed in late March. Demand for heavy machinery increased strongly, as end-user demand expanded and dealers rebuilt inventories." - Chicago Fed
  • "Multiple contacts reported dramatic increases in the prices for steel products, partly attributable to recently announced tariffs; a manufacturer of tractor trailers said they “can't raise prices as fast as material costs." - Minneapolis Fed
  • "The majority of contacts said potential steel and aluminum tariffs would have a low-to-medium impact on their drilling costs, and several have already experienced moderate increases in the cost of steel." - Kansas City Fed
  • "Outlooks, while still optimistic, have become more uncertain due to new tariffs and trade concerns" - Dallas Fed
  • "Downstream energy contacts were still figuring out how much of their steel is subject to the new tariff and how that will affect their costs and investment decisions." - Dallas Fed
  • "Several manufacturers said that talk of steel tariffs immediately resulted in higher steel prices." - Dallas Fed
  • "Contacts reported a jump in inflationary pressures for metals prices, partly due to the anticipation of tariffs and unrelated increases in raw material costs." - San Francisco Fed

In short, everyone appears to be freaking out over the inflationary impact of tariffs. And here is the kicker: in a growing, vibrant economy, there would be no panic as businesses could simply pass on these costs to consumers. The fact that there are no less than 36 instances of "tariff panic" confirms all you need to know about the pricing power of US businesses.

What is more problematic is whether the Fed will view inflationary tariffs as a reason to hike rates again in two months, or to keep them unchanged due to the resulting decline in consumer purchasing power.

Finally, here are selected key anecdotes from the Beige book, courtesy of Bloomberg:

  • Boston: One contact said: "Thin gauge foil" is produced only in China and tariffs raised the price three-fold; the contact argued that "these tariffs are now killing high-paying American manufacturing jobs and businesses."
  • New York: A New York City agency reports that a new law prohibiting potential employers from asking about a candidate’s salary history has led candidates to demand higher pay
  • Philadelphia: Of the 22 manufacturing firms that offered general comments, seven mentioned impacts from recent tariffs or proposed tariffs - most noted rising prices or anticipated rising prices; just one firm anticipated greater demand.
  • Cleveland: One accounting firm noted that its work in mergers and acquisitions was the strongest that it has been in the past 10 years.
  • Richmond: A Virginia display case manufacturer reported stockpiling steel in anticipation of higher prices resulting from the new tariffs.
  • Atlanta: Global demand for liquefied natural gas continued to intensify, resulting in rising exports of LNG out of Louisiana’s Sabine Pass liquefaction terminal.
  • Chicago: Steel production increased at a moderate pace, primarily in response to steady end-user demand. Steel imports spiked in anticipation of the 25% tariff imposed in late March.
  • St. Louis: Reports from contacts in Little Rock indicate that wages have risen for workers such as truck drivers, warehouse workers, and skilled mechanics
  • Minneapolis: A western Montana staffing contact said labor orders were "up in all of our markets. Our biggest struggle is lack of candidates."
  • Kansas City: The majority of contacts said potential steel and aluminum tariffs would have a low-to-medium impact on their drilling costs, and several have already experienced moderate increases in the cost of steel
  • Dallas: Drought conditions plagued much of Texas, severely so in the Texas panhandle. Lack of soil moisture particularly affected winter wheat, and the crop was largely in poor to very poor condition.
  • San Francisco: Demand for workers experienced in cybersecurity was up

 

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