At first glance, the Federal Reserve’s Beige Book report for the month of May looks mildly better than the April report, as fewer Fed Districts indicated deteriorating economic conditions. Indeed, nine of the twelve indicated slower growth in April, and in May, seven described activity as softer, weaker, lower, slower, sluggish, or modest.
Nevertheless, a deeper look at the report reflects dour prospects for the economy, as the Beige Book said:
- Consumer spending slowed since the last report as incomes were pinched by rising energy and food prices.
- Higher energy prices also appeared to damp domestic tourism.
- Manufacturing activity was generally soft in recent weeks.
- Lending activity also varied across Districts and market segments, though tighter credit standards were reported for most loan categories.
- Reports of higher input costs were widespread.
The report of slowing consumer spending is particularly negative for US expansion, as consumption accounts for approximately 70 percent of US GDP. Meanwhile, the New York, Philadelphia, and Cleveland Fed Districts all reported an increase in overall delinquencies, while New York indicated a notable rise in late payments for consumer loans, suggesting that times remain hard for the average person. Furthermore, credit conditions are far from “easy,” as three Districts expected loan quality to deteriorate going forward, and all Districts reporting on credit standards noted further tightening for consumer, residential, and commercial loans.
On the inflation front, most Districts reported increases in input prices especially for commodity-related items like energy, metals, and food. This is starting to get passed down to the consumer, as manufacturers have had success doing so, while some retailers noted they would be raising prices or already have.
Overall, the report supports the Federal Reserve’s hawkish inflation stance. However, given the clear downside risks to the economy and despite the central bank’s staunch rhetoric as of late, the FOMC is highly unlikely to hike rates anytime soon. – Terri Belkas, Currency Analyst for DailyFX.com