U.S. July Beige Book report indicates increasing wage and price pressures

The Beige Book (July 2018) indicated that out of 12 districts, 10 recorded moderate or modest expansion in late May to early July period. As was seen in the previous report, Dallas continued to be an outlier, with solid growth driven partially by the energy sector. However, now activity in the St Louis district is described as slight.

The July Beige Book showed that there were concrete effects from import tariffs. Manufactures in all districts showed concern regarding tariffs and several districts recorded higher prices and supply disruptions that they linked to the new trade policies.

Report of increased input costs and shrinking margins were also seen. Trucking capacity was a particular issue in six districts and linked it to a shortage of commercial drivers. Price rises were seen as modest to moderate on average, but rises were seen in many districts. Important input prices rose further including fuel construction materials, freight, and metals. Tariffs added to the rises for metals and lumber. But, the degree of pass-through from input to consumer prices continued to be slight to moderate. Pricing pressures are likely to deepen further in some Districts, while in others the outlook is for stable price rises at a modest to moderate rate, noted TD Economics in a research report.

The assessment of wage rises was upgraded a bit from modest in the last Beige Book, to “modest to moderate” in the July report, with a few of districts citing a rebound in the rate of wages. The assessment of overall activity in the July Beige Book continued to be widely the same, but wage and price pressures seem to have increased. This implies an economy at the mature stage of the economic cycle, with many pockets running up against capacity constraints.

“Overall, today's report is consistent with continued rate hikes by the FOMC, with the next likely to come at the end of September. Rising trade protectionism is a clear downside risk that the Fed is no doubt watching closely, but for now, the risk is not strong enough to forestall further hikes”, added TD Economics.

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