Weekly Economic Commentary | Week of March 10, 2014
- In early 2014, harsh winter weather has replaced policy uncertainty as the biggest weight on the economy.
- Our Beige Book Barometer decreased to +62 in March 2014 from +76 in January 2014, as weather received 119 mentions.
- The Affordable Care Act continues to be a key concern for Main Street.
Beige Book: Window on Main Street
Still Growing, With Limited Wage and Price Pressures
The Beige Book is a qualitative assessment of the U.S. economy that we believe is best interpreted quantitatively by measuring how the descriptors change over time. The latest edition of the Federal Reserve's (Fed) Beige Book once again described the economy as increasing at a
"modest-to-moderate" pace, with price pressures described as "subdued" and noted that wage
pressures remained "stable" for most districts. The modest-to-moderate description of the overall
economy has now been used in the last seven Beige Books, and in eight of the past nine dating back to March 2013. The Fed's Beige Book -- a qualitative assessment of economic and financial conditions in each of the 12 Federal Reserve districts -- was released last Wednesday, March 5, 2014, ahead of the March 18-19, 2014, Federal Open Market Committee (FOMC) meeting.
Weather Weighs on Growth
To provide a snapshot of the sentiment behind the entire Beige Book collage of data, we created our proprietary Beige Book Barometer (BBB) [Figure 1]. The barometer ticked down to +62 in March 2014 from +76 in January 2014. At +62, the latest reading remains well below its recent peak (+112 in April 2013), but the +62 reading is consistent with the Beige Book Barometer readings seen in the middle of the 2001-07 economic expansion in the United States.
Weather was mentioned an incredible 119 times in the latest Beige Book, and the mentions were
almost always in a negative context. To put the 119 mentions of weather in the March 2014 Beige
book in historical context, weather was mentioned only 48 times in the Beige Book released just after Superstorm Sandy hit the east coast of the United States in October 2012. Weather was mentioned atotal of 61 times in the three Beige Books released during the unusually cold and snowy winter of 2010-11. On balance, the 119 mentions of weather in the latest Beige Book -- along with 31 of the word "cold," 24 of "snow," and 35 of "severe" -- suggest that the weather's impact on the economy in the early part of 2014 was widespread and significant.
Beneath the Ice and Snow
A closer look at the mentions of weather or associated words, finds that beneath all the ice and snow, the economy is likely poised to accelerate -- once weather returns to normal. For example, in a section discussing manufacturing and auto output, the Beige Book said,
Auto production was strong in Chicago despite weather-related slowdowns in sales, and Cleveland reported auto production to be higher than a year ago. Most Districts were optimistic
about the future and expect manufacturing activity to rise in the coming months.
The above example represents a common theme in the Beige Book: citing poor weather as a factor for weakness in the current period, but pointing to underlying optimism once the weather normalizes.
While weather dominated the March 2014 Beige Book, the uncertainty and lack of confidence around fiscal policy (fiscal cliff, debt ceiling, sequester, government shutdown) that dominated the Beige Book for most of 2013 began to fade. In the March 2014 Beige Book, there were just 18 mentions of the words noted above after 26 mentions in the January 2014 Beige Book. These words were mentioned 65 times, on average, in each of the eight Beige Books released in 2013. As we wrote in our Outlook 2014: The Investor's Almanac, we continue to expect concerns over government policy to fade over the course of this year.
Good weather or bad, the Affordable Care Act (ACA), and health care in general, has remained a
consistent source of concern among respondents to the Beige Book. The ACA received 29 mentions in the March 2014 Beige Book, close to the 32 mentions in the January 2014 edition. On average, the ACA/health care saw 22 mentions per Beige Book in 2013. We continue to expect this topic to appear frequently in the Beige Book in the quarters ahead as businesses and consumers adjust to the rollout of the legislation.
Wage pressures were described as "stable" for most districts in the latest Beige Book, although there were scattered mentions of upward pressure on wages in certain areas and among skilled workers in certain regions of the country. The reference to scattered wage pressures and lack of workers in certain skilled occupations has been a consistent refrain in the Beige Book for over a year now. Fed Chair Janet Yellen, and the rest of her FOMC colleagues, are watching wages closely (see the Weekly Economic Commentary: Janet Yellen's Employment Report from March 3, 2014). While wage increases have moved beyond scattered reports in just a few industries, the bond market will likely keep a close eye on this component of the Beige Book in the coming months and quarters as it gauges whether or not the Fed is "behind the curve" on wages, and, in turn, inflation. We'll take a closer look at how wages and prices are described in the Beige Book in an upcoming edition of the Weekly Economic Commentary.
For now, the Beige Book describes an economy that is still growing slowly, with limited wage and
price pressures, which suggests that the Fed can remain accommodative. However, the underlying
Beige Book tone suggests when the weather returns to normal, the economy could accelerate --
forcing the Fed to begin thinking about removing some of the accommodation sooner than the
market now thinks is likely.
How the Barometer Works
The Beige Book Barometer is a diffusion index that measures the number of times the word
"strong" or its variations appear in the Beige Book less the number of times the word "weak" or
its variations appear. When the Beige Book Barometer is declining, it suggests that the economy
is deteriorating. When the Beige Book Barometer is rising, it suggests that the economy is
Beige Book: How It Works
The Beige Book compiles qualitative observations made by community bankers and business
owners about economic (labor market, prices, wages, housing, nonresidential construction,
tourism, manufacturing) and banking (loan demand, loan quality, lending conditions)
conditions in each of the 12 Fed districts (Boston, New York, Philadelphia, Kansas City, etc.).
This local color that makes up each Beige Book is compiled by one of the 12 regional Federal
Reserve districts on a rotating basis -- the report is much more "Main Street" than "Wall Street"
focused. It provides an excellent window into economic activity around the nation using plain,
everyday language. The report is prepared eight times a year ahead of each of the eight Federal
Open Market Committee (FOMC) meetings. The next FOMC meeting is March 18-19, 2014.
The previous word clouds or text clouds, which are a visual format useful for quickly perceiving
the most important words in a speech, text, report, or other transcript, are culled from the Fed's
Beige Books published last week (March 5, 2014) and the prior report (January 15, 2014). In
general, the more often a word appears in a speech, text, report or other transcript, the larger
that word appears in the word cloud. The word clouds show the top 50 words for each of the
two Beige Books mentioned above. Similar words are grouped together and common words like
"the," "and," "a," and "is" are excluded, as are words that appear frequently in all Beige Books
(federal, district, loan, level, activity, sales, conditions, firms, etc.).
The opinions voiced in this material are for general information only and are not intended to
provide specific advice or recommendations for any individual. To determine which investment(s)
may be appropriate for you, consult your financial advisor prior to investing. All performance
reference is historical and is no guarantee of future results. All indices are unmanaged and cannot
be invested into directly.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Stock investing involves risk including loss of principal.
The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve Board that
determines the direction of monetary policy. The eleven-person FOMC is composed of the
seven-member board of governors, and the five Federal Reserve Bank presidents. The president of the Federal Reserve Bank of New York serves continuously, while the presidents of the other
regional Federal Reserve Banks rotate their service in one-year terms.
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