Bank of the West U.S. Outlook Report for March 6, 2015

US Outlook Report: Insights from the Beige Book Report

Usually the Beige Book report from the Federal Reserve is a pretty boring read, largely a descriptive analysis of various regions and sectors of our economy. Economists often end up just counting up the positive to negative words to gauge any new insights on the Fed’s reading of current economic conditions.

This month’s report was quite a bit more interesting, shedding some light on how the economy is faring under the onslaught of bad winter weather, drought in California, the West Coast port slowdown, and sluggish global growth.  It also mentioned how companies are dealing with falling input costs, and the tightening labor market.

The overall message from the report was generally positive: Moderate economic growth continues across most regions of the nation despite the bad winter weather and West Coast port slowdown.

Importantly, descriptions of labor market performance and wage pressures appear more robust in this month’s Beige Book report than others in the recent past.  Noting “strong labor demand” and “challenges filling a variety of skilled positions”. The beige book points out that “contacts reported increased wages to attract skilled workers in hard-to-fill positions”. Moreover, services firms in the New York District reported widespread wage hikes.  Other districts noted wage pressures in trucking, entry level positions and some unskilled workers to help reduce turnover. Combine these descriptions with the recent announcement that Walmart and other retailers are raising their wages, and it sounds like the U.S. is getting closer to full-employment to me.

Also, the description of how businesses are handling the drop in energy and commodity prices, gives us some good insights into how long and widespread the drop in consumer inflation is likely to be. Lower input prices, due primarily to declines in energy and commodity prices are being put to work as increased margins, not necessarily being passed through to the consumer. This suggests a very temporary rather than prolonged decline in consumer inflation due to the oil price decline.  Businesses are not seeing any meaningful drop in demand due to the decline in prices and so do not feel the need to pass along their cost savings in order to maintain sales.

Lastly, negative impacts were cited in oil and gas industries and regions, construction, agriculture and to some extent manufacturing, due to bad winter weather, drought, and the plunge in energy, agricultural and other commodity prices.  Bottom-line, the wild weather is once again playing havoc with the economic data in the first quarter, but underlying the statistical noise beats the heart of a healthy and growing economy.

To learn more, check out this week’s US Outlook Report.