Stansberry Research

The Fed's Beige Book Indicates Economic Growth Has Stalled

Stansberry NewsWire

The economy is feeling the pressure from the Federal Reserve...

The latest release of the Fed's Beige Book showed that economic activity was largely flat at the start of 2023 and highlighted the slowdown that's expected this year.

The report is a summary of economic activity in the 12 regional bank districts. It surveys banks and businesses on a broad range of economic topics, like current economic conditions in their state or region and developments in their industries. But the combined reports are meant to give qualitative color on national economic activity based upon boots-on-the-ground responses.

Here's what Fed Chair Jerome Powell said about inflation and the economy back in November 2022...

We are tightening the stance of policy in order to slow growth in aggregate demand. Slowing demand growth should allow supply to catch up with demand and restore the balance that will yield stable prices over time. Restoring that balance is likely to require a sustained period of below-trend growth.

Powell has said on multiple occasions that the central bank's goal in its path toward reducing inflation is below-trend economic growth. And in this latest installment of the Beige Book, regional banks are depicting this very economic scenario.

Six of the Fed's 12 regional banks reported no change or slight slowdowns in economic activity... five reported no change or slight upticks... and one reported a significant decline.

While many may push aside this report due to the lack of major macroeconomic surprises, the fact that economic activity is showing little growth is important.

You see, a slowdown in economic activity is one of the explicit prerequisites the Fed is looking at as it judges just how far into restrictive territory (via rate hikes) it needs to go.

The effects of the Fed's interest-rate hikes have shown progress toward slowing inflation for several months now. But we may be just starting to see the ramifications on the larger economy. Monetary policy affects different parts of the economy at varying lags. And if the Fed believes that a sustained slowdown in economic activity is a direct result of its monetary policy, the central bank will begin to pull back on its tightening cycle as it approaches its targeted terminal interest rate.

Yesterday's summary highlighted that pricing pressures and supply-chain constraints continue to ease while slowing economic activity takes hold. Below are some noteworthy bullet points taken from the release...

  • Businesses and contacts surveyed expect little growth in the months ahead.
  • Retailers noted that while consumer spending saw marginal increases, the effects of higher prices continue to reduce the purchasing power of consumers, especially low- and moderate- income households.
  • Manufacturers reported that activity declined modestly across the board, despite supply chain disruptions easing.
  • Housing markets continued to weaken as sales and construction declined across the board.
  • Employment continued to grow at a modest pace, with some districts reporting that labor availability had increased.
  • The sustained tightness of the labor market kept upward pressure on wages.
  • The sales price of goods and services increased at a modest pace, however most districts reported that the pace of increases had slowed from previous reports.
  • Manufacturers reported the cost of freight/transportation and commodities showed easing.
  • Retailers reported more difficulty passing on rising costs to the consumer, forcing retailers to offer deeper discounts and accept smaller profit margins.

These statements paint the exact picture that Powell has been advocating for over the past six months... Economic growth is showing signs of a sustainable slowdown to achieve long-term annual price growth close to its 2% target.

As costs continue to cool and economic activity eventually stalls, the Fed will be inclined to take its foot completely off the gas pedal and end its rate-tightening cycle. This will spur investors and money managers to lock in higher yields and send the bond market – which incurred one of its worst years on record in 2022 – higher.