One of the most useful contributions from the Federal Reserve’s 12 regional banks is the so-called Beige Book, a collection of anecdotes from each Fed district reflecting the real-time experiences of businesses.
Published eight times a year, it provides a useful corrective for the econometric models so dear to Fed Chairman Jerome Powell and the Washington staff confined to the Beltway bubble.
Reality can be quite different from those models. The regional bank presidents take part in the discussions of the Federal Open Market Committee, and often have a divergent view from Washington staff based not only on their own staff research, but on contacts within their districts.
The latest Beige Book, published last week, paints a less reassuring picture of what’s going on in the economy than Powell’s bland assurances that the Fed’s ultra-lax monetary policy is giving us the best of all possible worlds.
The surveys in the Fed districts portray widespread shortages of materials and labor, delays in getting supplies and delivering products to consumers, and in general an economy bursting at the seams from being held back.
The word “shortages” is something of a leitmotif throughout the report, appearing 53 times. The Boston bank reported one firm had open positions equal to 10% of staff, and many companies said they were offering higher wages and signing bonuses.
Employment agencies in New York City and upstate reported an urgency in filling new positions as firms in all major industry sectors plan to raise wages to attract workers.
The story was the same on the West Coast, with employers reporting labor shortages not only in hospitality, retail, tourism, and food services, but also in manufacturing, construction, transportation and agriculture.
Ditto in flyover country, as the Kansas City district reported demand for workers in all positions, from truck drivers to technicians. More than one-third of firms expect to raise wages by 4% or more to attract labor.
Read it and weep. Powell and his economists, as well as former Fed chair and current Treasury secretary Janet Yellen, assure us all these shortages and the inflation they entail will be “transitory.” Yet, on the ground, firms are paying higher prices for virtually everything and plan to pass it on to consumers.
How short does transitory have to be for this not to cause problems?
St. Louis Fed chief James Bullard says his judgement is “evolving” in the face of this real-world evidence as he thinks the U.S. labor market is tighter than it looks, despite protestations from Powell and other members of the board of governors that the Fed is still far from its goal of maximum employment.
“You’re certainly seeing that in firms saying that they’re just gonna go ahead and raise wages for these types of workers,” Bullard told the Financial Times in an interview. Adding:
“They’re going ahead and saying, ‘let’s pay some signing bonuses to get workers in the door,’ you’re seeing some businesses actually just staying shuttered because they can’t find enough workers.”
He suggests Fed policymakers should look at job market measures that reflect this reality, such as the unemployment to job opening ratio, which registered 0.8 in February 2020 and is now back down to 1.2 after hitting 5 in initial lockdowns.
Time to change monetary policy? “It does seem like we’re getting close to that juncture,” Bullard says.
U.S. job market figures for May, released on Friday, showed a gain in nonfarm payrolls of 559,000, well above the upwardly revised 278,000 for April, but short of the 670,000 estimated. Some took this as a bullish sign that the Fed will not feel pressure to tighten monetary policy, but it may be underestimating the impact of inflationary pressure.
Retail giant Costco (NASDAQ:COST) is the latest to beat the drum about inflation, as CFO Richard Gallanti warned in an earnings call last week that pressures will continue for most of the year.
He ticked off the sources of pressure:
“These include higher labor costs, higher freight costs, higher transportation demand, along with the container shortage and port delays, increased demand in various product categories, various shortages of everything from chips to oils and chemical supplies by facilities hit by the Gulf freeze and storms and, in some cases, higher commodity prices.”
For good measure, he noted specific price pressure in beef, paper products, and aluminum foil.
Did he leave anything out? Like the reports in the Beige Book, his view seems to contradict the calm projected by Fed officials.
The consumer price index for May will come out on Thursday, as economists expect a 4.7% increase on the year, even hotter than the 4.2% reported for April.
The question for investors is when will Fed policymakers reach a tipping point, as reality threatens to overwhelm their models.