United States

Federal Reserve’s “Beige Book” shows tariffs beginning to bite

Commentary on rising input costs and general trade anxiety

THE REAL ECONOMY  | 

U.S. hard economic data has yet to catch up with the initial round of tariffs amid widening trade spats. But the U.S. Federal Reserve’s Summary of Commentary on Current Economic Conditions, known as the “Beige Book,” reveals anecdotal evidence of rising input costs and general trade anxiety among businesses surveyed in the report, which was released on July 18.

Tariffs contributed to price increases for metals and lumber. However, the extent of the pass-through from input to consumer prices remained slight to moderate. Movements in pricing of agricultural commodities were mixed across products and banking districts. Pricing pressures are expected to intensify further moving forward in some districts, while in others, the outlook is stable price increases at a modest to moderate pace.

Below is a summary of recent commentary from the most recent Beige Book:

Boston Federal Reserve Bank (FRB): Tariffs

Contacts expressed concerns about tariffs, but none cited trade issues as affecting demand or hiring and capital expenditure plans.

Boston FRB: Software and information technology services

Firms across the sector expressed concern about acquiring and retaining talent in the tech industry. Further, contacts unanimously expressed anxiety about shocks to the broader economy, such as the potential for changes in trade, tariffs, immigration, war and the stock market.

New York FRB: Manufacturing and distribution

A number of manufacturing contacts remarked that tariffs had raised their costs. Moreover, uncertainty about future trade policy was cited as a major concern, particularly in parts of upstate New York, where there is substantial trade with Canada.

Philadelphia FRB: Manufacturing

The makers of chemical products, paper products, fabricated metal products and electronic equipment noted gains in new orders and shipments; the makers of lumber products, primary metals and industrial machinery reported mixed results. One machinery manufacturer said that effects of the steel tariffs have been chaotic to its supply chain by disrupting planned orders, increasing prices and prompting some panic buying.

Philadelphia FRB: Consumer spending

Auto dealers in New Jersey and Pennsylvania reported year-over-year sales flat to up slightly in May and June. Year-to-date sales appear to be holding even with 2017’s high levels. However, dealers noted greater downside risk than normal for the second half of 2018, including disruptions from tariffs, volatile markets and rising interest rates.

Cleveland FRB: Prices and tariffs

Business activity in the 4th District grew moderately during the survey period. Demand was strong in many sectors, but hiring continued at about the same pace as in the previous survey period, as a dearth of qualified workers constrained hiring. Wages rose moderately, and increases were in line with recent trends. Upward pressure on input costs was strong, notably for fuel and metals. Contacts widely attributed the cost increases to import tariffs.

Manufacturers and builders commented widely that import tariffs were lifting steel and aluminum prices. In some cases, manufacturers noted a rush to purchase metals in anticipation of additional price increases. To a lesser extent, construction contacts also noted lumber price increases. Aside from the manufacturing, construction and transportation sectors, contacts noted moderate cost increases consistent with recent trends.

Richmond FRB: Manufacturing

Manufacturing remained fairly strong. However, several manufacturers reported that while sales increased, profits dipped as price increases could not offset the rising costs of materials and transportation. Manufacturers also expressed concern about potential adverse effects of rising trade tensions. For example, a 5th District foam manufacturer reported growth in business but growing costs of raw materials resulting from tariffs. Additionally, a Maryland can manufacturer said it could not get the quality of steel needed domestically and anticipated losing business to foreign competitors not faced with steel tariffs.

Atlanta FRB: Tariffs

On balance, reports from 6th District business contacts indicated that economic activity continued to expand at a modest pace from mid-May through June. Although a number of contacts’ sentiment declined due to uncertainty related to the impact of tariffs and tariff rhetoric, the overall outlook among businesses remains positive as most expect an increase in activity for the second half of the year. District firms reported some increases in nonlabor input costs, particularly for steel, aluminum and transportation, with limited accounts of an ability to pass along these increases. Expectations of rising costs related to tariffs continued to contribute to vendor price increases for commodities.

Chicago FRB: Prices

The pace of price increases edged up in late May and June, but remained modest overall. Contacts expected prices to continue to rise modestly over the next six to 12 months. Retail prices increased slightly overall. Producer prices rose modestly, reflecting in part the pass-through of higher costs for labor, materials, energy and freight. Contacts in the agricultural sector noted heightened price volatility related to uncertainty over U.S. and foreign tariff policies.

Chicago FRB: Agriculture

The outlook for agriculture income dimmed some over the reporting period, as prices for most commodities fell. Crop farmers reported that, in general, field conditions were excellent and better than last year. Both corn and soybean prices fell, reducing expected profits from the upcoming harvest. Livestock farmers continued to struggle overall, with some reports of asset sales by hog producers and closures of dairy operations. Contacts throughout the 7th District expressed heightened concerns over the impact of trade disputes and tariffs on the agricultural industry. 

St. Louis FRB: Labor and shipping

Economic conditions improved slightly. Labor market conditions remained tight and wage growth was modest. Local contacts reported robust increases in shipping costs across all sectors due to higher fuel prices and driver shortages. Reports from businesses on the impact of tariffs varied by industry.

St. Louis FRB: Prices

Tariffs and trade restrictions have had a mixed effect on prices. U.S.- imposed tariffs raised prices for steel and aluminum, increasing input costs for several business contacts. Construction contacts lamented that rising prices pressured their industry before tariffinduced inflation of metal costs. In contrast, proposed tariffs by China have led to an overall downturn in agricultural commodity prices, particularly the price of soybeans. These lower commodity prices have been passed on to food retailers, which reported that lower food prices have more than offset increased freight costs.

St. Louis FRB: Manufacturing

Manufacturing activity rose at a moderate pace since the previous report. Overall manufacturing activity was stronger than one month earlier in both Arkansas and Missouri, and expansion, new orders and production increased in both states. Several companies that manufacture motor vehicles and parts reported plans to expand facilities and increase production. Contacts in paper packaging reported running at nearly full capacity. Similarly, those in the recycled metals noted record volumes, while those in mining equipment manufacturing reported experiencing backlogs. On the other hand, a maker of plastic products for appliances indicated lower sales. Several manufacturers noted increases in input prices, which they linked to tariffs.

Minneapolis FRB: Prices

Pricing pressures increased moderately relative to the previous report. Manufacturing contacts reported steep increases continued in aluminum and steel material input costs in reaction to tariff announcements. Construction materials costs continued to increase briskly. A June survey of purchasing managers indicated that inflation expectations were elevated, but had decreased slightly from the previous month. Retail fuel prices as of late June were mixed across 9th District states relative to the previous reporting period; Montana and the Dakotas saw prices increase slightly, while prices in Minnesota and Wisconsin fell. Prices farmers received for corn, soybeans, wheat, hay, chickens and eggs increased in May, compared with a year earlier.

Dallas FRB: General outlook

Expansion in the 11th District economy continued at a solid pace. Manufacturing output increased, and loan demand and retail spending rose. Broad-based expansion in the energy and service sectors continued. Home sales rose modestly, while apartment markets softened slightly. The ongoing drought negatively affected crop and grazing conditions. Hiring remained strong, and widespread labor shortages continued putting pressure on wages. Price pressures stayed elevated largely due to increases in input costs, particularly steel and aluminum. Although outlooks remained fairly optimistic, tariffs and trade-related concerns were creating uncertainty.

Dallas FRB: Prices

Pricing pressures remained elevated. Input costs increased for energy, manufacturing and construction firms, in part due to rising freight costs and new tariffs on steel, aluminum and lumber. Auto dealers reported higher new vehicle prices and financing costs, while transportation service firms noted climbing fuel prices. Many other retailers and service firms also cited increasing costs for inputs and services such as health care. A number of contacts planned on increasing selling prices to offset higher costs. West Texas Intermediate oil prices rose to their highest levels since 2014, driven by falling inventories, rising geopolitical risks in the Middle East, U.S. policy on Iran and other oil supply concerns.

San Francisco FRB: Prices

Price inflation increased moderately over the reporting period. Recent oil price increases spurred inflation in a variety of sectors. Pricing pressures strengthened for freight costs at lumber businesses in California and Oregon and for petroleum-based products like asphalt. Across the 12th District, contacts noted a pickup in price growth for finished steel and for metal inputs for manufactured products. A few contacts in manufacturing attributed recent inflationary pressures for metal products and declines in the duration of price guarantees to the implementation of tariffs.

Solid construction sector activity continued to exert upward pressure on prices for building materials. Contacts in California reported moderate price inflation for cherries, nuts and raisins after yields fell due to poor growing conditions. A few contacts reported that grocery stores passed increased food-safety costs on to consumers, somewhat lifting retail food prices. Excess capacity in power generation and low input costs continued to limit increases in electricity prices in southern California. Generic drug prices continued to fall modestly following a relaxation in regulation and heightened competition among the largest drug sellers.

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