U.S. Growth and the Fed: Fade to Beige?

U.S. Growth and the Fed: Fade to Beige?

The Fed's Beige Book gave a glimpse of the future impact of the labor shortage – and the trade conflicts; copper prices showed the impact of possible future trade weakness on today's demand; the UK and the EU get down to business on finding a workable compromise on a post-Brexit border in Ireland.

"The risk that current trade tensions escalate further… is the greatest near-term threat to global growth"
IMF chief economist Maurice Obstfeld

U.S. Growth and the Fed: Fading to Beige?  Testifying before Congress last week, Fed Chair Jerome Powell was cautiously optimistic about the country’s growth trajectory, mostly resisting the temptation to opine on matters outside the Fed’s brief – including the impact of tariffs on specific regions or sectors of the economy.

But the July edition of the Fed’s Beige book, released on July 18, is more revealing. The report, designed to tease out emerging trends that “may not be readily apparent in the economic data”[1], noted expansion in all 12 Fed districts. Still, manufacturers in all districts expressed concern about tariffs; in many, they reported higher prices and supply disruptions attributed to new U.S. trade policies.

A second potential constraint to future growth was the inability to find workers, which was reported in most districts. More specifically, six districts specifically mentioned trucking capacity shortages, which they blamed on a shortage of commercial drivers.

These qualitative trends, for the most part, have yet to work their way into general economic statistics. But the Beige Book suggests that if current trends continue, it’s just a matter of time before they do. And once these issues affect planning for corporate capital expenditures, their effects could be more widespread.

Commodity prices: Testing one’s metal The effects of newly-imposed tariffs on steel and aluminum have rippled through the commodities markets. A key example: copper prices. The cash price for copper on the London Metals Exchange (LME) fell from $7,330.50 per metric ton on June 7, to $6,039.50 on July 19, a 17.6% decline. Year to date, palladium is down some 15.6% to $896.61 per Troy ounce.

The common denominator between the two metals: industrial demand. Copper is essential in construction, electrical and electronic equipment; palladium is the key ingredient in automotive catalytic converters. These, and other commodity markets, can be fickle, changing with shifts in sentiment. But since the futures markets for these commodities are used by industry to manage their own production costs, changes in price can have significant real-world impact.

Brexit: Borderline European Union (EU) chief Brexit negotiator, Michel Barnier, said on Friday that he is ready to negotiate on options for preventing a “hard border” in Ireland in the wake of the onset of Brexit in March 2019. Barnier said he is open to any solutions “so long as they are workable and can be transformed into legally operative text in time for the withdrawal agreement”.  That could be a tough hurdle to clear, since the EU plan calls for effectively including Northern Ireland in the EU’s single market and customs union, a solution that’s been called unacceptable to UK Prime Minister Theresa May.

Much of the disagreement is focused on what happens if an agreement can’t in fact be found – the “backstop”. which is intended to ensure that there will be no hard border on the island of Ireland – even if a long-term solution can’t be found before the end of the UK’s post-Brexit transition period. But the mere fact that both parties appear to be eager to get on with the negotiations is itself a positive sign that a workable agreement may yet be found.

All data Source: Bloomberg, July 20 2018, unless otherwise specified.

[1] July Beige Book, Introduction and Table of Contents.



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