Fed Says Growth Steady Amid Tight Labor Market, Trade Worries

(Bloomberg) -- A majority of Federal Reserve districts reported modest to moderate economic growth, though uncertainties over trade and labor shortages put pressure on firms, a survey from the U.S. central bank showed.

“Several districts indicated that firms faced rising materials and shipping costs, uncertainties over the trade environment and/or difficulties finding qualified workers,” according to the report, released Wednesday in Washington.

The central bank's Beige Book economic report, based on anecdotal information collected by the 12 regional Fed banks through Oct. 15, continued to show that companies are generally not responding to the tightening labor market with significantly higher wages.

While some firms offered signing bonuses, flexible hours and more vacation time in order to woo and retain workers, the report characterized wage growth as “modest to moderate.” Most businesses also expected wage gains to remain “modest to moderate” over the coming six months.

Economy On Track

Prepared by the Richmond Fed, the report will be reviewed by policy makers as they prepare for their Nov. 7-8 meeting. Officials have penciled in one more interest-rate hike for this year.

The U.S. economy is on track to post its best back-to-back quarters of growth since 2014 when third quarter data is released on Friday. Economists surveyed by Bloomberg expect a 3.3 percent annualized pace of expansion in the July-September period after a 4.2 percent gain in the prior quarter.

The Beige Book continued to point to anxiety among U.S. firms over the ongoing trade dispute with China. Manufacturers reported they were raising prices out of necessity as tariffs drove up the cost of raw materials, including metals.

“New car prices are also expected to increase significantly to cover the burden of recently implemented tariffs,” the Boston Fed reported in one of many anecdotes included in the survey.

Labor Shortages

The report also pointed to widespread labor shortages that were “linked to wage increases and/or constrained growth.”

In the Philadelphia district, one firm noted difficulty launching a third shift because of a lack of workers while another was planning to add robots.

Unemployment fell to 3.7 percent in September, though wages and overall inflation have remained muted. Average hourly earnings for the year through September rose 2.8 percent, in line with a slow upward trend over the past several years.

Anecdotes on housing were mixed with homebuilders in Cleveland reporting a modest fall in demand because of decrease in affordability.

The Dallas district, which includes many areas benefitting from higher energy prices, continued to be a particularly bright spot with “solid” growth in manufacturing, retail and nonfinancial services.

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