Fed Beige Book Says Economy Improves, Growing at Modest Pace

(Bloomberg) --

Economic activity grew at a “modest pace overall” from April to mid-May, an improvement from the “slight-to-moderate pace” in the prior period, according to the central bank’s Beige Book economic survey released Wednesday in Washington two weeks ahead of policy makers' next meeting.

The report is a generally positive -- though not uniformly so -- signal ahead of crucial data Friday on employment in May. A recent string of weak reports on retail sales, factory orders and home purchases have indicated growth is slowing as President Donald Trump's trade war with China weighs on businesses.

The Beige Book, based on anecdotal information collected by the 12 regional Fed banks through May 24, will factor into discussions among Fed officials. Policy makers have signaled they're open to cutting interest rates if escalating trade tensions dim the U.S. economic outlook amid muted inflation.

So far they've stopped short of flagging a move when they next meet June 18-19 in Washington, even as investors expect three quarter-point rate cuts in the next year. Investors have increased bets the Fed will ease after Trump threatened Mexico last week with additional tariffs unless it curbs the flow of migrants into the U.S.

Nearly all districts reported some growth, indicating they're handling the headwinds to the economy well, including the tariffs and a lack of available workers. At the same time, there are indications of weakness, with some regions citing the uncertainty caused by tariffs, a slowdown in manufacturing, and struggles in agriculture.

Most districts saw modest or moderate growth in jobs and wages, though regions including Richmond and San Francisco cited difficulties finding workers or highlighted tight conditions. Overall wage pressures remained “relatively subdued” with some employers boosting benefits.

Restaurants Closed

In one example of labor pressures highlighted in the report, several restaurants in Charleston, South Carolina, closed because they were so short-staffed. One business moved to counter service and switched to disposable utensils to stay open.

The Fed said prices increased at a modest pace in most districts -- in line with recent muted inflation readings. At the same time, firms noted that input prices were rising at a faster pace than final goods costs, and several regions highlighted higher freight prices.

Trade and tariffs were mentioned in several regions including Philadelphia, which cited uncertainty as delaying business investment. Dallas also said trade uncertainty was weighing on business sentiment.

Some of that may be affecting manufacturing. Richmond, for example, said factory shipments and new orders declined. The picture for commodity inputs was varied across the nation, with some sources spotting lower steel prices while others said costs remained elevated.

Across the U.S., farms reported struggles. In the Minneapolis district, a wet spring threatens the planting season, with some growers saying they might not be able to plant at all this year.

In Kansas City, farm income and credit conditions for producers weakened. Anecdotes from Chicago echoed these troubles, with farmers challenged by poor weather and low crop prices.

Other messages on the economy were mixed earlier Wednesday. U.S. service industries expanded at the best pace since February, according to an Institute for Supply Management survey, while the ADP Research Institute said companies added the fewest workers to payrolls since 2010.

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