Latest Beige Book signals that US economic activity continues to expand, driven by domestic spending

All twelve Fed Districts expanded over the July to mid-August period, according to the latest Beige Book. Six Districts reported a moderate pace of growth (down from seven previously), five reported modest growth (three in prior edition), while the Cleveland District noted only slight growth. Across most sectors, respondents expected growth to continue at its recent pace, although the Kansas City District reported mixed expectations.

A majority of Districts stated that sales and revenues continued to expand in the retail sector. Two cited flat consumer spending, Atlanta was mixed while Dallas reported a year-over-year decline. Auto sales increased, while most reports cited strong tourism activity. Contacts in several Districts were optimistic that retail sales would stay on pace or improve in the coming months. A few Border Districts reported that the rising dollar was discouraging cross-border shopping from foreigners. Demand for non-financial services generally expanded, with increased activity in transportation, as well as in business and consumer loans in the banking sector.

Districts were mostly positive on manufacturing, but four reported a mixed picture across sectors, while the New York and Kansas City Districts cited declines in activity. Autos, aerospace and construction-related goods were sources of strength. Weakness in both energy and agriculture was said to be damping demand for related machinery. The strong dollar was cited as a challenging influence, while three Districts explicitly cited the Chinese slowdown as a constraining factor. Nonetheless, the outlook among respondents was generally positive.

Reports on residential and commercial real estate markets were mostly positive. Home sales and prices increased in every District. Indeed, various supply-side factors were cited as constraints on activity in some Districts, including difficulty in obtaining construction financing and new construction permits, shortages in skilled labor, and declining inventory. A majority of Districts expected increased residential activity to continue, while several District also cited a positive outlook for commercial construction.

Most Districts reported modest to moderate growth in labor demand, although employment itself saw only slight or modest growth. Wages were relatively stable in most Districts, with slight to moderate increases since the last Beige Book. The tightening in labor markets was said to be pushing wages up slightly in selected industries or occupations, but particularly in the New York, Cleveland, St Louis and San Francisco Districts. In fact, almost three fifths of respondents in the St Louis District reported having raised wages over the past three months. Otherwise, input and selling prices were reported to be stable or up only slightly.

Overall it appears that economy activity at the start of the third quarter progressed largely in line with the pace at the end of the second quarter. 

"We are currently tracking real GDP growth of roughly 2.5%, below the 3.7% pace seen in Q2, the positive tone is another indication of relatively robust domestic activity", says Societe Generale.

With the survey period ending on the 24th of August, there was little overlap with the recent turbulence in financial markets. Still, the strong dollar and Chinese slowdown are evidently weighing on activity, particularly in the manufacturing sector. Robust domestic activity, such as in construction and auto-related industries, remain a clear driver for the economy. While the U.S. is not immune to overseas turbulence, progress in the labor market, elevated consumer confidence, and nascent signs of wage growth suggest continued economic growth. Inflation continues to remain extremely subdued, however supply-side pressures in several areas provide evidence that core inflation will, in time, pick up.