US economy started strong in 2023 on firm consumer spending: Fed Beige Book

The economy proved resilient to start the new year, marked by steady consumer spending and stabilizing manufacturing activity, contacts surveyed in the Federal Reserve’s latest Beige Book said.
 

“Overall economic activity increased slightly in early 2023,” the Fed said Wednesday in the report, published two weeks before each meeting of the policy-setting Federal Open Market Committee. 

However, the outlook going forward is less optimistic. “Amid heightened uncertainty, contacts did not expect economic conditions to improve much in the months ahead,” the report said, drawing from anecdotal information collected by the Fed’s 12 regional banks through Feb. 27.

The comments support economic data that’s largely surprised to the upside so far in 2023, notably robust job growth that’s powered consumer spending. Officials are looking to Friday’s employment data and next week’s consumer price index among key data that’ll help determine the path of policy.

What Bloomberg Economics Says...
 

“The Federal Reserve’s latest Beige Book showed uneven activity across districts, with half experiencing no change in economic activity and others seeing modest expansion. That’s precisely what the year ahead could bring — no uniform picture for the whole country and some regions more susceptible to a hard landing.”

— Eliza Winger, economist

The Beige Book, which was compiled by the New York Fed, comes at the conclusion of Fed Chair Jerome Powell’s two-day testimony before Congress, in which he opened the door to the possibility of accelerating the pace of interest-rate hikes should economic data continue to come in strong while stressing that no decision on the March meeting has been made yet.

Policymakers have raised rates aggressively in the past year in an effort to curb inflation that stood at a 40-year high. They slowed down the pace of rate hikes to a quarter point increase at their last meeting, bringing interest rates to a range of 4.5% to 4.75%.

Firms across the country indicated persistent price pressures, though some were abating. Many districts also noted continued wage growth and that a lack of child care is still keeping workers out of the labor force.

There were some glimmers of hope in both the outlook for inflation and the state of the labor market in the report. Many districts saw supply-chain issues ease and reported relief in some transportation costs. Firms said labor availability was improving slightly, but finding workers with the right skills or experience “remained challenging.”

From the Minneapolis Fed:

“A recent Minneapolis-area job fair with more than 20 employers and hundreds of job openings attracted only 20 people. A Montana construction firm has found it economical to rent a jet to fly workers in to one of its plants to fill operational needs. Hiring local employees ‘would be our first choice, but we had to adjust when we could not staff that way.’”

A few districts saw “moderate to strong” retail sales growth during a period that is usually slow, echoed by Powell in his congressional testimony. Retail sales and inflation data showed US consumers remained robust at the start of the year, bolstered by the ample availability of jobs.

Most districts saw strong travel and tourism activity, part of the services sector of the economy that excludes energy and housing, which has shown persistent strength and is worrying policymakers.

“To restore price stability, we will need to see lower inflation in this sector, and there will very likely be some softening in labor market conditions,” Powell said Tuesday in testimony before the Senate.

Most districts also reported subdued housing-market activity. Mortgage rates are close to a 22-year high reached in November, according to Bankrate.com. Energy activity was largely unchanged, with the Dallas Fed district reporting that labor and supply-chain disruptions are weighing on the sector.