The Federal Reserve’s Beige Book said that while manufacturing activity continues to expand, there has also been a notable slowdown in some areas. In particular, several regions have reported reductions in new orders, with the Philadelphia and Richmond Federal Reserve Banks observing contractions in shipments and orders.
One area of continued weakness continues to be the labor market, which the Fed describes as growing “at a tepid pace for most Districts.” Net hiring among manufacturers was also mixed, varying by region and sector. Even with these declines, respondents to these regional surveys remained cautiously upbeat about future production. Interestingly, its description of the weak labor market mostly paints an economic environment that is plagued by uncertainty. It writes:
The Boston, Cleveland, Atlanta, Chicago, and Dallas Districts said employment levels were flat to up slightly, with most contacts citing U.S. fiscal policy uncertainty or weak demand for their conservative approach to hiring. Kansas City said employers were reluctant to increase wages or hire full-time staff until economic uncertainty diminishes.
The Beige Book noted “largely positive” residential construction news, echoing the largest housing starts figures released earlier in the day. Retail sales were said to be higher. The report said, “Districts that saw an increase in [retail] activity mostly noted strength in auto sales.” One other positive has been the easing of pricing pressures, particularly energy costs have declined.
The overall tone of the Beige Book echoed previous reports. The overall economy continues “to expand at a modest to moderate pace in June and early July.” This assessment is more upbeat than the one that Ben Bernanke gave in his semiannual report to Congress over the past two days. In his testimony, the Chairman said, “The U.S. economy has continued to recover, but economic activity appears to have decelerated somewhat during the first half of this year.”
His remarks appeared to reflect more recent news on retail spending, and more importantly, it tended to focus a lot more on the risks to economic growth posed by Europe and the U.S. fiscal cliff. He reiterated the possibility of recession in early 2013 if “the full range of tax increases and spending cuts were allowed to take effect” on January 1. He then added this advice to the Congress:
The most effective way that the Congress could help to support the economy right now would be to work to address the nation’s fiscal challenges in a way that takes into account both the need for long-run sustainability and the fragility of the recovery. Doing so earlier rather than later would help reduce uncertainty and boost household and business confidence.
In short, the Fed continues to acknowledge some of the strengths in the economy, which include an improving housing sector and a still-expanding (albeit at a slower pace) manufacturing sector. But, there are significant hurdles out there in the coming months that will need to be addressed. The Fed notes that uncertainty can start to have real effects on economic growth, which is might already be doing (e.g., with regard to hiring and investing). This is why the NAM continues to push for pro-growth policies and for addressing our fiscal challenges sooner rather than later.
Chad Moutray is chief economist, National Association of Manufacturers.