Beige is Boring?
The Federal Reserve released its Beige Book yesterday. The Beige Book is a Federal Reserve publication about current economic conditions across the 12 Federal Reserve Districts. The information comes from interviews and online questionnaires completed by businesses, economists, market experts, and other sources. The Biege Book is more of a mirror than a crystal ball, but does provide some anecdotal evidence for Fed policy makers to supplement other hard data and models of the economy.
The most recent Beige Book showed the number of Districts that reported flat or declining activity rose from five to nine in the current period. Meanwhile, economic activity grew slightly in only three Districts. Employment levels were steady overall, though there were isolated reports that firms reduced hours and shifts, lowered overall employment levels through attrition and filled only necessary positions. Wage growth was modest, while selling prices ranged from slight to moderate.
The Beige Book noted that consumer spending ticked down in most Districts. Auto sales continued to vary, with some Districts noting increases in sales and others reporting slowing sales because of elevated interest rates and high vehicle prices. Manufacturing activity declined in most Districts, and two Districts noted that these declines were part of ongoing contractions. Residential construction and real estate activity were mixed, while most reports indicated softer home sales. District contacts generally expected economic activity to remain stable or to improve somewhat in the coming months, though three Districts anticipated slight declines ahead.
Jolted by JOLTS and ISM
The July JOLTS report (Job Openings and Labor Turnover Survey) came in lower than expected this week. US job openings fell in July to the lowest level since the start of 2021, consistent with other signs of slowing demand for workers. Available positions decreased to 7.67 million from a downwardly revised 7.91 million reading in the prior month.
Economic activity in the manufacturing sector contracted in August for the fifth consecutive month and the 21st time in the last 22 months according to the Manufacturing ISM® Report On Business®. “The Manufacturing PMI® registered 47.2 percent in August, up 0.4 percentage point from July. While still in contraction territory, U.S. manufacturing activity contracted more slowly compared to July. Demand continues to be weak, output declined, and input prices increased. Slower demand was reflected by the New Orders Index dropping further into contraction, the New Export Orders Index contracting slightly faster, the Backlog of Orders Index remaining in strong contraction territory, and Customers’ Inventories Index at the ‘just right’ level.
Looking for Green Shoots? Look to the Cookie.
The S&P 500 fell just over 2% on Tuesday on the first day after the Labor Day holiday, its third-worst pullback of the year. Large technology stocks and cyclicals were among the notable decliners after softer economic data was released, fueling fears of a potential recession. On Friday we will get the August jobs report, potentially adding weight to a slower economic trend. In the near term, it appears that bad economic news is bad news for the markets as well.
In terms of individual stocks, Dick’s Sporting Goods reported a decent quarter, but a lower-than-expected outlook, resulting in a 10% drop in the stock before recovering by about half. Ditto Dollar Tree#, which lowered its outlook on weaker consumer spending trends, resulting in a 22% stock decline. AI chip company Nvidia# has been fading as well, down about 20% from its late August high, along with weakness in semiconductor stocks in general. On the plus side, Mondelez# said that its outlook remains robust, especially regarding its new Coca-Cola Oreo combination cookie. One side is bright red for Coke and the other side is traditional Oreo black. Can we still dip that Oreo in milk?
The yield curve has been flattening out as weaker economic data rolls in. The 2-year and 10-year Treasury rates have flattened out at about 3.8%. This comes after a long period of yield curve inversion that has historically portended recession. Restoring the normal upward slope of the yield curve following inversion has typically happened when the Fed starts to lower interest rates, as we expect later this month. Since the Fed tends to ease monetary policy when the economy slows down, this has raised investor concerns about recession once again. Traders have fully priced in a quarter-point rate cut at the Fed policy meeting this month with more than a 30% chance of a half-point rate reduction. A total of 1% in interest rate reductions is expected by the end of this year.
While markets have seen red so far in September, that is not unusual based on historical monthly returns going back to 1928. We may need to see more green shoots arising in the economy until good economic news becomes good news again for markets.
Some colorful characters have birthdays today, including actor Michael Keaton (Beetlejuice and Batman) who turns 73, Carice van Houten (Game of Thrones) who turns 48 and Dweezil Zappa who turns 55.
Christopher Crooks, CFA®, CFP® 610-260-2219