Beige Book Shows Pace of Recovery is Moderating

Posted by lplresearch

Economic Blog

We have seen a historic rebound in economic growth since the US economy emerged from lockdowns, but the pace of the economic rebound has tapered in recent weeks as the effects of fiscal stimulus fade. The recently released Federal Reserve (Fed) Beige Book appears to show that economic activity has become more segmented, with changes in activity varying greatly by sector—consistent with what we’ve seen from manufacturing and services data.

In the Beige Book, the Fed presents qualitative observations made by community bankers and business owners—or “Main Street”—about economic (housing, labor market, manufacturing, nonresidential construction, prices, tourism, wages) and banking conditions (lending conditions, loan demand, loan quality). At LPL Research, we maintain an indicator called the Beige Book Barometer (BBB) to gauge Main Street’s sentiment by looking at how frequently key words and phrases appear in the text.

In this month’s Beige Book, “strong” words posted their first decline since the recovery began. However, “weak” words and mentions of uncertainty declined relative to September’s Beige Book. The modest improvement in aggregate sentiment has pushed the BBB past the pre-COVID-19 level, when the concerns of the virus’ outbreak in other areas of the world were first noted.

Source:  LPL Research 10.22.20

View enlarged chart.

“With the effects of fiscal stimulus subsiding, we’re seeing the rebound in growth and sentiment slow from their blistering pace seen during the summer,” noted LPL Chief Market Strategist Ryan Detrick. “While the rate of growth seems to be slowing heading into the fourth quarter, we don’t think the recovery is at risk of stalling.”

Several reporting districts also pointed toward the impact of election uncertainty on business decisions, but ultimately these concerns should prove transitory. Surprisingly, most districts reported tight labor market conditions, unusual when the unemployment rate is elevated, as worker health concerns and childcare needs prompted many firms to offer schedule flexibility to compensate.

While the BBB is a qualitative update on growth, we will get the true numbers for the third quarter next week with the gross domestic product release slated for Thursday, October 29.

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