Fed’s Beige Book Highlights Range of Risks Facing the Economy

Posted by George Smith CFA CAIA CIPM

Thursday, April 21, 2022

According to LPL Research’s analysis of the Federal Reserve’s (Fed) recently released Beige Book, Main Street sentiment is confronting an expanding number of risks but remains positive overall. Words related to uncertainty reached their highest level since 2019, but within the context of extraordinary low mentions of weakness, which is usually a clearer sign of economic disruption. The main causes of the uncertainty aren’t surprising. The count of inflation-related words remains high, although it is off its peak, COVID remains a major theme, and Russia or Ukraine appeared 47 times. Still, positive words were at their highest level since the middle of 2021, signaling Main Street businesses likely see the possibility of an economic turnaround as we move further into 2022.

“Looking at the Fed’s most recent Beige Book, local U.S. businesses remain resilient despite elevated uncertainty,” said LPL Financial Asset Allocation Strategist Barry Gilbert. “Inflation, COVID, and the conflict in Ukraine will keep uncertainty elevated in the near term, but if we can navigate these challenges we believe there are solid prospects of a pick-up in growth in the second half of the year.”

As shown in the LPL Chart of the Day, Main Street sentiment rebounded from March weakness and remains consistent with economic expansion, according to LPL Research’s proprietary Beige Book Barometer (BBB). The reading is based on our analysis of the Fed’s Beige Book, a publication released two weeks before each Fed policy meeting that captures qualitative observations made by community bankers and business owners—what we like to think of as “Main Street” rather than “Wall Street.” The BBB gauges sentiment by looking at how frequently key words and phrases appear in the text.

View enlarged chart.

Overall, we think the Beige Book Barometer may provide a more accurate picture of the economic outlook than consumer sentiment right now, which remains weak in the face of rising consumer prices. Despite weak economic growth in the first quarter, data has recently been coming in ahead of consensus expectations indicating downside may largely be baked into expectations. The strength of a potential second half rebound may be limited. Fed rate hikes are likely to put a ceiling on the growth outlook as it focuses on fighting inflation and the long-term health of the economy, but we believe we may still be able to achieve solid above-trend growth, although uncertainty does remain elevated. If further economic damage from inflation, COVID, and the conflict in Ukraine remains limited, an economic rebound is likely to continue to support earnings and set up equities for a rebound over the remainder of the year.


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