“Both Kansas City and San Francisco noted that their economies expanded further,” The Fed says. “Chicago reported that although there was an increase in activity, it was at a pace not quite as strong as during the previous reporting period.” Mixed signals but not definitive ones.
There was not much good news about real estate. Load demand did not pick up in a meaningful way. Manufacturing rebounded. Hiring did not, and many companies continued their appetites for temporary workers. These are people who usually get no benefits may only be on the job for a few weeks. It calls to mind the 60,000 workers Home Depot has begun to add. Most of those people will be gone after the sales season for home rebuilding. If a new slowdown sets in, many could be gone sooner than that.
The data which shows manufacturing growth as the solid bright spot in the economy is hardly good news at all. The idea that the recovery can improve forever with low consumer spending and strong factory activity is a myth. Demand will eventually catch up to output. The collision will be ugly. The manufacturing sector may be the only one adding jobs.
The other Achilles Heel of manufacturing is the rising cost of goods to be sold. Inflation at the commodities level is rising faster than many economists had forecast. Those costs cannot be passed on to troubled consumers. Margins at manufacturing companies will flatten out, or worse, begin to drop.
The markets reacted very little to the Beige Book observation. Investors may wish that they had taken its signals more seriously.
Douglas A. McIntyre
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