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The Fed’s Beige Book showcases 5 signs of economic pain flying under the radar



Federal Reserve officials spend a lot of time poring over reams of economic data, but sometimes it pays to take a more hands-on approach, and the Beige Book is designed to do just that. 

Published eight times each year, the Beige Book—named for the color of its cover—collects insights into the current state of the economy from on-the-ground interviews, reports, and surveys completed by each of the 12 Fed district banks. Former Fed Vice Chair Alan Blinder once described it as the “ask your uncle” approach to economics. 

With forecasters’ narrative shifting wildly over the past year—from a recession, to a “soft landing,” to the current favorite: a higher-growth, higher-inflation “no landing” scenario—the anecdotal details of April’s beige book were closely dissected by many experts. Its release this week followed strong consumer spending data and the third hot inflation report of the year, a combination that led even Chair Jerome Powell to push back on the prospect of widely anticipated, market-juicing interest rate cuts at a recent policy forum in Washington, D.C.

But instead of showing evidence of an overheating economy, the latest Beige Book suggests the opposite, revealing signs of slowing economic growth. “The Beige Book points to more of a slowdown in hiring and economic activity than reported in the ‘hard’ indicators of the U.S. economy, like the jobs report or real GDP,” Bill Adams, chief economist at Comerica Bank, told Fortune via email. 

Even worse, the Fed’s surveys and interviews revealed many Americans are still struggling with the high cost of living; certain sectors of the economy are facing painful corrections; and there’s evidence that the nation’s charities can’t keep up with rising demand for their services. If you asked your uncle, this is what he’d tell you about the U.S. economy right now—and it’s not as pretty as the hard data suggests.

1. It’s painful for low- and middle-income households

First, low- and middle-income households are still struggling with inflation. The Cleveland Federal Reserve noted that two-thirds of the nonprofits in its district reported that low- and middle-income Americans have experienced a decline in their financial well-being over the past six months. 

“Moreover, nearly three-quarters said that the availability of affordable housing decreased amid rising rents, the loss of units to blight, and insufficient unit supply,” Cleveland Fed officials wrote.

The Federal Reserve Bank of Philadelphia also reported that “contacts from many sectors noted that lower-income households are struggling with high prices and high interest rates.” Repossessions and delinquencies on auto loans were rising due to higher interest rates and car prices, particularly for low-income households, the Philadelphia Fed said.

The pain appears to be national as well. The Federal Reserve Bank of Dallas reported that its constituents have seen “sustained high demand” for nonprofit services, including food pantry services, health insurance assistance, and basic clothing donations. “Cost-of-living was an ongoing concern, and more people were looking for second jobs to make ends meet,” Dallas Fed officials added.

The Federal Reserve Bank of Chicago also noted that for low-income consumers, inflation, particularly rising housing costs, “remained a challenge for household budgets.” Despite efforts to increase the supply of affordable housing in the district, “high costs for materials and labor” have slowed progress, officials said.

2. Inflation is hitting nonprofits

While an increasing number of Americans are looking to charities for help due to the impact of inflation, many nonprofits are themselves facing a crisis. In New York, nonprofits have been “strained,” according to the Federal Reserve Bank of New York. “Inflation has caused the cost of providing services to increase, but there has not been a corresponding increase in funding,” officials explained.

Nonprofits are also facing high employee turnover and consistent job vacancies in New York state, according to the Fed, which reported that “workers have left for more lucrative and less stressful roles in the public and private sectors.”

“With shortfalls in funding and staffing, recipients of social services such as childcare, mental health, housing placement, and senior ambulances have experienced increasing wait times and service reductions,” New York Fed officials added.

San Francisco Fed officials also reported high demand for support services and “strained” resources. “Households and community members sought assistance as they faced challenges with the cost of housing, utilities, food, and health services,” they wrote. This news follows the 10.5% drop in charitable donations nationwide in 2022, according to a Giving USA report.

3. Profit margins are shrinking

After years of booming corporate profits, both small and large businesses nationwide reported shrinking margins in the Fed’s April Beige Book. Officials at the Federal Reserve Bank of St. Louis said that although inflation only increased “modestly” in their district, “firms continue to note higher costs are compressing profit margins as they are unable or unwilling to increase prices to customers.”

Among the examples: a boat retailer is cutting profit margins to boost sales amid slowing demand; and a restaurant and a textile manufacturer that both reported higher food and labor costs, but said that they can’t raise prices to compensate.

Chicago Fed officials even saw evidence of falling demand impacting margins in the relatively robust manufacturing space, explaining that “several manufacturers indicated that raising prices had become more difficult in recent months and that their margins had shrunk.”

Finally, the Kansas City Fed reported that multiple business contacts said they had a “significant increase in operation expenses” that has impacted margins. “Contacts anticipate greater difficulty passing along those operating costs to customers, thus further compressing profit margins,” they added.

4. Pricey insurance is weighing on consumers

The Fed’s Beige Book gave a small window into how rising insurance costs are affecting consumers and businesses across the nation as well. 

In March, car insurance prices spiked 22% from a year ago, according to the Consumer Price Index. And nearly three quarters of homeowners said their home insurance rates were hiked in 2023, according to a February ValuePenguin survey. But Fed district surveys show just how much those home insurance rates shot up last year in some areas. The St. Louis Fed said one insurance agent reported homeowners saw 20% to 25% annual increases on insurance premiums in the district.

Multiple major districts reported “sharp increases in insurance rates, for both businesses and homeowners,” according to the Beige Book. Businesses also saw higher insurance costs, with one of the St. Louis Fed’s retail contacts reporting a doubling in her premiums.

The Atlanta Fed said that “increases in insurance premiums were notable” in its district as well in recent months. ”Rising insurance premiums and HOA fees in coastal markets remained a challenge for homeowners on fixed incomes,” officials explained. And the Kansas City Fed flagged rising business operating expenses, with “notable growth in business insurance costs” as one of the key issues in its region.

5. Office real estate’s woes continue

Rising borrowing costs and the hybrid work trend have combined to hammer the U.S. office real estate market in recent years. Office real estate values have slid as much as 15% nationwide since the start of 2022, according to data from CoStar, and some cities, including New York and San Francisco, have seen far more dramatic drops. With office vacancies hitting a record in the first quarter, forecasters are expecting more tough times ahead as well. 

The Beige Book showed even more evidence of the office real estate debacle in April. New York Fed officials reported the region’s commercial real estate market “weakened noticeably,” with demand for office space falling and vacancy rates rising “sharply.” 

“All in all, financial strain among property owners in New York City continued to build as debt service payments rose,” they wrote. 

The Boston Fed said that, although its commercial real estate sector “picked up slightly” and the outlook is now improved, the “risk of financial distress for large office buildings remained elevated.” And the Philadelphia Fed noted that transactions in the office sectors are continuing to drop because “investors are waiting for discounts on distressed properties.”

However, the U.S. has a very regional real estate market, and that was also on display in the Beige Book. Minneapolis Fed officials reported that their commercial real estate sector “improved slightly” and demand remained strong. “The office sector has ‘stabilized,’ according to one source; subleasing fell modestly, and workers were gradually returning to the office,” they wrote.

What does this mean for interest rates?

All in all, the Fed’s Beige Book paints a far more pessimistic picture of the U.S. economy than recent data suggest. But for investors panicking over the prospect of fewer interest rate cuts this year due to persistent inflation, the evidence the report offers of lower growth and lower inflation may be good news. As Comerica Bank’s Adams explained, “the Fed will be glad to hear Beige Book contacts reporting they expect slow inflation in their outlook.” After all, it means the central bank has less work to do to achieve price stability.

However, Adams noted that on-the-ground surveys like those included in the Beige Book tend to be more pessimistic about the state of the economy, which means they won’t “outweigh” hard economic data from recent inflation or growth reports that have shown substantial price pressures. Still, he argued the Fed will at least see this as a “reason to discount the message from the hard data.”

As Brian Rose, senior U.S. economist at UBS Global Wealth Management, explained in a Wednesday note: “In our view, the Fed cannot cut rates until the inflation data cools off, but the softness expressed by their contacts will make them more reluctant to even contemplate additional rate hikes.”

Rose argued that the Beige Book data will lead the Fed to hold rates steady for now, before cutting in September. But while the evidence of slower growth and lower inflation in the Beige Book could be good news for investors hoping for market-juicing rate cuts, it certainly isn’t what most Americans wanted to see.

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