According to our textual analysis, the latest Beige Book portrays grave concerns about the US economy, and a moderation of concern about inflation. Commentators have tended to point to the report as reflecting continued concern about inflation, especially in light of tariffs. However, that is not how it appears by our textual analysis. In our view the main takeaway is a significant reduction in optimism around growth. Translated into GDP forecast – which of course it is not – suggests the US real economy effectively stopped growing in the Feb-April period.
Our sentiment indicator shows a pronounced shift downwards. From ‘steady’ growth in the March report, the latest report has shifted sharply into the red, indicating concerns about growth on a par Q3 2008 (pre-Lehmans bankruptcy). This is not yet a crisis, but comes with little warning and signals a clear break from assessments of the last two years.
The reference period for the report is intended to be February-March. The cut-off date, however, was 14th April, so the latest Beige Book assessment period includes the mayhem that followed ‘Liberation Day’. The market disruption, especially the bond price swings, may have heavily influenced the tone of the report at a late stage of its compilation.
Typically, the Beige Book lags major changes in economic conditions by 2 release cycles (approximately 1.5 months) and we are yet to see significant hard data on economic slowdown. There is strong historical link between market volatility and a decline in confidence which can precede a rise in savings and decline in spending by both households and business. This is a factor to which the Fed is highly sensitive – from staff level to the chair.
Beige Book sentiment has a reasonable record of reflecting nominal GDP progress. As a rough’n’ready guide the sharp decline in the sentiment would translate into a rate of approximately 2.5% annualised NGDP, or ~0% real GDP.
It is concern about tariffs which stands out, overwhelming most other considerations. This could be an indirect reference to market volatility that followed ‘Liberation Day’ or it could be a sober reflection of economists’ projections.
Broken down into ‘strong’ versus ‘weak’ components, the sentiment shows a marked decline in words associated with strength, and a less pronounced rise in words associated with weakness, so the report may reflect caution as much as expected decline in growth.
There seems to be a decline in concern on inflation. Though the sentiment index for inflation remains historically elevated, it is now clearly below the level that seems to reflect Fed alarm (which equates to a level of ‘2’ in the chart below). This is surprising because many expect the Fed to maintain its vigilance on inflation due to cost rises associated with tariffs. However, the latest inflation score could also simply reflect that focus has now switched to growth. This is potentially a significant development.
Employment/Unemployment remains above long-term averages as a discussion point and has been trending higher since mid-2024. With the exception of the peak COVID panic era (2020-2022) the occurrence of employment/unemployment stands close to long term highs.
Turning to regional perspective in growth and inflation, the contrast of the current report to the earlier March release is stark.
Economic growth has gone from heterogeneous but overall positive to almost universally arctic blue (signalling a decline in growth momentum). The comparison shows how earlier pessimism from the West Coast has now permeated the entire country.
Weirdly, inflation has gone from a lingering concern across most districts in March, to of little concern in April – except in Kansas District. Media coverage of the Beige Book picked up on the more troubled outlook for growth, but did not suggest there was a marked decline in concern about inflation. Whether we are actually measuring the right things here is something we’ll look into.
The bond market certainly picked up on the overall decline in economic impetus reflected in the Beige Book. 10-year yields stood at 4.39% just prior to release on Wednesday, fell immediately 7bps (overnight) and continued to decline to reach 4.26% by 11.30am on Thursday.
In contrast, the S&P500 index rallied, possibly responding to the fall in yields rather than the decline in economic outlook.
The forthcoming FOMC meeting on 6-7th May promises to be a most interesting event.