The Fed’s Beige Book and a “Soft Landing”?

By at 19 October, 2023, 8:37 am

by Raymond J. Keating –

The opening paragraph of the Federal Reserve’s latest Beige Book was another slap in the face on the economy.

Consider this, according to the latest take: “Most Districts indicated little to no change in economic activity since the September report.”

And this: “The near-term outlook for the economy was generally described as stable or having slightly weaker growth.”

None of this is a positive addition to the assortment of information we’re sifting through on the state of the economy.

As a reminder, the Beige Book offers a summary of takes on economic activity from “comments received from contacts outside the Federal Reserve System and is not a commentary on the views of Federal Reserve officials.”

As for some key areas, consumer spending was rated as “mixed,” as was manufacturing.  Banks reported “slight to modest declines in loan demand.”

The take on labor markets was informative and worth a lengthier quote:

“Labor market tightness continued to ease across the nation. Most Districts reported slight to moderate increases in overall employment, and firms were hiring less urgently. Several Districts reported improvements in hiring and retention as candidate pools have expanded and those receiving offers have been less inclined to negotiate terms of employment. However, most Districts still reported ongoing challenges in recruiting and hiring skilled tradespeople. A few highlighted that older workers are remaining in the labor force, either staying in their existing position or returning in a part-time capacity. Wage growth remained modest to moderate in most Districts.”

As for inflation and the price of inputs, the challenges for business owners persist and were rather ably explained:

“Districts noted that input cost increases have slowed or stabilized for manufacturers but continue to rise for services sector firms. Increases in fuel costs, wages, and insurance contributed to growth in prices across Districts. Sales prices increased at a slower rate than input prices, as businesses struggled to pass along cost pressures because consumers had grown more sensitive to prices. As a result, firms struggled to maintain desired profit margins.”

But all of this brings me back to a point that is incessantly brought up, especially among those talking on financial news networks: Are we going to have a “soft landing”?

This, of course, is in reference to the Fed’s idea that the way to fight inflation is to dampen economic and employment growth.

Hmmm. But that would seem to require an economy that is or recently was growing at a healthy clip. Below is the data of real economic growth from the latest GDP report.

Source: U.S. Bureau of Economic Analysis

Am I missing something? Where’s the strong growth?

The pandemic and its fallout hit the economy hard in 2020. We then had a bounce-back year (2021), and since then … what? Two quarters of declining real GDP – that used to be called a recession, by the way – and then growth of less than 3 percent, gradually declining from 2.7 percent in the third quarter of 2022 to 2.1 percent in the second quarter of 2023. This entire stretch has the whiff of a “soft landing.”

Consider this vital fact: From 1950 to 2006, annual real GDP growth averaged 3.6 percent, and from 2007 to 2022, annual real GDP growth averaged only 1.8 percent. That’s right, average real U.S. growth has been cut in half.

And since the onset of the Great Recession, assorted economists, talking heads, policymakers and politicians have been peddling a dangerous kind of diminished or low expectations. Their line is that the economy can’t possibly grow like it did in the past, so now 2 percent growth is just dandy.

Why? Well, that’s not really all that clear.

Perhaps the reality of a grossly under-performing economy has to do with public policies that raise costs for and disincentivize the entrepreneurship and private investment that drive innovation, productivity and economic growth forward. Such misguided policies include tax increases and threats of higher taxes; increased regulatory burdens and looming increases in such costs; protectionist trade policies; rampant expansion of government spending and debt; monetary policy not focused solely on price stability; and an anti-growth, unwelcoming immigration agenda. Hey, just a thought.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest books on the economy are The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist and The Weekly Economist II: 52 More Quick Reads to Help You Think Like an Economist.


News and Media Releases