The Latest ‘Beige Book’ Isn’t Great

I’m sure many of you know about the Kelley Blue Book for car pricing…

But have you ever heard of the “Beige Book” from the Federal Reserve?

Now, maybe you’re thinking, “Great… more outdated, lagging numbers from the folks at the Fed.” And in many cases, you wouldn’t be wrong with that assumption

A lot of the Fed’s reports and metrics are quantitative. That means they’re based on numbers you can measure exactly.

It takes a lot of time to gather, verify, and publish all that information. That’s part of why huge lags exist in the data releases for inflation, gross domestic product, and more.

But the Beige Book is different…

The Fed publishes the Beige Book eight times every year – roughly every month and a half. And as the central bank describes it, this report “gathers anecdotal information on current economic conditions” from each of the Fed’s 12 districts.

The data is based on what folks are seeing in real time. It essentially comes from interviews with each of the banks’ heads about the trends they’ve noticed in the market in their areas.

In other words, it’s a quicker way to check the pulse of the economy across the country.

And importantly, the Fed just published its most recent Beige Book last Wednesday…

Some of the surface-level details in this update look promising. But as I’ll explain in today’s essay, the report ultimately points to more trouble ahead for stocks…

Let’s start with some of the key points from the Fed’s latest Beige Book…

  • Price levels remained elevated, but nine Fed districts reported some slowing in the rate of increase.
  • Manufacturing and construction input costs are still elevated, but lower fuel prices and cooling overall demand reduced costs – especially freight shipping rates.
  • Several Fed districts reported some declines in steel, lumber, and copper prices.
  • Salaries grew and many employers planned to give end-of-year pay raises to workers.

Now, on the surface, these points all appear to be good signs for the economy.

But the problem is… I don’t think they’ll last.

For example, as I noted, a lot of the Fed’s districts reported declines in steel, lumber, and copper prices. And these declines for some of the economy’s most essential products helped push prices down across the board.

But right now, a lot of the inflation relief we’re seeing is coming from lower fuel costs. And as my colleague Pete Carmasino detailed recently, the world is in a tough spot for energy…

Russia continues to hold Europe’s energy supply hostage. In fact, Russian energy giant Gazprom just shut down its Nord Stream 1 pipeline yet again earlier this month.

As a result, millions of folks in European countries like Germany will have huge problems getting enough energy to heat their homes this winter. The energy supply will need to come from other places.

That will push energy costs up worldwide. And in turn, inflation will remain uncomfortably high.

That doesn’t bode well for interest rates, stocks, or bonds. And ultimately, this chain reaction means that we’ll likely see more rate-hiking action from the Fed.

So the latest Beige Book might seem encouraging at first. But beneath the surface…

Expect inflation to keep increasing. Expect the Fed to keep raising rates. And expect the stock market to continue languishing as the whole saga plays out.

Whatever you do, make sure your investment strategy accounts for this uncertainty.

Good investing,

Karina Kovalcik

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