Beige Book: Window on Main Street

The latest edition of the Federal Reserve’s (Fed) Beige Book, released last week, suggested continued steady economic growth. While signs of a tightening labor market and concerns about tariffs continue to appear, we believe they should be viewed within the context of Main Street’s generally positive view of the overall economy. The Beige Book is a qualitative assessment of the domestic economy and each of the 12 Fed districts individually. The report is prepared eight times per year, ahead of each Federal Open Market Committee (FOMC) meeting — the next of which is scheduled for the end of this month. We believe the Beige Book is best interpreted by measuring how key words change over time. Details in the September 2018 Beige Book were collected in the weeks prior to August 31.

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Manufacturing Health at 14-Year High

Strong manufacturing growth is a bellwether for overall economic health. Even though manufacturing is a dwindling part of domestic output, accounting for about 12% of gross domestic product (GDP), strong manufacturing growth has consistently preceded significant phases of GDP growth. Because of this, the Institute for Supply Management’s (ISM) U.S. Purchasing Managers’ Index (PMI) survey is one of the gauges we monitor in our Recession Watch Dashboard. Over its past five cycles, the U.S. economy has fallen into a recession an average of 46 months after the ISM index peaked [Figure 1].

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Productivity On the Rise

Productivity gains play an important role in economic output, and recent gains support an encouraging picture of the U.S. economy. Productivity, first and foremost, is a primary driver of gross domestic product (GDP) growth [Figure 1]. In the second quarter of 2018, nonfarm productivity rose 2.9%, its fastest pace of growth since the first quarter of 2015. Business sector productivity grew 3.6%, its biggest quarterly jump since the fourth quarter of 2009, while manufacturing sector productivity rose 0.9%. Nonfarm productivity grew primarily from an increase in output per hour of work (versus the number of hours worked). Output increased 4.8% quarter over quarter (its fastest pace since 2014), while hours worked grew 1.9% (versus a 2.2% rise in the first quarter).

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