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2020 Fed Beige Book - Prices Up, Wages Flat

Posted by Jonathan Ting on January 16, 2020

This week, the Federal Reserve released its Beige Book report which covers economic activity in the final six weeks of 2019. Given the Fed’s dual mandate on employment and inflation, let’s focus on its findings from those two areas.


Employment Chart

Across all regions, the labor markets are tight. With the unemployment rate at a 50-year low, business are finding it increasingly difficult to hire skilled workers, ultimately stunting future plans. For some reason, it seems businesses are either unwilling, or unable to raise wages to attract workers. One survey respondent noted that as a small business, they did not have the resources to compete with larger businesses on wages. In response, they are employing other tactics, finding ways to automate, and some have even given up trying.

Below are some notable excerpts:

“The minimum wage increases in effect January 1 in some states further raise labor costs” (Boston)

“Average work hours have continued to edge down since the prior period and a lack of available labor has constrained production and expansion plans.” (Philadelphia)

“The tight labor market led some firms to increase benefits and wages, ease background screening requirements, and invest in labor-saving technology. To retain workers, firms have increased wages, training, and talent development.” (Richmond)

“Businesses reported continuing to explore new recruiting and retention tactics, such as offering a variety of benefits, paying for training and certifications, and clearly demonstrating potential career paths. Many firms continued to pursue investments in automation and technology, which are expected to ultimately reduce headcount requirements.” (Atlanta)

“Manufacturers facing slow demand again reported cutting hours rather than laying off workers because they were worried the tight labor market would make it too difficult to hire when demand recovered.” (Chicago)

“Uncertainty over how tight labor markets will impact market wages of various positions has led some Missouri contacts to delay hiring for at least a month. An Arkansas contact reported multiple retailers are hiring fewer workers to counteract the increase in labor costs.” (St. Louis)

“Firms in the technology and retail sectors highlighted that brisk competition limited their ability to pass through wage increases to final prices.” (San Francisco)

“A majority of survey contacts cited labor shortages as the single most important problem currently facing their business.” (Kansas City)


Core CPI Chart

Price inflation and core CPI (Consumer Price Index) remain stubborn, growing only modestly over the past few years, despite conditions that should push it higher according to conventional wisdom. This has led some economists to doubt the relevancy of the traditionally followed Phillips curve (lower employment leads to wage inflation which leads to price inflation). I believe it is rather clear – it’s not a breakdown in the Philips curve, rather, as stated above, wage inflation has so far been either absorbed or subdued by companies. Although, external pressures have been introduced, namely the US-China trade war which is causing dislocations in supply chains and commodity markets. Prices are rising in pockets of the economy, which is causing broader inflation expectations to rise. Below are some notable experts on prices:

“Education & health and wholesale & retail trade have noted fairly widespread escalation in the prices they pay… businesses in all sectors plan to raise their selling prices in 2020.” (New York)

“Prices had risen modestly or not at all. A fish producer said that tariffs had stabilized but the resulting costs were difficult to pass on.” (Boston)

 “Several manufacturers said that tariffs continued to impact the cost of raw materials. Meanwhile, services sector firms reported an uptick in price growth for prices paid and prices received.” (Richmond)

“Construction contacts reported that prior price increases from tariffs on building materials, such as steel and aluminum, have now been passed on to consumers.” (St Louis)

“The anticipation of higher prices has broadened among manufacturers… almost none expected prices to fall.” (Philadelphia)

Technology is likely a major contributor to the strange environment we find ourselves in. It’s well understood that productivity is a function of three factors – capital, labor and technological innovation. Even though labor is being constrained, the availability of technology and automation are pushing businesses to find ways to cut costs rather than increase the capital input (increase wages). Policy-level actions have the potential to reverse this, but we may be entering an era of long-term deflationary wage headwinds, especially for lower-skilled workers, as companies look to adopt more technology.

Topics: Market Outlook

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