Market CommentariesBeige Book Shows Modest Growth Across Much Of The Country

The Federal Reserve's Beige Book economic compilation was issued within the past hour and the essential message was that the nation's economy was continuing to expand at a modest pace. That was relatively consistent with past Beige Book issuances and should not prove to be overly worrisome for the central bank as it prepares for its next FOMC meeting in two weeks. In short, this report was not a game changer, in our opinion.

The Fed's Beige Book is a collection of anecdotal information from business contacts nationwide. The latest summation found that U.S. labor markets appeared to be tightening despite just modest job growth. Such a development should lead to somewhat more aggressive wage increases. Lagging earnings growth among workers has been a theme of this long business expansion. We will get a more in-depth look at the nation's employment picture this Friday, when non-farm payroll data are issued.

In addition, the Beige Book found that inflation pressures were growing slightly across the country, in part because of the rising labor costs for many American companies. The recent tick up in inflation was evident in April's above-consensus 0.4% increase in the Consumer Price Index.

Getting back to the labor situation, tight labor markets were noted in most Districts, with pricing pressures up slightly, overall. The report could make some Fed policymakers more comfortable that inflation is on track to increase toward the Fed's 2% target. Price growth, on average, has been short of that mark, which is one reason the lead bank has been slow to raise borrowing costs. Recent comments by the Fed suggested that inflation likely would gradually head toward the 2% target.

Of course, tighter labor markets were not universal, as demand for workers was soft across the energy belt, encompassing five Fed Districts. In the meantime, the report noted that most firms expected the current rate of economic improvement to continue or increase. Also up in the latest Beige Book was loan demand, which gained modestly. However, manufacturing activity was mixed, a result that was in line with this morning's issuance by the Institute for Supply Management showing slightly better manufacturing activity across the country.

All in all, this was a reasonable report by the Fed and does not seem to make a statement one way or the other regarding whether the bank will choose to increase interest rates later this month. Our thinking continues to be that the Fed will act either this month or in late July, with perhaps a slight nod to the later date.

At the time of this article's writing, the author did not have positions in any of the companies mentioned.