Fed‘s Beige Book finds U.S. economy is expanding at a ‘modest‘ pace

Back-to-school shopping mitigated some slowing in retail sales in August, the Fed’s Beige Book found.

The outlook: Economic activity in the crucial non-financial service sector was either steady or improving across the country through the end of August,

What happened: The overall economy expanded at the same “modest pace” seen in earlier reports this year, the survey said.

While there was continued uncertainty over U.S. trade policy with China, a majority of business owners “remain optimistic about the near-term outlook,” the Fed found. Manufacturing and agriculture were the two weak spots in the late summer.

Reports on consumer spending was “mixed,” with auto sales continuing at a modest pace and “solid” tourism activity. Employment grew at a modest pace, with moderate upward wage growth. Price increases were modest. Businesses said that the impact of recent trade tariffs on Chinese products would not be felt for a few months on prices that consumers pay at the store.

Big picture: Economists generally don’t think that weak manufacturing and agriculture will be enough to push the economy into a ditch. Today’s report fits with the same 2% growth rate seen in the first half of the year.

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Fed officials are split about how to respond to fears of a sharper downturn, with some urging no rate cut while others push for aggressive easing at the next policy meeting on Sept. 17-18. Most economists think the safest course for the Fed will decide to cut interest rates by a quarter-point at its next policy meeting in two weeks, following up on a similar move in July.

Interesting anecdotes:

• Retailers in Boston said there was a slowdown in getting products from non-Chinese Asian manufacturers, as ports in these countries were said to be not yet able to handle the increased shipping demand.

• In New York, a major retailer said that had raised prices for furniture and other big-ticket items but that they were likely to reverse those hikes as consumers were not responding well.

• In Cleveland, manufacturers were not laying off workers but were taking other steps to reduce labor such as fewer shirts, reduced overtime, fewer temporary employees and shrinkage by attrition.

• Ports in the Richmond district saw robust activity from strong import volumes.

• Retailers in Atlanta detected some uncertainty among consumers about the geopolitical environment, and expressed some concern about the upcoming holiday season.

• Some retailers in Chicago were starting to incrementally increase prices to avoid a ‘single noticeable increase’ when tariffs come into effect.

Market reaction: Stocks were higher on hopes of possible end to violent protests in Hong Kong. The S&P 500 index  closed up by 31.51 points to 2,937.78.

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