Interest Rate Roundup

Thursday, October 12, 2006

Goldilocks Beige Book? Are you serious?

CNBC is currently saying the latest Fed Beige Book report is a "Goldilocks" report -- showing an economy that's not too hot, not too cold, and that has no inflationary pressures whatsoever. I'm not a raging inflationist, or anything, but I do think this report is anything BUT Goldilocks, and that it shows inflation pressures remain in the market. Just look at the following section of text -- while the overview copy claims price pressures are tame, virtually all the SUPPORTING copy talks about a tight labor market, still-high raw materials prices and pass-through at some businesses. Go figure. Bonds aren't showing much of a reaction to the news. They were recently up 6/32, about where they were trading before the Fed comments came out.

Employment, Wages, Prices

Labor market conditions remained taut since our last report. The Boston, Philadelphia, Richmond, Minneapolis and Dallas reports characterized labor markets as generally tight, particularly for skilled workers, while the remaining Districts noted that job growth was steady to stronger. Six Districts mentioned labor shortages, particularly for professional, scientific, and other technical workers. In addition, Kansas City said retailers faced shortages of experienced sales workers and Atlanta indicated that residential construction firms were having difficulty obtaining qualified construction workers, despite the slowdown in building activity. In contrast, Cleveland reported that roughly half of the homebuilders they contacted had reduced their labor force.

Wage growth around the nation was generally modest, although faster wage growth for skilled services workers was cited by a number of Districts. The San Francisco District noted that a short supply of healthcare, finance and construction workers pushed wages higher. In addition, Richmond noted a sharp uptick in retail wages and Atlanta reported that some manufacturers had raised entry-level wages in an effort to attract workers.

Most Districts reported few signs of increased price pressures in recent weeks. A number of Districts said that energy prices moderated, but increases in raw materials prices were noted by Philadelphia, Richmond and Atlanta, and a rise in building materials prices was reported by Minneapolis. Instances of businesses passing on higher costs were scattered across Districts; Cleveland and Atlanta said some manufacturers attempted to raise output prices while Boston reported increases in retail prices. Boston also reported that costs for some businesses had increased--especially for airfare and hotel accommodations. Likewise, the New York District noted that accommodation and theatre ticket prices had risen sharply compared to a year ago.


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