Fed: Wages and worker shortages are growing

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A report of data prepared for the Federal Reserve’s policy-setting meeting which begins at the end of this month suggests the U.S. economy is on a steady path, with prospects for further improvement.

The Fed’s Beige Book shows that economic growth has been expanding at a modest pace across the Fed’s dozen districts. The survey comes amid gains in sentiment and expectations, reflected in the stock market rally and surge in bond market interest rates.

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Retail, energy and manufacturing

Since manufacturing has been an under-performer in the U.S. for quite some time, it is good to see the word “turnaround” in the Beige Book. Manufacturers in most districts are enjoying rising sales, and the energy sector may have turned a corner, according to the report.

While retail sales were a mixed picture from the vantage point of major chains, the report confirms what many consumers know to be true from their own buying habits, specifically that “growth in e-commerce has come at the expense of brick-and-mortar retailers.” Think Amazon.com versus the likes of Macy’s and Sears.

With the unemployment rate below 5 percent since April of last year, shortages of skilled workers are reported to be “widespread.” Even some “less-skilled” jobs are apparently lacking well-qualified candidates, the Fed says.

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Wages and prices

Despite the tightening job market, wage growth still appears to be slight, with moves by states to raise the minimum wage having some of the most significant impact. The report says “most Districts indicated that wages increased modestly.”

Generally, the outlook for this year (and probably next) suggests that the job market should continue to improve. The Beige Book tells us many workers can expect to command higher wages, and the pace of hiring should at least hold steady. At the same time, prices are gaining some traction. “Pricing pressures intensified somewhat since the last report. Eight out of 12 Districts saw modest price increases and the remainder experienced slight increases, or flat prices in the case of the Atlanta District,” according to the report.  Earlier, the Labor Department reported that consumer prices surged 2.1 percent in 2016, the biggest increase in five years.

The Fed’s upcoming meeting

The report, prepared for the Fed meeting which concludes Feb. 1, is consistent with Fed policymakers’ projections looking for a quickening pace of interest rate increases over the next couple of years.

“The breadth of the improvements, with all districts reporting positive trends, suggests that faster growth is likely to continue and that should support rate increases at least at the rate the Fed is currently projecting,” says Brad McMillan, chief investment officer, 
Commonwealth Financial Network.

For that outlook to remain intact, it will require that the new president and Congress eventually deliver on promises aimed at boosting growth, meaning that the spotlight would finally shift to fiscal policy and away from the Fed’s monetary policy.

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