Evening Brief – 04.19.23

The Federal Reserve’s Beige Book, which is based on information collected on or before April 10, 2023, was released today and is the first since the banking crisis unfolded. The report indicated the US economy stalled, noting that “overall economic activity was little changed in recent weeks,” while two districts saw outlooks deteriorate.

Contrary to reports of a sharp drop in spending following the March banking crisis, the Beige Book reported that consumer spending was generally flat to down slightly amid continued moderate price growth.

Meanwhile, employment growth moderated somewhat and is becoming less tight as several districts noted increases in the labor supply. The slowdown wasn’t only in labor markets, but also in inflation.

But when one reads deeper between the lines, there were concerning remarks when it comes to the overall banking sector, as well as loan volumes and demand.

“Lending volumes and loan demand generally declined across consumer and business loan types” and “several districts noted that banks tightened lending standards amid increased uncertainty and concerns about liquidity,” the Beige Book noted.

The New York Fed reported that conditions in finance “deteriorated sharply; the San Francisco Fed said lending activity “fell significantly”; the Dallas Fed reported that credit standards “tightened sharply”; and the Cleveland Fed said deposits continue to decline, in part because of rate competition.

This likely reinforces the consensus view of one more 25bps rate hike in May (85.4% probability) and then a long pause as half a dozen banks seems to have issues with tightening standards, while the other half-dozen has issues with loan demand.

It also fuels concerns that the economy is heading toward recession, an outcome forecast by Fed staff economists – and seemingly ignored by the FOMC – at the March meeting.