WASHINGTON: US economic activity continued to expand at least modestly in recent weeks but political and trade uncertainty is undercutting optimism, the Federal Reserve said on Wednesday (Jan 16).
Companies also are concerned about volatility in financial markets and rising interest rates, according to the Fed's "beige book" survey of the economy.
And businesses nationwide continue to struggle to find and retain workers, despite rising wages, with some having to forgo work due to lack of employees, the report said.
"Outlooks generally remained positive," the Fed said, but in many of the 12 Fed districts "contacts had become less optimistic in response to increased financial market volatility, rising short-term interest rates, falling energy prices, and elevated trade and political uncertainty."
Nearly every region mentioned the impact of trade disputes and tariffs on manufacturing, retailers and other sectors.
In some cases the impact was positive but expected to be temporary.
In Richmond, which includes the port of Baltimore, "ports saw robust activity in recent weeks" which they attributed largely "to orders being made early to avoid possible tariff hikes."
However, "they expected trade to soften in the next few months."
One Virginia company even had Chinese goods shipped through the west coast ports to beat the tariffs, the report said.
President Donald Trump's aggressive trade policy has imposed steep tariffs on steel and aluminum as well as US$250 billion in goods imported from China annually.
The tariffs have raised costs for firms throughout the economy and in turn have drawn retaliation on US goods, felt most keenly by soy farmers.
The US government shutdown, which is in its fourth week and now the longest ever, also spurred uncertainty, especially in financial firms.
The Cleveland Fed said "Volatility in financial markets and political uncertainty have had a negative effect on consumer and business confidence and cloud the outlook for loan demand in the coming quarter."
And Dallas said manufacturers' sentiment "turned slightly negative in December," due to several issues including declining oil prices, labor constraints and political uncertainty.
The shutdown was in its early stages when the report was prepared, so it may have been too early to capture the effects.
WAGES RISING NATIONWIDE
Meanwhile, the tight labor markets continue to hamper firms from expanding, while wages are rising nationwide and at all skill levels including entry-level jobs as new minimum wage laws took effect. But so far those increases have been moderate, the Fed said.
The Minneapolis Fed said construction firms had been obliged to turn down business due to the inability to find workers.
But price increases have remained moderate even with rising input costs, helped by falling fuel prices, according to the report.
The Fed is watching prices and growth carefully but central bankers in recent weeks have clearly signalled that they can hold off on raising the benchmark lending rate again for a time.
But as Oxford Economics noted, the government shutdown has interrupted the usual stream of economic data the Fed uses to gauge the health of activity.
"With a backlog of unreleased economic data due to the government shutdown, the Fed's policymakers will pay special attention to these qualitative findings."
The beige book, collecting information prior to Jan 7, was prepared ahead of the Fed's rate-setting Federal Open Market Committee meeting on Jan 29-30.
The Fed raised the key rate four times last year, and Oxford Economics predicts two increases in the latter half of this year.
The US stock market, which was roiled in the final weeks of 2018 over concerns about the slowing economy and rising interest rates, largely shrugged off the Fed report, focusing instead on positive earnings reports.