Fed Beige Book: Brexit Weighs on Outlook in Some Regions

Workers helped construct a building in Boston in May. ENLARGE
Workers helped construct a building in Boston in May. Photo: Steven Senne/Associated Press

WASHINGTON—The U.K. vote to leave the European Union is causing concern among businesses in certain pockets of the U.S., a Federal Reserve report said Wednesday.

The Brexit vote was a factor in recent weeks across at least three areas, according to the central bank’s latest beige book, a review of regional economic conditions. But broadly, the report showed the U.S. economy is expanding at a modest pace.

In the Dallas region, for example, “outlooks were generally positive but more cautious, with the upcoming presidential elections and the Brexit vote driving some of the uncertainty,” the report said.

The survey collected anecdotal information on economic conditions through July 1 in the 12 Fed districts, so it provides policy makers an early look at how the June 23 Brexit vote affected the U.S. economy. The survey was released two weeks ahead of the U.S. central bank’s next policy meeting, scheduled for July 26-27.

In the Chicago region, “financial market participants reported a significant increase in volatility, driven primarily by the United Kingdom’s vote.” In Boston, two technology firms cited the fallout from Brexit as a “potentially destabilizing factor,” though a commercial real estate contact there said instability in Europe could boost foreign investment in the U.S.

However, reports from several other regional Fed banks made no mention of the vote or its potential impact on the economy.

Most other recent economic reports haven’t covered the late-June time frame when financial markets swung wildly after the Brexit vote. For example, June’s strong jobs report looked at the hiring situation during the middle of the month.

A report from the Institute for Supply Management, released July 1, did find that 38% of U.S. manufacturing firms and 32% of services firms surveyed expected at least some negative impact due to the Brexit vote.

When Fed officials last met June 14-15, they held their benchmark short-term interest rate steady. That meeting came on the heels of a May jobs report showing a sharp slowdown in hiring, and was just more than a week before U.K. voters went to the polls.

Given the uncertainty around the U.K.’s pending departure from the EU, many economists expect the Fed to hold its rate steady again later this month. However, a rebound in stock markets in recent weeks and better hiring last month could allow the Fed to increase rates later this year, if the economy maintains momentum.

Heading into 2016, many economists and Fed policy makers projected multiple rate increases this year. But pressures from China, Europe and a stronger dollar have caused the Fed to stand pat.

“I expect we will be living with uncertainty for a while as the U.K. and Europe establish the terms of their new relationship,” Federal Reserve Bank of Cleveland President Loretta Mester said Tuesday. Still, she repeated her view that the Fed can’t hold off indefinitely on raising rates and said the most likely outlook still favors “a gradual upward path of interest rates.”

More generally, the Fed reported modest or moderate economic growth in most of its 12 districts. Contacts in the Cleveland region reported a “steady level” of economic activity.

“The outlook was generally positive across broad segments of the economy including retail sales, manufacturing, and real estate,” the report said. “Districts reporting on overall growth expect it to remain modest.”

The wide-ranging report said employment continued to grow modestly, with strong demand for skilled labor. The report said firms are finding it difficult to fill information technology, biotechnology and health-care services positions—pushing up wage rates in those types of fields.

Consumer spending showed signs of softening, the report said, and inflation pressures outside of wages “remain slight.”

Factory activity was “mixed but generally improved across districts,” the report said.

Residential real estate activity strengthened from earlier in the spring, with home sales increasing despite limited inventory. Commercial real estate activity was stable or improved in almost all districts.

Overall loan demand increased, but varied across the country. Residential lending, specifically, ranged from an “anemic expansion in Dallas to strong growth in St. Louis.”

Most districts reported higher prices for their major crops at the time farmers were able to lock in for the fall harvest, the beige book said. “Planting for key crops compared favorably with historical progress.”

Write to Eric Morath at [email protected] and Ben Leubsdorf at [email protected]


WSJ.com: US Business

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