The latest Federal Reserve study of economic conditions reveals that businesses that did not raise prices or pass on the impact of tariffs to their customers are likely to take a hit on their profit margins.
What Happened: The Beige Book is a Federal Reserve System publication about current economic conditions across the 12 Federal Reserve Districts.
According to the central bank, this publication characterizes regional economic conditions and prospects based on a variety of qualitative information gathered directly from each District's sources. Reports are published eight times per year.
The latest edition of the Beige Book, covering the period from late May through early July, highlighted that most districts reported softer consumer spending as uncertainty weighed on consumers and business leaders. Also, ten out of twelve districts expect future economic activity to either flatline or soften in the coming months.
“Prices increased across Districts, with seven characterizing price growth as moderate and five characterizing it as modest, mostly similar to the previous report,” the Beige Book highlighted.
It also stated that “In all twelve Districts, businesses reported experiencing modest to pronounced input cost pressures related to tariffs, especially for raw materials used in manufacturing and construction.”
Commenting on this, Jeffrey Roach, the chief economist at LPL Financial, told Benzinga that “Investors should expect margin compression as businesses held off raising prices because of customers' growing price sensitivity.”
Highlighting how this could affect the consumers, he explained that the persistent cost pressures can increase the likelihood that prices will “start to rise later this summer” if businesses are successful in passing along higher input costs.
Roach also underscored that business leaders in several districts plan to postpone both hirings and layoff decisions until they get clarity about trade policy.
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Why It Matters: While Roach’s macro quicktake was that Beige Book reveals “heavier margin compression” in the coming months, he asked the investors and consumers to be cautious.
The bottom line, according to Roach, was that “Overall business activity was up in the last month, but the outlook was slightly more pessimistic. We should be watchful for signs of margin compression at the business level, financial stress via rising delinquency rates, and a sluggish housing market as inventories rise.”
Price Action: The CME Group's FedWatch tool‘s projections show markets pricing a 97.4% likelihood of the Federal Reserve keeping the current interest rates unchanged in its July meeting.
The SPDR S&P 500 ETF Trust SPY and Invesco QQQ Trust ETF QQQ, which track the S&P 500 index and Nasdaq 100 index, respectively, ended higher on Wednesday. The SPY was up 0.33% at $624.22, while the QQQ advanced 0.10% to $557.29, according to Benzinga Pro data.
On Thursday, the futures of the S&P 500, Nasdaq 100, and Dow Jones indices were mixed.
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