Labour shortages, trade uncertainty weighing on US economy: Fed report

Washington

THE US economy has been chugging along, expanding at a "slight-to-moderate pace" but labour shortages and trade uncertainty continue to weigh on the outlook, the Federal Reserve said Wednesday.

Competition for workers has driven up wages and benefit costs yet there are no worrying signs of inflation pressures in the Fed's "beige book" report on the economy and there is also cautious optimism that a trade deal with China will remove uncertainty and restore some exports.

"Economic activity expanded at a slight-to-moderate pace in March and early April," according to the report.

The anecdotal reports from the 12 regional Fed banks were prepared for the Fed's next policy meeting on Apr 30 and May 1.

On the positive side of the ledger, the Fed said: "Reports on manufacturing activity were favourable."

However, "contacts in many districts noted trade-related uncertainty". And the agriculture sector faces a grim task ahead in the aftermath of blizzards and devastating floods that wiped out livestock and crops, amid the already challenging environment with steep tariffs imposed by China and other US trading partners. President Donald Trump's aggressive trade policies, Brexit and other issues are showing signs of hitting global growth, and the US economy is expected to slow as well.

The more subdued and uncertain outlook prompted an about-face by the Fed, which now says it does not anticipate raising the key interest rate this year, after four increases in 2018. Some economists even believe the next move will be a rate cut.

All 12 districts reported rising employment in the past two months, especially in high-skilled jobs, and a majority cited shortages of workers, especially for skilled positions in manufacturing and construction.

Firms around the country have had to offer "perks such as bonuses and expanded benefits packages in order to attract and retain employees", the report said.

In the Chicago district, the shortages of workers was the main factor restraining growth, and some firms now are willing to hire workers who had failed a drug test.

In the Philadelphia Fed region, the tight labour market also held down hiring, while in Boston, IT firms reported raising wages 3 to 5 per cent over the past year.

But a more pressing concern in Philadelphia was that "weak global demand and trade uncertainty constrained expansion". One small builder in the region took protective steps amid the trade disputes by stockpiling a three-year supply of nails, according to the report.

But in Chicago, "contacts said they were hopeful for a resolution to trade disputes with China and a subsequent pickup in exports". The farm districts, too, expressed hope a deal with China would boost prices.

But the near-term prospects are grim, and planting is likely to be delayed. The Kansas Fed noted "recent severe flooding and blizzards throughout the district resulted in losses of cattle and stored crops as well as damage to roads, fields and other infrastructure". Officials have backed away from their December projections for two rate increases this year amid global growth concerns, with Philadelphia Fed president Patrick Harker saying he forecasts one in 2019 "at most". AFP, BLOOMBERG