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We have started to cover the weekly Redbook same store sales growth readings more closely because of the tariffs that are hitting consumer goods in September. The data from the final 2 weeks in August was strong as you can see from the chart below.

Source: Trading Economics

Yearly growth was 5.7% and 6.5%. That’s good news for the back to school shopping season which is the 2nd biggest shopping season of the year. These good numbers aren’t in tune with the big sequential decline in the University of Michigan survey.

Are Consumers Reacting To The Tariffs?

It wouldn’t be a big surprise if consumer spending growth is solid in September as well despite the new tariffs. That’s because retailers are taking margin declines rather than raising prices. The founder of the houseware company Casabella stated, “They want to hold the line on prices. Their fear is that if we increase prices, the sales will go down, the volume will go down. It’s a war. … It’s difficult conversations.”

It’s notable that Redbook is just one somewhat volatile report. The August retail sales report on Friday the 13th will give us a better description of the back to school shopping season and how consumers were spending leading into the new tariffs. The past 2 months have seen amazing sales growth in the control group. Let’s see if that continues.

Dovish Beige Book

It’s easy to pick out somewhat optimistic phrases in the Fed’s Beige Book, but the totality of the August report was pessimistic which implies dovishness. That’s what you’d expect from a report that precedes a rate cut. There is a 100% chance of a cut at the September meeting. It’s worth noting that the cutoff date of the Beige Book was August 23rd. That’s the exact date Trump raised the latest round of tariffs. Businesses obviously didn’t get a chance to respond to this which means the data may have been more negative if the report was delayed a couple weeks.

As you can see from the chart below, the Beige Book diffusion index shows the Fed pivoted in late 2018 as the stock market was cratering. Not much has changed since then as the Fed is on a path of cutting rates.

In the Beige Book, the Fed stated, “Although concerns regarding tariffs and trade policy uncertainty continued, the majority of businesses remained optimistic about the near-term outlook.” Pessimism likely increased after the tariff announcement on the 23rd. The Fed described the growth in employment as “modest” and “on par with the previous reporting period.” That jives with the jobless claims data. We’ve seen a slowdown in job creation growth which makes sense because the labor market is nearing full employment.

Interestingly, the BLS projects the labor force will grow 0.54% per year over the next 10 years which is 68,000 jobs added per month in the payroll reading. Obviously, that will vacillate cyclically. Current average job creation is still above that even with the unemployment rate low.

Possibly because of the timing of the latest tariff increases, the number of times “tariffs” were mentioned in the Beige Book fell from 37 to 29. Oddly, as you can see in the chart below, the use of “tariffs” has predicted how many times the Fed will use the root word “slow.”

When the number of times “slow” is used is lagged by 2 months, its correlation with the use of “tariffs” is high. If the correlation stays the same, then the Fed won’t mention “slow” as much in the October Beige Book. That might not be a good bet as the latest economic data shows economic growth is slowing.

Just 1.5% Q3 GDP Growth

The chart below shows Bespoke’s Beige Book index compared to yearly GDP growth with the GDP report lagged 9 months.

This correlation is high which means the latest Beige Book diffusion indexes portend a further slowdown in yearly GDP growth. It’s interesting to see this great track record because the Fed has been given a bad reputation for missing the last 2 recessions especially the 2008 financial crisis. It’s tough to make forecasts especially since the Fed’s opinion can cause weakness. Even if you see a crisis as a Fed member, should you yell fire in a crowded theater? It’s a difficult position to be in.

The Fed’s bearish Beige Book reports look correct because Q3 GDP growth is expected to be weak based on the current data. As you can see from the chart below, the blue chip quarterly growth estimate is about 1.8% and the Atlanta Fed Nowcast is at 1.5%. In the September 4th reading, the estimate for real personal consumption expenditures growth fell from 3% to 2.8%. That’s below Q2’s rate of 4.7%.

The consumer needs to be strong in Q3 if GDP growth is going to be above 2%. The estimate for real non-residential equipment investment growth fell from -1.7% to -2.4%. Finally, the estimated contribution from net exports fell from -0.26% to -0.33%.

John Williams Wants More Inflation

John Williams, the President of the NY Fed, also spoke on the day the Beige Book was released. He stated, “Low inflation is indeed the problem of this era. The current outlook of moderate growth, low unemployment, but stubbornly low inflation is a reflection of the broader economic picture.” We prefer to look at real growth and productivity growth to determine the health of the overall economy, not inflation. If there is real expansion without inflation, that’s not a problem.


Consumers aren’t reacting to tariffs just yet because retailers aren’t passing down the price increases fully. The Fed was dovish in its August Beige Book which makes sense because the economic data has been weak. Q3 GDP growth is set to be below 2% as of early September. We don’t agree with the statement that low inflation is bad, implying that price increases need to occur for there to be a strong economy. In that case, the price increases from the tariffs would be good for the economy. This is similar logic to the broken window fallacy.

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