The latest Federal Reserve Beige Book, released Wednesday, indicates U.S. economic activity grew at a slight to modest pace in recent weeks, with little change in employment levels across most districts and overall prices continuing to rise moderately. Businesses remain attentive to cost pressures stemming from Middle East tensions and tariffs, while views on the future path of inflation have become more divergent.
The report, compiled by the Federal Reserve Bank of Chicago, aggregates anecdotal information from the 12 regional Federal Reserve Banks based on business and market contacts up to July 6. It shows the U.S. economy continued to expand overall, though conditions were not uniform across regions. Most businesses anticipate continued economic growth in the coming months, though several districts noted heightened uncertainty regarding the outlook for fuel costs.
On prices, the Fed stated that overall price increases continued at a modest pace. Some firms attributed rising costs to the conflict in the Middle East, while others cited the impact of tariffs. Consumer prices also continued to rise, with some districts reporting that consumers have become increasingly sensitive to price changes.
Expectations for future inflation varied across districts. Some businesses anticipate price increases will continue at their recent pace in the coming months, while others believe inflation may gradually moderate as fuel prices decline. Headline U.S. inflation fell on a monthly basis in June, primarily driven by a drop in gasoline prices. A temporary peace agreement between the U.S. and Iran had initially eased pressure on household energy spending, but the recent resumption of conflict has sent international oil prices sharply higher again, introducing new uncertainty into the inflation outlook.
Recently, several Fed officials have expressed concern about persistent inflation, warning that further interest rate hikes may still be needed this year. However, remarks from Federal Reserve Chair Wash and New York Fed President Williams on the near-term inflation outlook have been relatively measured.
Regarding the labor market, the Beige Book noted that employment levels were mostly flat, with wage growth holding at a slight to modest pace. Some districts still saw wage pressures as firms competed for skilled workers.
Looking at regional details, manufacturing firms in the Boston Fed's district added staff slightly, while seasonal hiring in retail and hospitality was higher than last summer. Service sector employment was generally stable, though one firm reported a small reduction in white-collar staff due to efficiency gains from artificial intelligence.
The New York Fed district saw strong tourism activity. Boosted by World Cup visitors, New York City hotel occupancy and room rates increased, and some restaurants and bars reported strong sales from viewing events. International arrivals at airports rebounded after a weak spring.
Data from the Philadelphia Fed district showed manufacturing activity related to data centers, AI, and defense remained robust. Homebuilders in the Cleveland Fed district reported rising demand for affordable housing, while demand for luxury homes remained strong.
Port activity in the Richmond Fed district returned to modest growth after slowing over several prior cycles. The Atlanta Fed district saw a slight increase in transportation demand. Freight brokers indicated that as the excess capacity built up during the pandemic is gradually absorbed, industry conditions are stabilizing or improving, with freight volumes surpassing year-ago levels for the first time since 2021.
Businesses in the Chicago Fed district reported that increased promotional activity by retailers boosted consumer spending, partly due to Amazon Prime Day and competing discount events moving from July to June.
Firms in the St. Louis Fed district widely expect to continue passing higher costs on to consumers in the coming months. Some businesses in the Minneapolis Fed district noted that rising gasoline prices are dampening overall consumer spending. Consumers are also shifting more from cash and debit to credit card payments, and associated fees are further squeezing business profits, particularly for small firms.
Employers in the Kansas City Fed district indicated a willingness to train job applicants lacking technical skills but found it more difficult to hire those lacking soft skills like communication and collaboration.
Staffing firms in the Dallas Fed district reported a broad-based pickup in hiring demand across industries and skill levels, with one agency noting June was its best month since before the pandemic.
The San Francisco Fed district reported that price-sensitive consumers continue to shift toward lower-priced goods. A Southern California business noted that in-store shoppers are not only buying fewer high-priced food items but also purchasing less in quantity.
Overall, the Beige Book depicts a U.S. economy that remains resilient but growing at a limited pace, with a generally stable labor market. Meanwhile, the conflict in the Middle East, energy price volatility, and tariffs continue to pose risks for further increases in business costs, representing significant variables that will influence the Federal Reserve's future policy assessments.
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