The Federal Reserve's latest Beige Book, released Wednesday, provides some support for its recent shift towards a more hawkish stance. The report indicates that U.S. economic activity expanded at a slight to modest pace in recent weeks, with employment levels largely unchanged across most districts.
The report states that from late May through June, economic activity improved modestly, with growth ranging from slight to moderate in eleven of the twelve Federal Reserve Districts, while the San Francisco District reported no change. This pace of growth is slightly better than the June report, which noted expansion in ten districts, no change in one, and a decline in one.
Overall price levels increased modestly, with nine districts reporting moderate price increases, two reporting strong increases, and one reporting slight increases. Compared to the prior reporting period, price growth was either the same or had slowed in all districts. The Federal Reserve noted in the report:
“Some business contacts attributed these cost increases to the conflict in the Middle East; others cited tariff factors. Consumer prices continued to rise, with a few districts noting that business contacts observed increased price sensitivity among their customers.”
The report is based on information collected by the Fed's 12 regional banks on or before July 6th and was compiled by the Federal Reserve Bank of Chicago.
Diverging Views on Inflation Path, Energy Prices a Key Variable
Several Fed officials have expressed concern about persistent inflation, warning that interest rate hikes may be necessary this year. However, Fed Chair Wash and New York Fed President Williams have recently offered more moderate views on the inflation outlook.
The report notes that predictions for the inflation path are diverging, with Middle East developments injecting additional volatility into energy prices. It states:
“Expectations for price growth over the coming months varied across districts, with some contacts expecting inflation to continue at its recent pace and others expecting it to moderate, partly due to falling fuel prices.”
Monthly inflation readings have softened in June as gasoline prices have retreated in recent weeks. A temporary truce between the U.S. and Iran provided a brief respite for American households, but the resumption of hostilities has since sent oil prices soaring again. The report points out:
“Contacts generally expected the economy to continue expanding over the coming months, though several districts noted increased uncertainty regarding the outlook for fuel costs.”
Labor Market Remains Solid, Wage Gains for Skilled Workers in Some Areas
Regarding the labor market, the report shows employment and wage gains were slight to modest, though some districts reported wage increases due to competition for skilled technical workers.
Employment increased, with five districts reporting slight, moderate, or steady gains, and seven districts reporting little to no change. In the previous report, only one district reported slight, moderate, or steady employment gains.
Employment rose in several sectors, including manufacturing, construction, and retail. Finding skilled workers remained difficult across industries, particularly for technicians and tradespeople. Wage growth was modest in most districts, with two districts reporting only slight increases. Some wage gains were attributed to heightened competition for skilled workers.
Regional Economic Conditions
Boston: Manufacturing firms reported slight increases in staffing; retail and hospitality noted seasonal hiring 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 AI.
New York: Tourism activity in New York City remained strong, boosted by visitors for the FIFA World Cup, with hotels reporting higher occupancy and room rates. Some restaurants and bars saw strong sales due to viewing parties. International air travel, which had been soft in the spring, also rebounded.
Philadelphia: Contacts reported continued strong growth in activity related to data centers, artificial intelligence, and defense manufacturing.
Cleveland: Real estate developers noted rising demand for affordable housing, while demand for high-end homes remained robust.
Richmond: Port trade activity returned to a moderate pace of growth after slowing in recent cycles.
Atlanta: Transportation demand grew modestly. Trucking brokers reported stable, improving conditions as pandemic-era excess capacity was absorbed, with volumes exceeding year-ago levels for the first time since 2021.
Chicago: Contacts reported that more aggressive retail promotions boosted consumer spending, partly because Amazon Prime Day and competing promotions were moved to June from their usual July timing.
St. Louis: Contacts generally expected businesses to continue passing higher costs on to consumers in the coming months.
Minneapolis: Several contacts noted that rising gasoline prices were restraining overall consumer spending. Additionally, consumers are shifting payment methods from cash and debit to credit cards, with associated fees further squeezing business profits, particularly for smaller firms.
Kansas City: Employers indicated a willingness to train job seekers lacking technical skills, but found it more difficult to hire those lacking soft skills like communication and teamwork.
Dallas: Staffing firms reported increased hiring demand across industries and skill levels. One contact noted June was their best month since before the pandemic.
San Francisco: Price-sensitive consumers continued shifting to cheaper alternatives. A contact in Southern California noted that in-store shoppers were not only buying less expensive food items but also reducing the quantity of goods purchased.
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