The latest Beige Book report released Wednesday by the Federal Reserve challenged the narrative that the U.S. economy is strong, reporting that momentum slowed a bit as persistently elevated inflation spurred increased consumer caution.
Wednesday's Beige Book proved more downbeat when compared with September's report, especially on economic activity and consumer spending, with signs of increasing inflation pressures. Along with the latest hotter inflation data, it seemed to further strengthen the case for an October rate increase.
In anecdotal surveys, businesses and community members in the 12 Fed districts reported conditions have shifted from steady growth with manageable cost pressures in September to more muted economic activity in observations collected over the four weeks through Oct. 5. Over the past month, accelerating energy and operating costs are weighing down activity and there are signs of more caution among consumers.
The latest Beige Book comes as the Federal Open Market Committee is set to meet on Oct. 27-28 to determine whether or not to raise interest rates again. The report includes anecdotal information collected from businesses and other experts that is complementary to the quantitative data that Fed officials, economists and market analysts scrutinize to determine the direction of the U.S. economy.
The economic data so far for September and early October has painted a more complicated picture. Employment conditions remain stable, although not exactly robust. Inflation, however, rose 3.7% year over year in September, according to the latest consumer price index data released Wednesday. That was hotter than anticipated and even the core reading, which strips out food and energy costs, still ticked up to an annual gain of 2.6%.
Several policymakers, including New York Fed President John Williams, Vice Chair Philip Jefferson, and Vice Chair for Supervision Michelle Bowman have called for patience in hiking rates, signaling that officials may opt to keep the fed-funds rate steady at the upcoming meeting.
In Wednesday's Beige Book, the inflation risks appeared to escalate.
Three districts characterized overall price growth as robust, while eight noted that growth was moderate. But of those eight, three reported input price pressures were intensifying, if not already growing robustly -- signaling that inflation would likely rise in the coming months.
"Firms in several districts cited persistent uncertainty around energy and tariffs and expect that prices will increase further in the coming months, as existing contracts expire, and firms must renegotiate hedge contracts for their own inputs and/or delivery contracts to their customers," the report said.
Companies reported tighter profit margins. Consumer-facing businesses reported they are using selective price hikes, targeted incentives, and introducing menu changes that reduce their costs.
Wednesday's Beige Book seems to corroborate the view that there's a growing risk the U.S. could see more price increases from businesses as pent-up pass-through from this year's energy shock filters into new contracts, writes Omair Sharif, founder of Inflation Insights.
When it comes to economic growth, momentum was more downbeat. Only nine districts reported economic expansion, with most reporting slight to modest growth, while three districts reported flat conditions. That's compared with September's beige book, when 10 of the 12 districts reported growth.
Those conditions may make the Fed's path ahead more complicated. Fed Chair Kevin Warsh and other Fed officials have called out the strength of the U.S. economy, noting that current conditions can support higher rates.
Consumers appeared to be under more financial pressure in the latest report. Most districts reported "little or no change" in consumer spending and over half of the regions reported the consumption that was occurring was driven almost exclusively by high-income households. Even in the Dallas Fed district, which reported solid retail sales in recent weeks, the report noted that there were "some reports of lower-income customers being more cautious with spending."
In New York, one contact reported that there's been a rise in 401(k) hardship withdrawals and earned-wage advances.
"Several districts noted that inflation has spawned additional wage pressure in the form of higher cost-of-living demands from individuals as well as challenges from rising benefit costs," the report said.
Manufacturing continued to drive modest to moderate growth in about half of the 12 Fed districts, with much of the momentum tied to data center infrastructure, military spending, and power generation. Only Dallas reported broad-based growth in manufacturing. Five districts reported little or no manufacturing growth.
Nationwide, tourism continued to grow, but several districts, including Boston, Minneapolis, and San Francisco, reported a decline in spending from Canadian cross-border tourists.
Across the country, districts reported that the labor market is at a standstill, with most describing "little or no net change" in overall employment levels. Concerns around layoffs driven by artificial intelligence resurfaced in October. Five districts, including Boston, Chicago and New York, reported that businesses had reduced staffing levels and delayed new hiring due to AI-driven productivity gains.
"The Beige Book is delivering a distinctly uncomfortable message to the Federal Reserve. Certainly, it strongly undercuts the narrative of a 'solid' economy," writes Robert Embree, senior economist at Rosenberg Research & Associates.
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