To The Moon

The Federal Reserve's latest Beige Book survey report, released Wednesday, indicates that overall U.S. economic activity has continued to expand since mid-April. However, the report highlights a further widening of the consumption gap between different income groups, creating a pattern of a "K-shaped" recovery.

The report notes that among the twelve Federal Reserve districts, ten reported slight to modest growth in economic activity. One district reported a slight decline, while another reported no change. Despite the overall stability in economic activity, consumer spending is showing increasingly clear divergence across income groups.

This divergence is described in the report as a "K-shaped" economy. Specifically, high-income households are demonstrating resilience and are less sensitive to price increases. Middle-income households are described as "trying to get more value out of every dollar before deciding to spend." Meanwhile, low-income consumers are facing the greatest financial pressure. Overall, reports indicate increased credit card usage, a decrease in foot traffic at physical retail stores, and stronger demand for essential goods.

The Beige Book is a summary of economic conditions compiled from feedback from business contacts nationwide, collected by the Federal Reserve. It serves as a reference for the interest rate decisions of the Federal Open Market Committee (FOMC) at its upcoming meeting on June 16-17. Recent data shows that the year-on-year increase in the U.S. Personal Consumption Expenditures Price Index for April jumped to 3.8% from 3.5% in March, remaining above the Fed's 2% target for over five consecutive years.

Regarding inflation, the report explicitly states that energy costs related to the Middle East conflict are a primary driver of inflationary pressures. The spillover effects have impacted multiple sectors, including shipping, packaging, groceries, and fertilizer. Most districts reported price increases at a "modest to strong" pace, with inflation higher than in the previous report.

Manufacturing activity has shown some resilience, with nine districts reporting growth at a modest to strong pace. This is partly attributed to demand driven by data center construction. However, the outlook for the agriculture and energy sectors remains highly uncertain, leading producers to postpone major expansion plans.

On the labor market front, employment was essentially flat in eleven districts, characterized by "low hiring and low layoffs." Employees are reluctant to change jobs due to economic uncertainty, and businesses are also cautious in their hiring. Business expectations for the commercial outlook over the next six months have shown almost no change, with high levels of uncertainty and signs of weak consumer spending continuing to weigh on sentiment.