To The Moon

The latest Federal Reserve Beige Book, released Wednesday, indicates that while the US economy continues to expand overall, rising energy prices stemming from conflict in the Middle East are emerging as a primary driver of renewed inflationary pressures. Concurrently, concerns among businesses and consumers about the future economic outlook have increased, signaling that the US economy is grappling with the dual challenge of growth alongside inflation.

The report, which compiles survey data from businesses, financial institutions, and industry groups across the Fed's 12 districts, shows that 10 districts reported slight to modest economic growth through May 27. It serves as a key input for the Fed's assessment of economic conditions and monetary policy formulation.

The Beige Book notes that the Middle East conflict has led to sustained increases in energy prices, constituting the core source of current US inflation pressure. Districts widely reported that rising energy costs are not only pushing up fuel prices but are also transmitting through the broader economy via transportation, packaging, groceries, and fertilizer costs. Several regions noted a marked increase in consumer concern over higher gas prices, which is beginning to influence household spending behavior.

The Fed indicated that while economic growth currently shows some resilience, businesses are growing more cautious about the operating environment for the next six months. The survey suggests that high uncertainty and signs of slowing consumer spending are eroding business confidence. Most firms anticipate little change in their growth prospects compared to prior periods, but overall sentiment is turning more conservative.

Regarding the labor market, conditions overall remained stable. Most districts continued to describe employment conditions as a state of "low hiring, low layoffs," with businesses remaining cautious in hiring. New positions were primarily concentrated in critical roles or to replace natural attrition. The report highlighted manufacturing as one of the sectors with the strongest hiring demand, driven by increased defense industry orders and a boom in data center construction.

Notably, the impact of artificial intelligence on employment structures is beginning to surface. The Boston District reported sustained demand for high-skilled talent in professional technical services, while demand for entry-level positions has weakened. Some respondents linked this trend to the expanding application of AI technology. Meanwhile, sporadic layoffs have begun at some larger firms, while small and medium-sized enterprises are controlling costs by eliminating open positions.

Regionally, rising energy prices are having a broad impact across multiple industries. A food manufacturer in the New York District stated that higher energy costs have increased prices for packaging materials, raw materials, equipment, and components, while rising fertilizer prices are further lifting food costs. Firms in the Philadelphia District noted that while overall wage pressure has eased somewhat, some employees are requesting raises due to increased fuel expenses. Some businesses in the Cleveland District likened current cost volatility and supply chain uncertainty to the COVID-19 period.

An agricultural exporter in the Richmond District reported that due to a sharp rise in fuel surcharges, some low-value-added agricultural products have lost their shipping economic viability, forcing companies to postpone shipments. The Chicago District pointed out that even if some firms receive tariff rebates, they are unlikely to lower product prices as a result, indicating price levels are likely to remain elevated.

On the consumer spending front, businesses are increasingly attentive to public sensitivity to price increases. A hotel company in the St. Louis District stated that to avoid customer loss, it chose to cut some service offerings rather than raise prices further. Another consumer-facing business said it would pass on supply chain cost increases to end customers in a more measured way.

The tourism industry is also feeling pressure. A lodging business in northeastern Minnesota, reported by the Minneapolis District, said current bookings have slowed noticeably, with high fuel prices and a reduction in Canadian visitors making it pessimistic about its future business prospects.

The energy industry is likewise affected by cost increases. Firms in the Kansas City District reported that rising diesel prices have increased the cost of drilling new wells, prompting a search for lower-cost alternative materials. The Dallas District noted that while some energy companies are accelerating well development, constraints such as insufficient rig supply, limited natural gas pipeline capacity, and shortages of certain oilfield chemicals are expected to continue limiting industry expansion through 2027.

However, some sectors remain quite vibrant. Firms in the San Francisco District reported that to meet growing customer demand and prepare for upcoming 2026 World Cup-related events, some companies have already begun increasing seasonal hiring.

On inflation data, figures previously released by the Bureau of Economic Analysis showed that the Personal Consumption Expenditures price index, closely watched by the Fed, rose 3.8% in the 12 months through April, marking the largest increase since 2023. The persistent pressure from rising energy prices is intensifying market worries about a reacceleration of inflation.

Markets widely expect the Federal Reserve to keep interest rates unchanged at its policy meeting scheduled for June 16-17. However, with inflation heating up again, many investors are adjusting their expectations for future monetary policy. Federal funds futures indicate the market has largely priced in the possibility of a 25-basis-point rate hike by the Fed before March of next year.