Vosh Takes Over the Dual Economy: Investment Boom Meets Consumption Cold, Inflationary Pressure Rises

Author: Xiao Yanyan, Jintou Data

The Federal Reserve's "Beige Book" released in the early hours of Thursday Beijing time shows that the U.S. economy is simultaneously under dual pressures of weakening demand and rising costs. The report indicates that regarding business outlooks over the next six months, companies generally believe growth will be limited, uncertainty is increasing, and soft consumer spending is suppressing market sentiment.

This summary report, which provides qualitative information from across the United States, is an important reference for policy making. The latest content shows that cooling consumer demand and rising inflationary pressures are appearing simultaneously across multiple industries, with energy prices related to Middle Eastern conflicts being viewed in many regions as a key factor driving price increases, affecting sectors such as shipping, packaging, groceries, and fertilizers.

Rising energy prices are changing consumer and production behaviors. The report mentions that rising gasoline prices have prompted some consumers to switch to hybrid vehicles or simply reduce car purchases; shipping companies, expecting domestic demand to weaken, have reduced outbound empty container exports. Rising fertilizer prices directly impact agricultural production, with apple growers in New York State expecting a significant decline in harvest later this year due to the inability to bear high costs.

Feedback from businesses is also becoming more cautious. The Richmond Fed's manufacturing information shows that demand has weakened due to tighter consumer spending; a plastic equipment manufacturer stated that its customers have delayed capital expenditure plans due to concerns over tight oil supplies.

Regional differences still exist. The San Francisco Fed pointed out that demand related to concerts and business events in the West remains relatively robust, but local and regional travel demand driven by cost-effectiveness has declined. A contact from the Kansas Fed described that middle-income families are being more frugal in their consumption decisions, "trying to squeeze more value out of every dollar."

In the overall weak environment, the investment sector still has some support. Nine out of twelve regional Fed districts mentioned that investment continues to be driven by the construction of AI data centers, which also boosts employment in construction and manufacturing, but this bright spot has not masked the soft performance of other industries.

Nancy Vanden Houten, an economist at Oxford Economics, said that the situation presented in the Beige Book is consistent with reality: The U.S. and Israel's war with Iran has pushed up prices, low- and middle-income groups are under significant pressure, but the overall economy remains resilient, with an expected GDP growth of about 2% this year.

The resurgence of inflationary pressures is tightening the outlook for monetary policy. At the end of May, Kevin Warsh succeeded Powell as Federal Reserve Chair, and prior to this, most policymakers had already become more cautious about inflation trends. The inflation level exceeding the 2% target has persisted for over five years, with signs of acceleration in recent months, partly related to U.S. support for the Iran war.

From public statements and the minutes of the April 28-29 meeting, the Fed's internal judgment has shifted: from an earlier expectation of rate cuts later this year, to a greater inclination to maintain the current rate for a longer period, and even to consider further tightening. The current policy rate range remains at 3.50% to 3.75%.

Key inflation indicators continue to rise. The core inflation the Fed monitors increased to 3.8% in April, up from 3.5% in March. Meanwhile, the labor market remains generally stable. According to a Reuters survey of economists, the U.S. government’s May employment report to be released on June 5 is expected to show the unemployment rate holding steady at 4.3%.

Trump had explicitly hoped that Warsh would push for rate cuts when appointing him, but with recent sharp increases in gasoline prices, this stance has shifted, and there is no longer a firm insistence on immediate rate reductions.

The structure of the employment market is also changing. Several regional Fed districts pointed out that the expansion of AI applications is weakening demand for entry-level positions. The Minneapolis Fed found in its survey that about one-third of companies increased prices in April, with most reporting that non-labor input costs rose by more than 2% over the past two months, and a quarter of companies experiencing increases over 5%.

Signs of a slowdown in hiring are particularly evident in some regions. The New York Fed mentioned that a staffing agency in northern New York observed an oversupply of entry-level labor, while a tech recruiting firm in the New York City metropolitan area said that the hiring cycle has significantly lengthened, with job seekers often needing to go through months and multiple interviews before being hired.

Although defense-related demand and data center construction in some regions have supported manufacturing employment, the overall employment environment remains characterized by "low hiring, low layoffs", with most workers choosing to stay in their current jobs and reducing mobility.