Federal Reserve Beige Book: The U.S. economy is seeing slight to moderate growth; the inflation outlook is divided; and the labor market remains strong

By Yang Chen, Wall Street Insights

The latest Beige Book released by the Federal Reserve on Wednesday slightly supported its recent shift toward a more hawkish stance. In recent weeks, U.S. economic activity saw mild to moderate growth, with employment levels in most areas showing little change or almost no change.

The report said that from late May to June, U.S. economic activity improved moderately. Of the 12 Federal Reserve districts, 11 saw growth rates improve slightly to moderate, while one district in San Francisco saw no change. The pace of growth was slightly better than in the June report, when economic activity expanded in 10 districts, remained flat in one, and declined in one.

Overall, the price level showed a modest increase. Nine districts reported moderate price growth, two reported strong price growth, and one reported a slight increase in prices. Compared with the previous reporting period, price growth was the same or slowed in all districts. The Fed said in the report:

“Some business contacts attributed these cost increases to the conflict in the Middle East; others cited tariff factors. Consumer prices continue to rise, and a small number of districts said business contacts have noticed that their customers’ sensitivity to prices has increased.”

The report is based on information collected by the Fed’s 12 regional banks before July 6, and was compiled by the Federal Reserve Bank of Chicago.

Diverging inflation outlook, energy prices are the key variable

Several Fed officials have expressed concerns about high inflation and warned that rate hikes may be needed this year. However, Fed Chair Powell and New York Fed President Williams have recently taken a comparatively moderate view of the inflation outlook.

The report said that because the situation in the Middle East injects additional volatility into energy prices, forecasts for the inflation outlook differ. The report said:

“Districts’ expectations for price growth over the coming months vary. Some contacts expect inflation to remain at its current pace, while others expect inflation to slow somewhat, partly due to falling gasoline prices.”

As gasoline prices have declined over recent weeks, the month-over-month inflation rate in June fell. A temporary peace agreement between the U.S. and Iran gave U.S. households a brief window of relief, but the resumption of hostilities afterward caused oil prices to surge again. The report said:

“Contacts generally expect the economy to continue expanding over the coming months, but multiple districts noted that uncertainty around the fuel cost outlook has increased.”

Labor market remains solid, with pay increases in some districts for skilled workers

On the labor market front, the report showed that employment and wage growth were mild to moderate. However, some districts saw wage increases as they competed for skilled workers.

Headcount grew, with five districts seeing small, moderate, or steady increases in employment, while seven districts saw little to no change. In the previous report, only one district recorded small, moderate, or steady employment growth.

Employment increased across several industries, including manufacturing, construction, and retail. Finding skilled workers has been difficult across all sectors, especially technicians and tradespeople. In most districts, wage growth was modest, with only two districts seeing very small wage increases. Some of the wage increases were attributed to intensified competition for skilled workers.

Economic conditions by district

Boston: Manufacturing firms reported a small increase in employee headcount; retail and hospitality said seasonal hiring was higher than last summer. Service sector employment was broadly stable, though one company conducted small-scale layoffs of some white-collar employees as AI improved efficiency.

New York: Driven by tourists from the FIFA World Cup, tourism activity in New York City stayed strong, with hotel occupancy rates and room prices rising. Some restaurants and bars reported strong sales due to demand from event spectators. The number of international flight passengers, which had been weak earlier in spring, also rebounded.

Philadelphia: Respondents said activity related to data centers, artificial intelligence, and defense manufacturing continued to see strong growth.

Cleveland: Real estate developers said demand for affordable housing is rising, while demand for high-end residences remains strong.

Richmond: Port trade activity returned to modest growth after slowing in the prior few cycles.

Atlanta: Transportation demand grew moderately. Truck brokerage firms said conditions stabilized and improved as excess capacity formed during the pandemic was gradually absorbed, and freight volumes surpassed the same period last year for the first time since 2021.

Chicago: Respondents said stronger retail promotions boosted consumer demand, partly because Amazon Prime Day and other competitors’ promotions were held in June rather than July as in past years.

St. Louis: Respondents generally expected that over the coming months, businesses will continue passing higher costs on to consumers.

Minneapolis: Several respondents said rising gasoline prices restrained overall consumer spending. At the same time, consumers’ payment methods are shifting from cash and debit cards toward credit cards, and higher credit card fees further compress business profits, especially for small businesses.

Kansas City: Employers said they are willing to train job seekers who lack certain technical skills, but hiring is more difficult for candidates lacking soft skills such as communication and collaboration.

Dallas: A human resources firm said hiring needs increased broadly across industries and skill levels. One respondent said June was the best month they had seen since the outbreak of the pandemic.

San Francisco: Price-sensitive consumers continued shifting to cheaper substitutes. One respondent in Southern California said that in-store customers not only bought fewer high-priced foods, but also started buying fewer items overall.