Fed Beige Book: US Economy Flat Amid Price Pressures

Fed Beige Book Paints a Picture of Flat US Economy with Rising Prices

The Federal Reserve's Beige Book, released Wednesday, showed that U.S. economic activity was largely flat in recent weeks, with overall consumer spending edging down. Employment levels remained generally stable, with soft labor demand; meanwhile, prices continued to rise, with multiple districts reporting an acceleration in the rate of input cost growth.

The report was based on information collected by the Fed's 12 regional banks through October 6 and compiled by the Federal Reserve Bank of San Francisco. It noted that since the last report, there has been little change in economic activity overall. Three districts reported slight to modest growth in economic activity, five districts said there was no change in economic activity, and four districts pointed to a slight slowdown in economic activity. In contrast, most districts reported no change in economic activity in September.

However, at the macro level, trends in most industries were similar to the results of the September assessments. Reports from various regions continued to show that consumer spending (especially consumer spending by middle- and low-income households) has weakened, and manufacturing has also been negatively affected by tariffs. This statement was essentially consistent with last month.

The latest report also showed differences in growth outlooks among different regions: some respondents expected demand to rebound in the next six to 12 months. One district pointed out that a prolonged government shutdown could pose a risk to economic growth.

Labor Market and Wage Conditions

Discussions about labor market trends indicated that the labor market has been slightly weaker in the past six weeks. The Beige Book noted that "labor demand was generally soft across districts and industries," and "more employers reported reducing employee numbers through layoffs and natural attrition," which was worse compared to the comments in September that employment had "hardly changed" in most regions.

However, the report also noted that "wages have increased in all districts, and overall, the growth rate has been moderate to medium." While several regions saw no wage growth in September.

Inflationary Pressures and Tariffs

The Beige Book noted that "prices have risen further during the reporting period," mainly due to tariffs. However, corporate reactions varied: "Some companies...maintained sales prices largely unchanged to maintain market share and deal with resistance from price-sensitive customers," the report noted, "Other districts reported that manufacturing and retail companies have fully passed on increases in import costs to consumers." This aspect was also similar to September.

While the price pressures triggered by tariffs are undoubtedly rising across the board, not all companies are currently passing on costs, which helps to some extent protect consumers and support the Fed in further easing its policy.

Impact of Government Shutdown

Because the US government shutdown has led to the temporary inability to publish hard economic data, the Fed's latest Beige Book is of greater importance than ever. Currently, policymakers are seeking a balance between "the risk of a cooling labor market" and "inflation that is still above the Fed's 2% target."

However, this report is unlikely to prevent Fed policymakers from voting in favor of further interest rate cuts at the upcoming meeting. In recent days, an increasing number of rate setters, including centrists and even hawks, have publicly expressed their support for further rate cuts in the short term.

ING Group said that the Fed’s Beige Book gave the green light for further rate cuts because it confirms the message conveyed by Powell: the economic situation has not improved since the Fed cut interest rates by 25 basis points on September 17. The institution expects the Fed to cut interest rates by 25 basis points at the FOMC meetings in October and December, even in the absence of key data reports.