US economic activity was little changed and employment was largely stable in recent weeks, the Federal Reserve said on Wednesday, but there were emerging signs of weakness including more layoffs and middle- and lower-income households pulling back on spending.
“In most Districts, more employers reported lowering headcount through layoffs and attrition, with contacts citing weaker demand, elevated economic uncertainty, and, in some cases, increased investment in artificial intelligence technologies,” the Fed said in its latest “Beige Book” report, a compendium of survey results, interviews, and other qualitative data from the 12 regional Fed banks.
“Nevertheless, labor supply in the hospitality, agriculture, construction, and manufacturing sectors was reportedly strained in several Districts due to recent changes to immigration policies.”
Published two weeks ahead of each Fed interest-rate-setting meeting, the report is meant to help central bankers assess the nation’s health with more timely, and often more colorful, insight than is available in the official statistics.
With the data vacuum left by the government shutdown, the Beige Book may get more weight than usual in Fed policymaker deliberations, following their decision last month to reduce the policy rate a quarter of a percentage point.
The report landed on the day that the Bureau of Labor Statistics had been scheduled to release a key inflation report, now delayed by the government shutdown until October 24. All other federal economic data, including a monthly retail sales report due Thursday, won’t be published until the government is reopened.
The Beige Book said that overall national consumption “inched down,” particularly on retail goods. Five of the Fed’s 12 regions reported lower consumer spending.
“Some retailers were cautiously optimistic about the upcoming holiday sales season, but a few expect holiday sales to be ‘meh,’ and noted that tariffs may soon cause prices to rise, resulting in further softening of demand,” said the Atlanta Fed, one of five banks reporting lower consumer spending. “Diners continued to pull back by skipping desserts and/or alcoholic beverages.”
Spending patterns diverged along wealth and income lines, with lower- and middle-income households showing heightened sensitivity to inflation and upper-income consumers accounting for most spending gains in some districts.
“Community contacts report rising food pantry usage among both low- and middle-income households, growing reliance on ‘buy now, pay later’ services, and elevated credit card delinquency rates,” the St. Louis Fed reported. “A hotel owner in Missouri reported that travel demand had dipped in the past few months, especially among middle-class consumers, and described the current environment as a ‘middle-class recession’ that is affecting select-service hotels.”
The latest Beige Book summarizes information collected from the commercial and community contacts of each of the Fed’s 12 regional banks through October 6.
Its mention of layoffs lines up with a rise in unemployment insurance claims estimated by Wall Street firms as they track state-by-state reports in the absence of nationwide reporting. Fed policymakers say their recent rate cut, and the likelihood of more reductions to come, stems from downside risks in the labor market.
“A South Carolina home builder reported a decline in demand due to increased prices, which they said would result in imminent layoffs,” the Richmond Fed said. “One manufacturer said that they had postponed layoffs while waiting for industrial production to recover but could not delay cuts any longer,” reported the Cleveland Fed.
At the same time, prices continued to rise, driven largely by tariffs.
“Tariff-induced input cost increases were reported across many Districts, but the extent of those higher costs passing through to final prices varied,” the Fed said in the report, which featured the word ‘tariff’ 64 times, fewer than the previous report.
In the Fed’s August Beige Book, “tariff” arose 100 times.
Meanwhile there were fresh hints that companies were dealing with a smaller pool of available workers due to the Trump administration’s immigration crackdown, as well as uncertainty about or outright softening in demand for their services and products.
“A few contacts in construction and manufacturing noted more difficulty finding workers for their entry-level positions, and they attributed that to reduced immigration,” the San Francisco Fed said.
“Outlooks deteriorated with slowing demand, policy uncertainty, and inflation highlighted as the top concerns for businesses,” the Dallas Fed reported.
Though financial markets are betting heavily on another interest-rate reduction at the Fed’s October 28-29 meeting, central bankers appear closely divided and say they are tracking conversations with business and community leaders particularly closely.
“Anecdotes become data,” St. Louis Federal Reserve President Alberto Musalem said last week. “Sometimes you have moments where you have been hearing a story for the past six or 12 months, but suddenly a new story emerges and you get these inflection points and, you often get those in the conversations before you get them in the data.” — Reuters
