Federal Reserve Beige Book: US economy expands moderately, inflation outlook sees increasing divergence

According to The Zhihui Finance APP, the latest Beige Book released by the Federal Reserve on Wednesday shows that U.S. economic activity grew at a slight to moderate pace in recent weeks, with employment levels in most regions showing little change and overall prices continuing to rise moderately. Geopolitical tensions in the Middle East and cost pressures from tariffs remain a concern for businesses, but there are significant regional differences in expectations for future inflation trends.

This edition of the Beige Book was compiled by the Chicago Fed, with information gathered from the twelve Federal Reserve district banks based on business and market feedback up to July 6.

The report indicates that the U.S. economy has generally maintained expansion recently, though regional performance varies. Most businesses expect economic activity to continue growing in the coming months, though several regions highlighted considerable uncertainty in the outlook for fuel costs.

On prices, the Federal Reserve stated that overall prices continue to rise at a moderate pace. Some companies attributed increased costs to the Middle East conflict, while others cited the impact of tariffs. At the same time, consumer prices continued to rise, with some regions reporting that consumers have become more sensitive to price changes.

Expectations for future inflation were not consistent across regions. Some firms anticipated that price increases would maintain their current pace in the coming months, while others believed that inflation could gradually ease as fuel prices fall.

Overall inflation in the U.S. decreased month-over-month in June, mainly driven by a drop in gasoline prices. Earlier, a temporary peace agreement between the U.S. and Iran had temporarily eased household energy spending pressures, but renewed hostilities recently sent international oil prices sharply higher, introducing new uncertainties for the inflation outlook.

Recently, several Fed officials expressed concerns about high inflation and warned that rate hikes might still be needed this year. However, Fed Chair Waller and New York Fed President Williams have both made relatively moderate statements about near-term inflation prospects.

Regarding the labor market, the Beige Book shows that employment levels remained broadly stable across most regions, with wage growth at a slight to moderate pace. In some regions, competition for technical workers continued to exert upward pressure on wages.

Regionally, manufacturers in the Boston Fed district slightly increased their staff, and seasonal hiring in retail and hospitality was above last summer’s levels. Overall, employment in services remained stable, though one firm made small white-collar layoffs due to improved operational efficiency through artificial intelligence (AI).

In the New York Fed district, tourism activity was strong. Boosted by World Cup visitors, New York City’s hotel occupancy and room prices increased, and some restaurants and bars recorded strong sales due to viewing events. International airport arrivals rebounded after weak performance in the spring.

Philadelphia Fed district data shows manufacturing activity related to data centers, AI, and defense remained strong. Homebuilders in the Cleveland Fed district reported rising demand for affordable housing, while demand for luxury homes remained robust.

After periods of slowing, port activity in the Richmond Fed district returned to moderate growth. Transportation demand in the Atlanta Fed district saw a slight rise. Freight brokerage firms said that as excess capacity built up during the pandemic is gradually absorbed, industry conditions are stabilizing or improving, and for the first time since 2021, freight volumes exceeded the pace of last year.

Chicago Fed district companies reported that increased promotions by retailers boosted consumer activity, partly because Amazon (AMZN.US) Prime Day and competing discount events were moved up from July to June. Businesses in the St. Louis Fed district generally expected to continue passing higher costs on to consumers in the coming months.

Some companies in the Minneapolis Fed district pointed out that rising gasoline prices are suppressing overall consumer spending. Consumers are increasingly using credit cards rather than cash or debit cards, and credit card fees are further squeezing business profits, especially for small firms.

Employers in the Kansas City Fed district reported a willingness to provide training to applicants lacking technical skills, but found it more difficult to hire those lacking soft skills such as communication and teamwork.

Recruitment companies in the Dallas Fed district noted that labor demand rebounded across industries and skill levels, with one agency stating that June was its best month since before the pandemic.

The San Francisco Fed district indicated that price-sensitive consumers continue to shift toward cheaper goods. A business in Southern California stated that in-person consumers not only reduced purchases of high-priced food items, but also bought less overall.

Overall, the Beige Book shows that the U.S. economy remains resilient but with limited growth, and the job market is generally stable. At the same time, the Middle East conflict, volatile energy prices, and tariffs could continue to push up business costs, and remain key variables influencing the Fed’s future policy decisions.