The Federal Reserve's latest Beige Book indicated that U.S. economic activity improved modestly from late May through June, with 11 out of the 12 Federal Reserve districts reporting growth. Inflation remained generally moderate, though districts diverged in their inflation outlooks, with uncertainty around energy prices emerging as the largest variable affecting the forecast. The labor market remained strong, with employment expanding slightly, although shortages of skilled workers continued to push up wages.
The Federal Reserve's latest Beige Book, released Wednesday, slightly bolstered its recent shift toward a more hawkish stance. U.S. economic activity expanded at a slight to modest pace in recent weeks, with employment levels showing little or no change in most districts.
The report noted that U.S. economic activity improved modestly from late May through June, with 11 of the 12 Federal Reserve districts reporting slight to moderate increases in activity, while the San Francisco district reported no change. This pace of growth was slightly stronger than in the June report, which showed expansion in 10 districts, no change in one, and a decline in another.
Overall price levels rose moderately, with nine districts reporting moderate price increases, two reporting strong increases, and one reporting slight increases. Compared with the previous reporting period, price growth either remained unchanged or slowed across all districts. The Fed stated in the report:
“Some business contacts attributed these cost increases to the conflict in the Middle East; others cited tariffs. Consumer prices continued to rise, and a few districts noted that business contacts observed heightened price sensitivity among their customers.”
The report is based on information collected by the Federal Reserve’s 12 regional Reserve Banks prior to July 6 and was compiled by the Federal Reserve Bank of Chicago.
Divergent inflation trends emerge, with energy prices as a key variable
Several Federal Reserve officials have expressed concern about elevated inflation and warned that rate hikes may be necessary this year. However, Fed Chair Waller and New York Fed President Williams recently offered more dovish assessments of the inflation outlook.
The report noted divergences in inflation forecasts due to added volatility in energy prices stemming from developments in the Middle East. It stated:
“Contacts across districts held differing expectations for price growth over the coming months: some anticipated inflation would remain at its current pace, while others expected it to moderate, partly due to declining fuel prices.”
Monthly inflation eased in June amid a recent decline in gasoline prices. A temporary peace agreement between the United States and Iran had offered American households brief relief, but the resumption of hostilities subsequently drove oil prices sharply higher again. The report noted:
Contacts generally expect the economy to continue expanding over the coming months, though several districts noted an increased level of uncertainty surrounding the outlook for fuel costs.
The labor market remains robust, with wage gains reported for skilled technical workers in some districts.
Regarding the labor market, the report indicated modest to moderate increases in employment and wages; however, some districts experienced wage growth driven by competition for skilled technical workers.
Employment levels rose, with five districts reporting slight, moderate, or steady increases, while seven districts saw little change. In the previous report, only one district had reported slight, moderate, or steady employment growth.
Employment increased across multiple sectors, including manufacturing, construction, and retail. Firms across industries continued to face difficulties hiring skilled workers, particularly technicians and tradespeople. Wage growth remained limited in most districts, with two reporting only minimal increases. Some of the wage gains were attributed to intensified competition for skilled labor.
Economic Conditions by District
Boston: Manufacturing firms reported a slight increase in staffing levels; retailers and hospitality businesses noted seasonal hiring exceeded that of last summer. Employment in the services sector remained broadly stable, although one firm implemented small-scale layoffs of white-collar staff due to efficiency gains from AI adoption.
New York: Tourism activity in New York City remained strong, supported by visitors attending the FIFA World Cup, leading to higher hotel occupancy rates and room prices. Sales at some restaurants and bars also surged due to demand for match-viewing venues. International air passenger volumes, which had been weak in the spring, showed signs of recovery.
Philadelphia: Respondents indicated that activity linked to data centers, artificial intelligence, and defense manufacturing continued to grow robustly.
Cleveland: Real estate developers reported rising demand for affordable housing, while demand for high-end residential properties remained strong.
Richmond: Port trade activity has returned to moderate growth following a slowdown in prior cycles.
Atlanta: Transportation demand is growing moderately. Trucking brokers report that industry conditions are steadily improving as excess capacity built up during the pandemic is gradually absorbed, with shipment volumes exceeding those of the same period last year for the first time since 2021.
Chicago: Respondents indicated that more aggressive retail promotions have boosted consumer spending, partly because Amazon Prime Day and similar promotional events by competitors were moved forward to June instead of their usual timing in July.
St. Louis: Respondents generally expect businesses to continue passing higher costs on to consumers over the coming months.
Minneapolis: Several respondents noted that rising gasoline prices have dampened overall consumer spending. At the same time, consumers are shifting payment methods from cash and debit cards to credit cards, and the associated credit card processing fees are further squeezing business margins, particularly for small enterprises.
Kansas City: Employers indicated they are willing to train job candidates who lack technical skills, but face greater difficulty hiring individuals who lack soft skills such as communication and collaboration.
Dallas: Human resources firms report broadly increased hiring demand across industries and skill levels. One respondent described June as their strongest month since before the pandemic began.
San Francisco: Price-sensitive consumers continue to switch to cheaper alternatives. A respondent from Southern California noted that in-store shoppers are not only reducing purchases of higher-priced food items but also buying fewer items overall.
Editor/Stephen