Fed Beige Book Sees Slight Growth, Moderating Wage Pressure

fed beige book sees slight growth, moderating wage pressure

Pedestrians in front of the New York Stock Exchange (NYSE) in New York, US, on Friday, Feb. 16, 2024. Wall Street is ending the week on a bit of a sour note, with stocks and bonds falling after economic data continued to fuel speculation the Federal Reserve will be in no rush to cut interest rates.

(Bloomberg) — The US economy has “expanded slightly” since late February and firms reported greater difficulty in passing on higher costs, the Federal Reserve said in its Beige Book survey of regional business contacts.

“Consumer spending barely increased overall, but reports were quite mixed across Districts and spending categories,” according to the report released Wednesday. “Several reports mentioned weakness in discretionary spending, as consumers’ price sensitivity remained elevated.”

“Another frequent comment was that firms’ ability to pass cost increases on to consumers had weakened considerably in recent months, resulting in smaller profit margins,” the Beige Book said.

The latest edition of the Beige Book was compiled by the Federal Reserve Bank of Boston using information gathered on or before April 8. The report includes anecdotes and commentary on business conditions in each of the 12 Fed districts.

Employment & Spending

The report was somewhat at odds with what recent data releases have been signaling about the US economy.

Reports on employment and consumer spending have continued to show surprising strength, and measures of inflation have remained elevated. The combination has pushed back expectations the Fed will begin cutting interest rates any time soon.

Fed Chair Jerome Powell on Tuesday said it was “likely to take longer than expected” before policy makers had enough confidence in inflation’s decline for it to lower rates.

The Beige Book noted that “price increases were modest, on average.” While raw materials costs were mixed, half of the Fed’s districts noted a pickup in energy prices. Several pointed to higher insurance rates, as well. Because of the difficulty passing these costs on to consumers and customers, profit margins were under pressure.

“On balance, contacts expected that inflation would hold steady at a slow pace moving forward. At the same time, contacts in a few Districts — mostly manufacturers — perceived upside risks to near-term inflation in both input prices and output prices,” the report said.

Most Fed districts also noted an increase in labor supply and an improved ability to retain employees, suggesting a cooling job market and less upward pressure on inflation from wages.

“Multiple Districts said that annual wage growth rates had recently returned to their historical averages,” the report said.

District Highlights

Atlanta: “Firms reported that imprecise CRE appraisals were leading to valuation accuracy challenges. Like the rest of the nation, Sixth District markets will contend with rising CRE loan maturities in 2024.”

Boston: “Domestic travel remained below pre-pandemic levels because of the incomplete recovery of business travel, but growth in international travel more than compensated. Hotel occupancy in greater Boston increased at a strong pace, exceeding seasonal norms, fueled in part by robust convention activity and sporting events.”

Chicago: “One contact said that his firm had substantially cut costs by switching from an external provider of marketing materials to generating materials using AI with no impact on sales.”

Cleveland: “Bankers reported that loan demand increased moderately. One banker attributed an increase in consumer lending to lower interest rates. Another banker said that improved commercial demand was associated with increased optimism surrounding economic conditions.”

Dallas: “Staffing firms noted continued declines in wage pressure, while a technology firm stated that wage increases were now in line with historical averages. A manufacturer mentioned not having to increase wages at all due to plentiful job applicants and higher retention.”

Kansas City: “Agricultural bankers reported a mild deterioration in farm borrower liquidity and a gradual softening in farm loan repayment rates. Crop prices were subdued, and some contacts reported slightly higher instances of carryover debt than a year ago. Cattle prices remained strong, however, and provided ongoing support to the sector.”

Minneapolis: “A regional manufacturing index indicated decreased activity in Minnesota and North Dakota in March from a month earlier, while activity increased in South Dakota. A metal fabricator reported, ‘We are in the midst of the deepest slowdown in my 35 years with our company.’”

New York: “Housing markets continued to strengthen, with the spring selling season picking up beyond the seasonal norm in much of the District. Though mortgage rate lock-in has continued to limit new listings, inventory edged up. Still, low inventory remains the key factor restraining sales.”

Philadelphia: “Housing affordability remained a concern because home price appreciation and high interest rates persisted. Lower-income households were especially burdened by the high-price, high-rate environment.”

Richmond: “A sandwich shop reported that it was still very difficult to find labor, but the applicant pool was increasing, and they were experiencing less attrition.”

St. Louis: “While demand for food pantry services was stable at an elevated level, there was an increased demand for assistance with health insurance and basic clothing. Cost-of-living was an ongoing concern, and more people were looking for second jobs to make ends meet.”

San Francisco: “Annual pay increases moved closer to historical averages and in line with moderating inflation. Some contacts reported employees’ willingness to take a pay cut in exchange for work flexibility and remote work. Wage pressures persisted in agriculture, as larger crop yields expanded the demand for workers.”

–With assistance from Jarrell Dillard.

(Adds regional summaries)

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