Fed Beige Book Shows Slowing Growth, Wider Price Pressures

• According to the report, two districts experienced moderate growth, three modest, four slight, and three reported no change. For comparison, in August ten districts grew while two were flat.
• Consumer spending saw little to no change across most districts.
• Employment conditions remained largely stable, with three districts posting modest gains, five slight increases, and four no change.
• On pricing, three districts recorded robust growth, eight moderate, and one modest.
• The pace of price gains accelerated in four districts.
• The economic outlook stays positive, though expectations point to slight growth, particularly in manufacturing.

The October Beige Book depicts an economy that is decelerating while inflationary pressures mount. The national summary omitted any headline description of activity. In August, the summary stated activity “increased modestly”; the current report merely counts districts and observes that reports apart from manufacturing “indicate little growth overall.” Both Philadelphia and New York decelerated to slight growth from modest, and Chicago fell to flat. Manufacturing is shouldering the burden, driven by a strong upswing in Dallas and ongoing strength in data centers, power generation, and defense.

Consumer activity has plateaued. In August, spending was described as rising slightly; currently, most districts note little or no change, and over half indicate that high-income households are driving spending. The pressure is moving up the income scale. San Francisco reported that financial strains on lower-income families have expanded to middle-income households, while New York observed increases in 401(k) hardship withdrawals and earned-wage advances. In Cleveland, a record 87% of nonprofits surveyed reported a worsening in clients' financial conditions. Boston, Minneapolis, and San Francisco each noted a decline in Canadian tourists.

The most notable change is in prices. Back in August, only one district reported robust price growth and only one indicated an acceleration. Now those numbers are three and four, respectively. Higher oil prices were cited in every district’s report, with diesel being the most frequently mentioned cost. The forward-looking statements are more alarming for the Fed: businesses anticipate further increases as hedges and fixed contracts expire and are repriced. Philadelphia's future price indexes are among the highest in 35 years, and a New York food manufacturer stated it has not experienced such widespread pressures since the pandemic. Consumer-facing companies still cannot pass through costs, squeezing their margins.

Hiring improved slightly compared to August, but real wages are becoming a problem. In Boston, staffing contacts reported that salary increases are trailing inflation, and cost-of-living demands surfaced in multiple districts. Artificial intelligence was also more prominent, with five districts noting that firms are reducing staff via attrition, postponing hiring, or planning for fewer new positions.

Higher interest rates have emerged as a new topic. Increased mortgage rates further dampened housing in Philadelphia, Kansas City reported a substantial rise in commercial real estate loan spreads, and Dallas bankers became pessimistic, pointing to the Mideast conflict, inflation, and the rise in the fed funds rate.

The FOMC is scheduled to meet October 27-28, and together with the CPI report released today, these factors strengthen the argument for a rate hike. Chair Warsh is expected to speak late tomorrow.