WASHINGTON — Economic activity continued to expand across most of the country through late May, but the Federal Reserve reported growing signs of strain among consumers as higher fuel and energy costs added to inflation pressures and uncertainty weighed on business sentiment.
According to the Federal Reserve’s latest Beige Book, economic activity increased at a slight-to-moderate pace in 10 of the 12 Federal Reserve districts. One district reported a slight decline in activity and one reported no change. The report said consumer spending remained mixed and increasingly divided by income level, with higher-income households continuing to spend while middle- and lower-income consumers faced mounting affordability challenges.
The Federal Reserve said contacts around the country reported increased credit card usage, fewer retail shopping trips and stronger demand for necessities. Auto dealers cited weaker demand for new vehicles because of affordability concerns and higher fuel costs, while consumers increasingly shifted toward used and hybrid vehicles. Manufacturing, however, remained a relative bright spot, increasing at a modest-to-strong pace in nine districts.
Employment Unchanged
The Beige Book said employment was largely unchanged across the country, with 11 districts reporting little or no change and one district reporting modest growth. Manufacturing hiring was among the strongest areas of the labor market, supported by defense-related activity and continued demand tied to data center construction. Most districts described labor markets as a “low-hire, low-fire” environment, with workers reluctant to change jobs amid economic uncertainty. Wage growth remained modest to moderate and generally kept pace with inflation.
Inflation pressures intensified, according to the Federal Reserve, with most districts reporting higher inflation than in the prior Beige Book. Energy-related costs tied to conflict in the Middle East were identified as a primary driver of higher prices, affecting transportation, shipping, packaging, groceries and fertilizer. Businesses in many sectors reported rising input costs outpacing their ability to raise prices, squeezing profit margins.
Regional Highlights
Among regional highlights cited by the Federal Reserve:
- In Boston, economic activity grew slightly, consumer spending edged higher despite elevated gasoline prices, and manufacturing activity improved modestly.
- New York reported a slight increase in economic activity after a prolonged period of weakness, with strong manufacturing growth, moderate gains in consumer spending and improving housing activity.
- Philadelphia was the only district to report an overall decline in business activity, with employment slipping and home sales weakened by affordability challenges.
- Cleveland reported moderate growth, led by manufacturing demand linked to data center development, while retailers said higher fuel costs were dampening consumer spending.
- Richmond reported modest economic growth, supported by gains in consumer spending, manufacturing and financial services, though businesses continued to express concerns about economic stability.
- Atlanta said activity expanded modestly, with retail sales increasing but travel slowing and housing markets remaining weak.
- Chicago reported slight growth overall, led by manufacturing, while prices rose rapidly and financial conditions tightened somewhat.
- St. Louis reported slight growth but noted that the outlook had deteriorated somewhat because of uncertainty, supply-chain disruptions and rising fuel costs.
- Minneapolis reported modest expansion, with particularly strong increases in prices and input costs.
- Kansas City reported slight growth but said consumer-facing businesses continued to experience soft demand and margin pressure.
- Dallas reported modest growth driven by services, manufacturing and banking, though retail sales weakened and business outlooks remained subdued.
- San Francisco reported stable economic activity, with steady employment and finance activity but weaker conditions in agriculture and residential real estate.
‘Generally Stable’
The Federal Reserve said banking conditions generally remained stable nationwide, although several districts reported rising delinquencies in residential mortgages, consumer loans and agricultural lending. Agricultural conditions were unchanged or weakened in much of the country as farmers contended with higher fuel and fertilizer costs. Energy activity increased in only a handful of districts, as producers remained cautious about expanding operations amid uncertainty surrounding future prices and global conditions.
Looking ahead, the Beige Book said business expectations for the next six months were largely unchanged. The Federal Reserve reported that elevated uncertainty and signs of weakening consumer spending continued to weigh on sentiment across many regions of the country.
