Three-Quarters of US Economy Stagnating or Contracting: New Federal Reserve Survey

Federal Reserve in Washington on Aug. 12, 2024. Madalina Vasiliu/The Epoch Times

Economic conditions in three-quarters of the United States experienced “flat or declining activity” in August as employment levels held steady and prices increased modestly, according to the latest Federal Reserve report.

The Beige Book—a summary of regional economic conditions across the 12 Fed districts—highlighted a national economy treading water. Of the dozen Fed districts, nine recorded sluggish or contracting economic activity, up from five in July. Three districts reported expansions.

While the overall labor market held steady, there were “isolated reports” of companies filling necessary positions, reducing hours and shifts, and lowering payrolls through attrition. Layoffs “remained rare” last month.

“Employers were more selective with their hires and less likely to expand their workforces, citing concerns about demand and an uncertain economic outlook,” the report reads.

On the inflation front, wage growth was “modest” and increases in businesses’ input costs and selling prices “ranged from slight to moderate.” However, the Fed’s contacts anticipate that cost and price pressures will “stabilize or ease further in the coming months.”

Consumer spending dipped in most Fed districts, while automobile sales varied by districts.

Manufacturing activity declined in most of the country, according to the Fed report. This was observed in the various regional central bank manufacturing surveys, such as the New York Fed’s Empire State Manufacturing Index and the Richmond Fed Manufacturing Index, highlighting a slumping sector.

Commercial and residential real estate industry construction was mixed in the reporting period, which was gathered on or before Aug. 26.

“District contacts generally expected economic activity to remain stable or to improve somewhat in the coming months, though contacts in three Districts anticipated slight declines,” the Fed report reads.

Recent Economic News

The financial markets were spooked again by two key manufacturing reports.

The August Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers’ Index (PMI)—an index that measures the general direction that the sector is heading—fell short of expectations and was stuck in contraction for the fifth straight month.

The S&P Global Manufacturing PMI weakened for the second consecutive month in August and came in slightly below the consensus estimate.

Chris Williamson, chief business economist at S&P Global Market Intelligence, warned that the latest U.S. manufacturing report sent “warning signals on economic conditions” as demand slowed, output fell, employment declined, and input costs unexpectedly rose.

“A further downward lurch in the PMI points to the manufacturing sector acting as an increased drag on the economy midway through the third quarter,” Williamson said in a report. “Forward-looking indicators suggest this drag could intensify in the coming months.”

Construction spending also slipped by 0.3 percent in July.

Workers assemble cars at the newly renovated Ford Assembly Plant in Chicago on June 24, 2019. Jim Young / AFP via Getty Images

“The ISM manufacturing index is still indicating a contracting sector with the key new orders and production components remaining in the doldrums,” James Knightley, chief international economist at ING, said in a note. “Construction activity is also cooling meaning that growth in the second half of this year is going to have to be provided by the services sector.”

The ISM’s August Services PMI will be released on Sept. 5 and is expected to show a tepid decline in activity.

The leading U.S. stock market benchmark indexes plummeted following the manufacturing figures, with the blue-chip Dow Jones Industrial Average plunging by more than 600 points. The tech-heavy Nasdaq Composite Index declined by more than 3 percent, while the S&P 500 tumbled by 2.2 percent.

Stocks were little changed on Sept. 4 after new data assuaged slowdown fears. Factory orders surged at a higher-than-expected pace of 5 percent in July.

A soft landing—a moderate slowdown in economic growth without breaking the labor market—is the likely scenario, although other possibilities are being monitored closely, according to Jennifer McKeown, chief globalist economist at Capital Economics.

“I think it’s much too soon to be really concerned that we’re heading back into a recession, but these are risks that we’re monitoring really closely,” McKeown said during a live webinar on Sept. 4. “The more indicators turned down, of course, the more worried you become.”

Based on regional central bank models, the U.S. economy is expected to avert a recession in 2024.

The Atlanta Fed’s GDPNow Model estimates 2.1 percent growth in the third quarter. The New York Fed Staff Nowcast anticipates an expansion rate of 2.5 percent in the July to September period.

Recent developments in the broader economy, from easing inflation to a weaker labor market, prompted Federal Reserve Chair Jerome Powell to pivot on monetary policy and signaled last month that “the time has come for policy to adjust.”

Bureau of Labor Statistics data have shown the unemployment rate rising to its highest level since October 2021 and the number of job openings declining to their lowest levels since early 2021.

Investors overwhelmingly anticipate that monetary authorities will announce the first interest rate cut since 2020 at the September policy meeting, according to the CME FedWatch Tool.