The U.S. economy is showing signs of softening, including weakening of the labor market, declining price pressures, some pullbacks in consumer spending, and slowing loan demand, according to the Federal Reserve’s Beige Book, which dovetailed with other recent data hinting at a slowdown.
Economic activity maintained a slight to modest pace of growth in seven of the Fed’s 12 districts during the latest reporting cycle, per the Beige Book report, which was
released on July 17. However, three more districts than in the prior cycle reported flat or declining activity, suggesting that the U.S. economy has been losing some of its strength.
Most districts saw soft demand for both consumer and business loans, which could reflect a combination of tighter credit conditions associated with the current high-interest rate environment, weaker consumer confidence, and reluctance to spend and invest.
While the Beige Book showed household spending remained little changed, nearly every district mentioned that retailers were discounting items or that price-sensitive consumers were limiting their purchases to bare essentials, buying fewer items, hunting for bargains, or trading down in quality.
The Fed data on consumer spending, which is a key driver of the U.S. economy, were roughly in line with the latest
Commerce Department report on retail sales, which were flat from May to June, defying analysts’ predictions for a slowdown.
“It may be that the weather has boosted retail footfall as people try to escape the heat, but there are still challenges for the sector from weak real income growth, a run down in savings levels, and high borrowing costs,” James Knightley, an economist at ING,
wrote in a note on the retail sales figures.
Expectations for the future of the economy over the next six months were for slower growth, with the Beige Book report citing factors such as uncertainty around the upcoming election, domestic policy, geopolitical strife, and inflation.
This fits together with
recent data on consumer confidence from The Conference Board, which showed that expectations for both future income and business conditions weakened, leading to an overall pullback in consumer confidence in June. Compared to May, consumers were less concerned about a forthcoming recession, although their assessment of their families’ financial situations, both in the present and six months ahead, was “less positive,” according to The Conference Board report.
One factor that limited the decline in consumer confidence in June, according to The Conference Board, was strength in current views about the labor market, which has shown remarkable resilience in the face of a prolonged period of high interest rates. However,
recent data from the Labor Department, which showed that the number of U.S. workers collecting unemployment benefits jumped to its highest level since November 2021, hint at some softening, as does a slow but steady rise in the unemployment rate, to 4.1 percent.
The Fed’s Beige Book suggested some softening in the labor market, which saw “slight” employment growth overall. Some sectors, however, such as manufacturing, faced declines due to slowdowns.
Skilled worker availability remained a challenge, though there were signs of improvement. Wage growth was modest to moderate with some deceleration due to reduced competition for employees and increased worker availability. Lower labor turnover reduced the need to find new workers and, looking ahead, several districts expected to be more selective in hiring and not backfill all open positions.
Prices rose at a “modest” pace overall, the Beige Book showed, with most districts reporting that input costs were beginning to stabilize.
The latest government report on inflation
showed that consumer prices declined slightly from May to June, bringing the annual pace of inflation down from 3.3 percent to 3 percent.
Some market analysts,
such as Mike Shedlock, saw the Beige Book report as confirming a progression toward a recession.
