Fed Beige Book: More regions see flat or declining economic activity, weakened consumer purchasing power, maintaining a pessimistic outlook on the prospects

On Wednesday, July 17, the Federal Reserve released the so-called "Beige Book," a regional economic survey report compiled by the 12 Federal Reserve Banks. The description of overall economic activity in the United States remained at a "slight to modest pace," but three additional districts in the report compared to May indicated that economic activity was flat or declining. Respondents expect the pace of economic growth to slow in the next six months.

The Beige Book is released two weeks before the Federal Open Market Committee (FOMC) policy meeting. This edition of the Beige Book was compiled by the Richmond Fed and summarized information collected up to July 8 and the previous six weeks, including anecdotes and comments on the business conditions in the 12 Federal Reserve Districts.

Regarding "overall economic activity," the Beige Book stated that in late May and June, economic activity in a majority of Districts in the United States maintained a slight to modest growth. Seven districts reported increased economic activity, five districts reported flat or declining economic activity, compared to the previous report in May where only two districts reported no change in economic activity.

The labor market in May and July Beige Books both maintained a "slight pace of growth." Most districts reported stable or slightly rising employment rates, with more districts mentioning stable or declining employment rates, and only a few districts reported "moderate" employment growth. Several districts reported a decrease in manufacturing employment due to a slowdown in new orders.

The scarcity of skilled workers remains a challenge in all districts, especially in the construction, maintenance, retail, healthcare, and tourism industries. However, there have been improvements in the labor supply situation in several districts, with a decrease in the rate of labor turnover, reducing the need to hire new workers. Several districts expect to be more cautious in hiring and will not fill all vacant positions. Companies continue to turn to automation and outsourcing to save costs and address actual or anticipated labor shortages.

Therefore, in terms of wage trends, wages in most districts are growing at a "modest to moderate" pace, with several districts mentioning enhanced worker availability and reduced competition for labor, leading to a slowdown in wage growth. This description is cooler than the May Beige Book, where wage growth was described as "mostly maintaining a moderate pace, with some areas growing more moderately."

On the price front, prices have generally risen modestly, with some districts reporting only slight increases, consistent with the May report. It is worth noting that:

"While consumer spending was generally reported to be nearly unchanged, almost every district mentioned that retailers were discounting goods or price-sensitive consumers were only buying essentials, lowering quality, purchasing fewer goods, or shopping around for the best deals.

Most districts noted that input costs were beginning to stabilize; however, the Atlanta Fed district specifically pointed out significant increases in products such as copper and electrical goods during this period As demand weakens, the ability of businesses to raise prices without driving away customers weakens. While food and commodity costs remain basically unchanged, prices for freight and some construction materials have risen."

Specific to consumer spending, statistics from most regional Federal Reserves show little change in household spending this quarter, with varying trends in car sales across regions. Some regions have noted that car sales have declined due to cyber attacks on dealerships and persistently high loan rates. Travel and tourism industries are steadily growing, in line with seasonal expectations.

In the banking and financial sector, demand for consumer and commercial loans is soft in most regions, but overall loan demand remains moderate, with slight increases in specific loan types (such as home equity loans and used car loans). Deposits continue to decline slightly.

There have been only minor changes in the residential and commercial real estate markets in recent weeks. The residential real estate market is showing typical seasonal slowdown, with inventories gradually increasing. Commercial real estate activities vary, with retail leasing picking up while office leasing remains soft:

"Due to near peak price levels and persistently high interest rates, residential sales volumes in most markets are flat or slightly down compared to the same period last year. The proportion of homes sold below the initial asking price is higher, indicating a shift towards a buyer's market.

Commercial real estate activities are mixed. Activity in the office and apartment markets has slowed, leading to rising vacancy rates, stagnant or declining rent growth, and increased foreclosure rates in these areas."

Manufacturing activities vary across regions, with descriptions ranging from "sharp decline" to "moderate growth". Some regions have noted soft demand for manufactured products. Overall, manufacturing activity has slightly declined since the May Beige Book, with some regions experiencing a slowdown in new orders for heavy equipment and weakening demand for wood products related to construction.

The agricultural situation has improved slightly, with cattle farmers reporting strong sales and optimistic attitudes among poultry farmers due to rising beef prices. However, demand for some crops like cotton remains soft, and agriculture is also affected by sporadic droughts across the U.S.

Furthermore, retail inventory replenishment has stimulated slight growth in transportation activities, while tight maritime shipping capacity has led to soaring spot freight rates. However, contacts in trucking continue to report seasonal demand below normal levels, with some logistics companies noting a decrease in direct-to-consumer (DTC) deliveries of bulk items like wholesale, retail, and appliances. Warehouse contacts have reported a slowdown in demand for distribution and storage space.

Of note, the Beige Book also mentions the expansion of AI technology investments:

"Utility contacts report that electricity demand in the commercial and industrial sectors continues to rise, primarily due to new and expanding data center projects that increasingly focus on using artificial intelligence technology In the renewable energy sector, contacts have indicated that the uncertainty surrounding the US presidential election has slowed down capital investment activities.

Overall, respondents' short-term outlook is not optimistic:

"Due to the upcoming US presidential election, domestic policies, geopolitical conflicts, and inflation uncertainties, people expect slower growth over the next six months."

Some analysts have pointed out that the latest beige book shows that the overall economic activity in the US remains positive but shows signs of slowing down. Consumer spending is stable but not growing, and consumers are more sensitive to prices. The economy is still growing, but at a slow pace, and there are increasing signs of growth stagnation or decline:

"This may indicate a soft landing, but remember, every hard landing starts with a soft one."

After the release of the beige book, the US Dollar Index (DXY) continued to decline intraday, stabilizing at its lowest level in nearly four months since late March. Major US stock indices also maintained their previous trends, with only the Dow Jones Industrial Average (Dow) rising, while the Nasdaq and S&P technology sectors are poised to deliver their worst performance since 2022. The two-year US Treasury bond yield also temporarily declined, trading at a five-month low, while the 10-year Treasury bond yield hovered around a four-month low