The Federal Reserve's Beige Book highlights the Fed's dilemma: a weak job market and persistent inflationary pressures coexist

The latest economic survey by the Federal Reserve shows that U.S. economic activity has nearly stalled recently, with a continued weakening in the labor market while cost and price pressures remain. The Federal Reserve will face a dual risk assessment at its key meeting in December.

On Wednesday, the Federal Reserve's Beige Book report indicated that half of the employers in the twelve Federal Reserve districts reported a decline in hiring intentions. The recent end of the U.S. government shutdown and the application of AI have put pressure on job seekers' prospects.

At the same time, rising tariffs and healthcare costs have increased corporate spending, potentially exacerbating inflation concerns. The K-shaped divergence among consumers has intensified, with high-income consumers in several districts maintaining resilient spending, while middle- and low-income families are "tightening their belts."

Due to the recent government shutdown leading to a pause in the release of a large amount of economic data, this Beige Book may hold greater significance for Federal Reserve decision-making than in the past.

Currently, there are differences within the Federal Reserve regarding the policy direction for the meeting on December 9-10. Some officials lean towards a 25 basis point rate cut due to the slowdown in the labor market, while others advocate for keeping rates unchanged due to persistently high inflation. The market currently expects an over 80% probability of a rate cut.

(The market currently expects an 81% probability of a Federal Reserve rate cut in December)

Labor Market Remains Weak

The situation for job seekers has not been optimistic over the past six weeks, with half of the twelve regional branches of the Federal Reserve reporting a decline in employer hiring intentions.

The report noted that while layoff announcements have increased, more companies are limiting their workforce through hiring freezes, only replacement hiring, and natural attrition. Many employers are also adjusting work hours to accommodate business volumes that are above or below expectations.

A few companies pointed out that artificial intelligence has replaced entry-level positions or increased the productivity of existing employees to the extent that it suppresses new hiring.

Most employers in the districts found it easier to recruit, but there are still difficulties in certain skill positions and a reduction in immigrant workers.

Wages are generally growing at a moderate pace, but industries such as manufacturing, construction, and healthcare are experiencing greater wage pressures due to tight labor supply.

Additionally, rising healthcare premiums continue to exert upward pressure on labor costs.

Tariffs Drive Up Costs, Pressuring Corporate Profits

The Federal Reserve noted that manufacturers and retailers are facing higher input costs, which they attribute to tariffs.

U.S. manufacturing and retail sectors are generally facing input cost pressures, primarily reflecting price increases due to tariffs. Some districts reported rising costs for insurance, utilities, technology, and healthcare.

Despite tariffs and tariff uncertainties remaining a hindrance, manufacturing activity has still seen some increase. Non-financial services revenues are mostly flat to declining, and loan demand reports are mixed. The agricultural and energy sectors are generally stable, but some contacts noted challenges from low price environments for oil and certain crops The degree to which higher input costs are passed on to customers varies, depending on demand, competitive pressure, consumer price sensitivity, and customer resistance. Multiple jurisdictions report that businesses are experiencing margin compression or facing financial pressure due to tariffs.

Certain material prices have declined, which businesses attribute to weak demand, delays in tariff implementation, or reductions in tariff rates.

Looking ahead, businesses generally expect upward cost pressures to persist, but there are divergences in recent price increase plans.

Weak Consumer Spending and Government Shutdown Impact

Overall consumer spending has further declined, but the market shows a clear polarization.

High-end retail spending remains resilient, while mid- to low-end consumption is more severely impacted. Some retailers have explicitly pointed out that the government shutdown has negatively affected consumer purchasing decisions.

A contact cited by the Minneapolis Federal Reserve stated:

High-income customers are unrestrained, but low-income customers are tightening their belts. Many businesses report that as household budgets tighten, consumers are now less willing to accept higher prices.

The automotive market has encountered specific shocks. Auto dealers report a decline in electric vehicle sales after the expiration of federal tax credits in the United States.

Travel and tourism activities have remained largely unchanged in recent weeks, with some industry insiders noting that consumers are cautious about non-essential spending.

Consumer businesses in the Philadelphia area report difficulty in raising prices, as more consumers are seeking discounts. A restaurant owner observed that although family restaurants are full, competition has pushed the average spending per customer into unprofitable territory.

Community organizations have observed an increase in food assistance demand, partly due to disruptions in SNAP benefits during the government shutdown. This phenomenon highlights the direct impact of policy uncertainty on low-income groups