Wage growth has slowed down in several regions, and overall prices have risen moderately and in some areas only slightly. Some analysts believe that the US economy is showing signs of slowing down, with stable but not growing consumer spending. Consumers are more price-sensitive, and labor market and wage pressures are easing, which seems to be pushing the Federal Reserve towards cutting interest rates. AI demand driving data center investment expansion is also one of the highlights.
On Wednesday, July 17th, the Federal Reserve released its so-called "Beige Book," a report on the current economic status compiled by 12 regional Federal Reserve Banks. The description of overall economic activity in the United States remained at "slight to modest pace," but three new regions reported "economic activity remained flat or decreased," and respondents expected economic growth in the next six months to slow down.
The Beige Book is published two weeks before the Federal Open Market Committee (FOMC) policy meeting. The report, compiled by the Richmond Fed, summarizes anecdotes and comments about the commercial situation in the 12 districts of the Federal Reserve that was collected information from and before July 8th over the past six weeks.
On the level of "overall economic activity," the Beige Book stated that economic activity in a majority of Districts remained at a slight to modest pace from late May to early June. Economic activity increased in seven regions, while remained flat or decreased in five regions. In the previous May report, it was only reported that economic activity did not change in two regions.
In both the May and July Beige Books, the labor market remained at a slight pace. The employment rate in most districts remained stable or "slightly up," while more districts reported stable or declining employment rates, and only a few districts experienced "moderate" employment growth. Several regions reported a decrease in employment in the manufacturing sector due to the slowdown of new orders.
Skilled workers remain scarce challenges in all regions, particularly in the construction, maintenance, retail, healthcare, and tourism sectors. However, the labor supply situation has improved in several regions, and the labor turnover rate has also decreased, reducing the need to hire new workers. Several regions expect to recruit more cautiously and not fill all vacant positions. Companies continue to turn to automation and outsourcing to save money and compensate for actual or expected labor shortages.
Therefore, in terms of wage trends, most regions saw wages increase at a "modest to moderate pace," and several regions reported that workers' availability increased and the competition for labor decreased, leading to a slowdown in wage growth. The above description is cooler than that of the May Beige Book, which described the wage growth for "the majority maintained a moderate pace, with a few areas growing more moderately."
At the price level, prices have risen moderately, and some regions reported only a slight increase, which is the same as the report in May. It is noteworthy that "although consumers' spending is reported to have hardly changed, almost every region reported that retailers discount products or consumers who are sensitive to price only buy necessities, reduce quality, buy fewer products, or compare prices to find the most cost-effective deal.
Most districts pointed out that input costs began to stabilize; however, the Atlanta Fed specifically pointed out that products such as copper and electrical appliances have significantly increased during this period.
As demand weakened, companies increased their pricing power without pushing away customers. Although food and commodity costs remained basically unchanged, freight and some building materials prices have risen.
"Most regions' demand for consumer and business loans is soft," but the overall demand for loans remains moderate, and specific loan types (such as home equity loans and used-car loans) have increased slightly. Deposits continue to decline slightly.
On the specific topic of consumer spending, statistcis from most districts show that household spending remains stable this quarter, and the auto sales situations vary from region to region. Some regions indicated that auto sales declined due to cyber-attacks on dealerships and high loan rates. Tourist and travel businesses grow steadily and are in line with seasonal expectations.
In the banking and financial sector, the demand for consumer and business loans in most regions is weak, but the overall demand for loans remains moderate. Some specific loan types (such as home equity loans and used-car loans) have increased slightly. Deposits continue to decline slightly.
The residential and commercial real estate markets have only seen slight changes in recent weeks. The residential real estate market is exhibiting typical seasonal slowing with inventory gradually increasing. Commercial real estate activities vary, with retail leases rebounding, but office leasing still seems sluggish:
"Although the number of residential sales in most markets is roughly the same as last year or slightly lower, the proportion of homes sold at prices below the initial asking price is higher, indicating that the market is becoming more buyer-friendly.
Commercial real estate activities are mixed. Office and apartment market activities have slowed down, causing vacancy rates to rise, rent growth to remain flat or decline, and default rates in these areas to increase.
Manufacturing activities vary from good to bad, with descriptions ranging from "sharp downturn" to "moderate growth." Some regions pointed out that manufacturing product demand is weak. Generally speaking, manufacturing activities have slightly declined since the May Beige Book, and new orders for heavy equipment have slowed in some regions, while demand for wood products related to construction has weakened.
The agricultural situation has improved slightly, and cattle farmers report strong sales, which has also led poultry farmers to maintain an optimistic attitude due to the rising price of beef. However, the demand for some crops such as cotton remains persistently weak, and agriculture is also affected by occasional droughts throughout the United States.
In addition, the replenishment of retail inventories has stimulated a slight growth in transportation activities, while the tight shipping capacity has led to a surge in spot freight rates. However, contacts in trucking transportation continue to report that seasonal demand is lower than normal levels, and some logistics companies report a decline in direct-to-consumer (DTC) deliveries for wholesale, retail, and large items such as home appliances. Contacts in warehousing report that demand for distribution and storage space has slowed down.
It is noteworthy that the Beige Book also discusses the expansion of AI technology investment:
"Utility contacts report that electricity demand in the commercial and industrial sectors continues to increase, primarily due to newly constructed and expanded data center projects that focus on using AI technology more extensively."
Contacts in the renewable energy sector indicate that the uncertainty of the US presidential election has slowed down capital investment activities."
Overall, respondents' short-term outlooks are not optimistic enough:
"Due to the uncertainty of the upcoming US presidential election, domestic policies, geopolitical conflicts, and inflation, people expect slower growth over the next six months."
Some analysis suggests that the latest Beige Book shows that overall economic activity in the United States remains positive but is showing 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 slower pace, and there are increasing signs of stagnation or declines in growth:
"This may suggest a soft landing, but please remember that every hard landing starts with a soft landing."
After the Beige Book was released, the US dollar index DXY continued to decline within the day, stabilizing at its lowest point in nearly four months since late March. The major US stock indexes maintain their previous trends, with only the Dow Jones index, which aggregates blue chip stocks, rising, while the Nasdaq and S&P technology sectors are expected to deliver their worst performance since 2022. The two-year US Treasury bond yield also temporarily declines, hitting a five-month low in trading, while the 10-year basic bond yield hovers near the lowest point in four months.