US Economy Weakening?... Fed Beige Book "Signs of Slowing Consumer Spending and Labor Market"

Despite high-intensity interest rate hikes, the U.S. economy, which has shown steady growth, has recently exhibited signs of slowing consumer spending and labor market activity, according to the Federal Reserve's (Fed) assessment.

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On the 29th (local time), the Fed stated in its Beige Book economic report that "overall economic activity has slowed since the last report." This evaluation covers the economic conditions across the 12 Federal Reserve Banks' districts and will serve as foundational data for the Federal Open Market Committee (FOMC) regular meeting scheduled for December 12-13. The Beige Book noted that "four districts recorded modest growth," while "six districts experienced slight declines in economic activity, and two districts saw slight decreases near a stable level."

In particular, heightened price sensitivity among consumers due to high inflation led to decreased sales of discretionary items, durable goods including electronics and furniture, in most regions. Reports from the Minneapolis Fed district indicated that shoppers sought cheaper goods, causing consumer spending to stagnate, while the construction and manufacturing sectors faced difficulties. The Philadelphia district also reported a decline in consumer spending. This supports recent forecasts that consumer spending, which accounts for two-thirds of the U.S. economy, will slow significantly starting in the fourth quarter.

Economic outlooks for the next 6 to 12 months have also worsened compared to previous assessments. Demand for business and real estate loans has decreased. Some banks reported a slight increase in delinquencies. Despite relatively healthy consumer credit, concerns were raised that this rise in delinquency rates could signal future risks. However, travel and tourism activities generally remained at a healthy level.

These signs of slowdown were also confirmed in the labor market. Most regions reported either stagnant or modestly increasing employment. The Boston Fed district noted a noticeable reduction in hiring plans in some sectors. However, some areas still reported a shortage of skilled workers and a tight labor market. The Fed has consistently pointed out that achieving the 2% inflation target requires below-trend low growth alongside cooling labor market overheating. The November employment report is scheduled for release next week.

Inflation continues to ease. The Beige Book stated that "inflation remains elevated but has significantly moderated across regions," adding that "construction input costs such as steel and lumber have stabilized or even declined." The following day, the Fed's closely watched inflation indicator, the Personal Consumption Expenditures (PCE) price index, will be released. The core PCE for October in the U.S. is expected to show a 3.5% year-over-year increase and a 0.2% month-over-month rise, continuing the easing trend. The Beige Book also projected that inflation will remain moderate next year.

Raphael Bostic, president of the Atlanta Fed and a prominent dovish figure within the Fed, wrote on the Fed's website that "based on our research and feedback from business leaders, the inflation slowdown is expected to continue," and "according to the information we have, economic activity is likely to slow over the coming months." He cited restrictive monetary policy and tightened financial conditions as the reasons behind this outlook.

Market expectations for a pivot (a change in policy direction) have strengthened. This follows dovish remarks from Fed Governor Christopher Waller, who mentioned the possibility of rate cuts the previous day, and the Beige Book's confirmation of slowing consumption and easing labor market conditions. According to the Chicago Mercantile Exchange (CME) FedWatch tool, federal funds futures on this day priced in about an 80% chance that the Fed will cut rates by at least 0.25 percentage points by May next year, a significant increase from around 55% a week ago. Due to rate cut expectations, the 10-year U.S. Treasury yield in the New York bond market fell below the 4.3% level. The 2-year yield, which is sensitive to monetary policy, also dropped to around 4.64%.

However, voices emphasizing the need for further rate hikes from Fed officials remain. Thomas Barkin, president of the Richmond Fed, appeared on CNBC and expressed concerns about the possibility of inflation surging again, arguing that the Fed should not abandon the option of additional rate increases. The previous day, Fed Governor Michelle Bowman also reiterated the need for further rate hikes to achieve the 2% target.