Fed’s Beige Book Finds Softening Job Market

Key Takeaways

The job market weakened a bit this month as some employers cut back on hiring plans or reduced employees' hours and others shed jobs, according to the Federal Reserve's latest anecdotal Beige Book.

The report is a data-light snapshot of the U.S. economy, giving the Fed visibility into what businesses are experiencing as Fed officials prepare to vote on interest rates. It may take on added importance at the Fed's Dec. 9-10 meeting, since the government shutdown prompted the cancellation of October's jobs report and a delay in November's.

The picture suggests conditions may have weakened since September, when employers added some 119,000 jobs.

Employment "declined slightly" as of mid-November, the Fed's Beige Book said, with about half of the Fed's 12 districts seeing weaker demand for workers.

"Despite an uptick in layoff announcements, more Districts reported contacts limiting headcounts using hiring freezes, replacement-only hiring and attrition than through layoffs," the report said. "In addition, several employers adjusted hours worked to accommodate higher or lower than expected business volume instead of adjusting the number of employees."

Why This Matters

A cooling labor market and softer spending shape expectations for the Fed's next interest-rate move, influencing borrowing costs for consumers and businesses. These shifts also signal the economy's resilience as it enters the year-end.

A few businesses also flagged early impacts of artificial intelligence, noting it replaced some entry-level positions "or made existing workers productive enough to curb new hiring."

The weakening job market lines up with the assessment of one restaurant contact in the Philadelphia Fed district, who noted there had been "an exodus of workers to warehouse jobs" in 2021 and 2022. Now, that contact said, those workers haven't lost their jobs but are picking up part-time restaurant work since they've had their hours cut.

While anecdotal, the report helps give the Fed visibility on whether their dashboards of data align with what local contacts are telling them.

Fed officials have been unusually split in recent weeks, with some seeing more signs of economic strength than others and debating risks to inflation. Their data dashboards have also been a little smaller due to the federal government shutdown, with its economic data apparatus slowly starting to re-emerge.

"In the absence of key data, the anecdotes will provide valuable insights for Fed officials and we see the FOMC proceeding with a year-end rate cut," Priscilla Thiagamoorthy, senior economist at BMO Capital Markets, wrote in a research note.

Softer Consumer Spending

The report also found that consumer spending was softening, as middle-of-the-road households became more cautious even as higher-income ones kept spending.

"Overall consumer spending declined further, while higher-end retail spending remained resilient," the report said, adding that some travel and tourism contacts saw "cautious discretionary spending among consumers."

In the Kansas City Fed district, the government shutdown led to "a visible slowdown in foot traffic" at many retailers and restaurants, the report said. Other businesses saw similar trends.

"One firm remarked that now was the best time to get a tattoo, as even top artists have more open appointments than usual," the report said.

The more wary tone lines up with recent data, with a monthly survey from The Conference Board showing confidence falling to its lowest levels since April. It also underscores the persistence of a "'K-shaped economy,'" BMO's Thiagamoorthy wrote, as spending among higher-income households rises while those on the lower end spend less.

Prices On the Rise

The report also flagged that prices "rose moderately," with tariffs helping prompt widespread pressures on input costs among manufacturers and retailers.

It's not clear how much that will translate into higher sticker prices for consumers—and show up in the Consumer Price Index or other inflation data.

"The extent of passthrough of higher input costs to customers varied, and depended upon demand, competitive pressures, price sensitivity of consumers, and pushback from clients," the report said.

Fed officials tend to cut interest rates when the economy is weakening, but the risk of higher inflation is making some officials prefer keeping rates unchanged.

Prices declined for some materials, the report said, with some businesses attributing to weaker demand, a delay in tariff implementations or the recent cut in tariff rates on some products.

Other businesses are still seeing higher prices, with "multiple reports of margin compression or firms facing financial strain stemming from tariffs," the Beige Book said.

The Fed's contacts broadly said they "anticipate upward cost pressures to persist," but their "plans to raise prices in the near term were mixed," the report said.

Source: Investopedia