Federal Reserve Beige Book: U.S. economy expands moderately but inflationary pressures intensify; AI boosts productivity curbing some corporate hiring demand

According to a report from Zhitong Finance App, the latest Beige Book released by the Federal Reserve on Wednesday shows that overall U.S. economic activity has continued to grow, but regional performance varies. Consumer spending is generally sluggish, and the labor market has seen little change. Meanwhile, rising energy prices, tariffs, and insurance costs are continually pushing up business operating expenses, with inflationary pressures intensifying in some districts. Notably, as businesses increase their investment in artificial intelligence (AI), some companies are beginning to reduce hiring needs by improving productivity, and AI's impact on the U.S. labor market is gradually emerging.

This Beige Book, compiled by the Philadelphia Fed, summarizes feedback from businesses and other respondents collected as of October 5. The report notes that among the Federal Reserve’s 12 districts, two saw moderate economic growth, three saw slight growth, four had only marginal growth, and the remaining three reported virtually no change in economic activity.

Manufacturing has become an important pillar supporting U.S. economic growth. The Dallas Fed district benefited from broad and robust manufacturing expansion, achieving moderate economic growth. Manufacturing activity in another six districts also saw slight to moderate growth, while the remaining five districts experienced almost no growth.

By contrast, overall growth in other industries was limited. Most districts reported little change in consumer spending. Among the six districts that reported on auto sales, five saw flat or slightly declining sales.

The trend of polarization in the consumer market has become more apparent. Over half of the districts indicated that consumer spending is primarily supported by high-income households, while low-income consumers have become more cautious under the pressure of rising living costs. Even in the Dallas district, where retail sales were relatively stable, businesses reported that low-income customers are cutting back on spending. The tourism industry as a whole continued to grow, but companies in the Boston, Minneapolis, and San Francisco districts all reported a decline in spending by Canadian tourists.

Looking ahead, most district businesses remain positive about the economic outlook but generally expect only limited growth, with momentum mainly concentrated in manufacturing. Persistent uncertainty continues to constrain economic activity.

Regarding the labor market, the Beige Book shows that overall U.S. employment levels have changed little, but AI is impacting hiring decisions at some companies. In the 12 districts, three reported slight employment growth, five reported minimal growth, and the remaining four saw essentially no change. Overall, labor supply generally meets business demand, though there remains a shortage of professional and skilled technical workers.

Notably, five districts reported that some companies, after investing in AI and raising productivity, began to reduce staff through natural attrition, postpone hiring, or expect to add fewer positions in the future.

Some large firms in the New York Fed district said that as AI gradually integrates into daily operations, they have started to cut positions or freeze hiring. Banking industry respondents in the Cleveland district also noted that automation and AI tools have improved efficiency for certain roles, reducing staffing needs. However, AI’s impact on employment is not uniform. While companies in the Atlanta district are expanding their use of AI and automation tools, most respondents anticipate that these investments will not lead to large-scale layoffs in the short term.

In terms of wages, five districts reported moderate wage growth, four saw slight increases, and two reported only marginal gains. Some businesses stated that persistent inflation has fueled higher cost-of-living demands among employees, while increased costs for health insurance and other benefits are further pressuring company payrolls.

On prices, the Beige Book signaled more pronounced inflationary pressures. The report showed that three districts experienced significant price increases, eight districts saw moderate price rises, and one district reported only a small uptick. In four districts, the pace of price increases accelerated compared to the previous reporting period.

Rising energy prices are one of the main drivers of increased costs. All districts mentioned the impact of higher oil prices, with businesses widely reporting high diesel costs and that fuel surcharges are pushing costs further down the supply chain.

Additionally, tariffs, other bulk commodities, and rising insurance costs are continually adding to business burdens. Some companies noted that, as consumers are becoming increasingly sensitive to price increases, it has become difficult for businesses to fully pass on higher costs to customers, squeezing profit margins. To maintain profitability, some companies are selectively raising prices, launching promotional offers, or reducing costs by adjusting product or dining menus.

The report points out that as existing procurement contracts expire, and companies renegotiate raw material hedging agreements and client delivery contracts, the cost pressures from energy and tariffs may be further reflected in the prices of goods and services over the coming months.

The report also shows that AI-related investments have driven demand in some manufacturing and infrastructure sectors, but are beginning to create a crowding-out effect in other industries.

Manufacturing firms in the Philadelphia Fed district report that data centers, AI, and defense-related businesses remain the main drivers of manufacturing growth. The Cleveland district also reported continued growth in demand for data center construction, power generation facilities, and the defense aerospace sector.

However, businesses in the Kansas City district noted that data center construction is using up part of manufacturing capacity and intensifying competition in the labor market. Some Dallas district firms reported that data center projects are raising labor costs in the construction industry and attracting workers from other sectors to related projects.

Meanwhile, the U.S. real estate market continues to be constrained by high interest rates. The Philadelphia district reported that rising mortgage rates in September further suppressed home sales activity, with some prospective buyers leaving the market due to high borrowing costs.

While the Atlanta district reported some improvement in home sales, many buyers still struggle to obtain mortgage approval, and sellers in states like Florida are using discounts and other incentives to attract buyers.

Housing supply in the New York district remains tight, limiting transaction volume and supporting home prices. Meanwhile, rising mortgage rates make many existing homeowners reluctant to sell and give up the low-rate mortgages they previously secured.

Looking at regional performances, the Dallas district achieved moderate economic growth with a marked acceleration in manufacturing expansion; the Cleveland and Richmond districts also maintained growth. By contrast, economic activity in the Chicago, Kansas City, and San Francisco districts was generally stable, with signs of weakness emerging in certain consumer and real estate sectors.