U.S. economic activity increased early this year even as inflation remained high and interest rates increased, according to the Federal Reserve’s March 8 Beige Book.
The Chicago and Minneapolis Federal Reserve districts saw employment gains. Economic activity declined slightly in the Kansas City region, even as employment remained high and labor markets were tight. “Consumer spending continued to fall, primarily due to reduced discretionary spending, as spending on food, energy and health care continued to rise,” the Fed stated. “Prices rose broadly at a moderate pace, but rental rates for housing continued to increase at a robust price.”
Overall commercial real estate activity was steady, with growth in the industrial market but continued weakness in the office sector. Loan demand fell, credit standards tightened and delinquency rates increased. In the Minneapolis region, most large markets saw closed residential real estate sales fall between 25 and 50 percent in December and January as interest rates continued to increase.
Business spending increased in January and early February as capital expenditures remained stable. Manufacturing inventories remained elevated, but wait times for raw materials dropped. Consumer spending remained similar to the previous quarter, though a few districts saw “moderate to strong growth” in retail sales during a typically slow period. Supply chain disruptions continued to ease, according to the report.
Agricultural conditions remained strong in the Minneapolis region. In the Chicago area, agricultural incomes were expected to be lower this year than in 2022. Chicago contacts expect near-average district agricultural income returns this year, down from an above-average 2022. Wheat prices increased due to longer Russian inspection times for Ukrainian grain shipments and greater buyer reluctance to enter purchase agreements.
Labor market conditions remained strong and employment continued to grow “at a modest to moderate pace” despite some firms freezing hiring, ongoing childcare challenges and scattered reports of layoffs. Wages increased at a moderate pace, according to the Fed, though some districts reported easing wage pressures. In the Minneapolis region, 30 percent of employers increased annual wages by at least 5 percent. In the Chicago region, more contacts reported that they were not looking to hire or were reducing their workforce.
Widespread inflation continued but moderated in many districts, according to the Fed. “Several districts indicated that high inflation and higher interest rates continued to reduce consumers’ discretionary income and purchasing power, and some concern was expressed about rising credit card debt,” the Fed said.