The U.S. economy expanded modestly over the last two months, even as many businesses reported slowed demand and expressed fears of a looming recession, according to the Federal Reserve Beige Book.
Inflation, which rose at a 9.1 percent clip in June, was a key driver in both wage and price increases. In the Cleveland Fed region, business activity slightly declined as households and firms faced rising costs and climbing interest rates. In the St. Louis Fed region, labor shortages slightly eased but continued to lead to upward wage pressure. In the Kansas City Fed region, rising interest rates slowed new growth in residential real estate and placed pressure on community banks’ liquidity positions. “Job growth was strong, but consumer spending softened,” the report said. “Several businesses indicated they began to offer prepaid gas cards or direct payments to offset rising gas prices for workers.”
Despite soaring inflation, there were signs that price pressures were easing in some industries. Three-quarters of respondents said prices had moderated for construction inputs such as lumber and steel. “Increases in food, commodities and energy (particularly fuel) costs remained significant, though there were several reports that price inflation for these categories had slowed compared with recent months but remained historically elevated,” the report stated.
Banking conditions were uneven across districts. Conditions tightened in the Chicago Fed region. “Participants in the equity and bond markets reported rising interest rates, elevated volatility and net declines in asset values,” the report stated. In the St. Louis Fed region, total loans grew, with consumer loans experiencing the largest increase. In the Kansas City Fed region, rising interest rates caused loan demand to weaken modestly, especially in commercial real estate and residential mortgage markets.
Contacts in the Minneapolis and Kansas City Fed districts reported strong ag conditions. Most of the corn and soybean crops in the Minneapolis Fed region were rated in either good or excellent condition and progressing on schedule. However, nearly half of Montana’s winter wheat crop was listed as being in either poor or very poor condition, as drought conditions continued in north-central Montana. Crop and livestock prices remained at multi-year highs in the Kansas City region. As drought conditions continued, the condition of wheat in nearly all regional states was listed as “exceptionally poor,” possibly hindering producer revenues.
Chicago Fed contacts said despite supply chain challenges, ag incomes are expected to be solid. Farmland prices increased, inputs were reaching farms on time, and corn and soybean conditions were close to normal for much of the district. In the St. Louis Fed region, ag conditions declined moderately. In June, the percentages of corn, cotton, rice and soybeans rated fair or better decreased slightly to moderately.
Commercial real estate activity slowed, and loan demand was mixed across most districts. Driven by continued high material expenses, supply chain shortages and rising borrowing costs, new construction and real estate projects and total active projects were lower over the most recent six-week period in the Minneapolis Fed region.
Manufacturing activity was mixed, and many districts reported that supply chain disruptions and labor shortages continued to hamper production. In the Chicago Fed region, contacts expected growth to remain slow in the coming months. Firms reported that a lack of staffing prevented them from operating at their ideal capacity.
Nearly all Fed districts saw modest improvements in labor availability amid weaker demand for weakers, especially in manufacturing and construction. Wage growth was reported in most districts; one-third said employers were either considering or had given employees bonuses to reduce the impacts of higher prices. In the Minneapolis Fed region, 36 percent of professional service firms reported that wages had increased by 6 percent or more over the last 12 months. One Minneapolis financial services firm reported giving employees $5,000 bonuses to offset rising prices.
In the St. Louis Fed region, one staffing firm, which typically filled at least 30 jobs per day before the pandemic, now struggles to fill even a couple. A regional transportation contact estimated they are spending three-four times more than in recent years to attract new drivers. Still, contacts in several industries said there were signs that the labor market was easing.