Fed beige book finds softer labor market

The labor market weakened slightly this month, with some employers scaling back hiring plans or cutting employees’ hours, and others shedding jobs, according to the latest Federal Reserve storybook.

The report is a snapshot of data on the U.S. economy, giving the Fed a view of what companies are seeing as Fed officials prepare to vote on interest rates. The matter may take on added significance at the Fed’s December 9-10 meeting, as the government shutdown has canceled the October jobs report and delayed the November report.

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

Employment “declined slightly” as of mid-November, with nearly half of the Fed’s 12 regions seeing weaker demand for workers, the Fed’s Beige Book said.

“Despite an uptick in layoff announcements, more districts reported communications limiting headcount using hiring freezes, replacement hiring only, and attrition rather than layoffs,” the report said. “In addition, many employers have adjusted work hours to accommodate higher or lower than expected business volume rather than adjusting headcount.”

Some companies have also pointed to the early effects of AI, noting that it has replaced some entry-level jobs “or made existing workers productive enough to limit new hiring.”

The weak job market is consistent with the assessment of one restaurant contact in the Philadelphia Fed District, who noted there will be a “mass exodus of workers into warehouse jobs” in 2021 and 2022. Now, as that person said, these workers did not lose their jobs but began working part-time in restaurants since their hours were reduced.

Although the report is anecdotal, it helps give the Fed insight into whether its dashboards match what local contacts are telling them.

Fed officials have been unusually divided in recent weeks, with some seeing more signs of economic strength than others and discussing risks to inflation. Their dashboards have also gotten a little smaller due to the federal government shutdown, as the economic data machine is slowly starting to resurface.

“In the absence of key data, anecdotes will provide valuable insights to Fed officials, and we see the FOMC moving forward with a year-end rate cut,” Priscilla Thiagamurthy, chief economist at BMO Capital Markets, wrote in a research note.

Softer consumer spending

The report also found that consumer spending is declining, with middle households becoming more cautious even as higher-income households continue to spend.

“Overall consumer spending declined further, while upscale retail spending remained resilient,” the report said, adding that some travel and tourism connections saw “cautious discretionary spending among consumers.”

In the Kansas City Fed District, the government shutdown led to a “visible slowdown in traffic” at many retailers and restaurants, the report said. Other companies have seen similar trends.

“One company noted that now is the best time to get a tattoo, and even top artists have more open appointments than usual,” the report said.

The more cautious tone is consistent with recent data, with a monthly survey by the Conference Board showing confidence falling to its lowest levels since April. It also highlights the persistence of a “K-shaped economy,” BMO’s Thiagamurthy wrote, in which spending rises among upper-income households while those at the bottom end spend less.

Prices are rising

The report also noted that prices “rose moderately,” as tariffs helped put widespread pressure on input costs among manufacturers and retailers.

It is not clear to what extent this will translate into higher prices for consumers and will show up in the CPI or other inflation data.

“The extent to which higher input costs are passed on to customers varies and depends on demand, competitive pressures, consumer price sensitivity, and customer opposition,” the report stated.

Fed officials tend to cut interest rates when the economy weakens, but the risk of higher inflation makes some officials prefer to keep interest rates unchanged.

The report said that the prices of some materials decreased, as some companies attributed weak demand, delays in implementing customs duties, or the recent reduction in customs duty rates on some products.

Other companies are still seeing higher prices, with “multiple reports of margin pressure or companies facing financial stress caused by tariffs,” Big Book said.

The Fed’s communications have broadly said they “expect upward cost pressures to continue,” but their “plans to raise rates in the near term have been mixed,” the report said.