Oct 14 (Reuters) – The US labor market remained stuck in a low-hire, low-fire state and inflation was intensifying across parts of the country in recent weeks, a Federal Reserve report showed on Wednesday, underscoring what’s at stake as the central bank weighs whether to deliver a second straight interest rate hike later this month.
While businesses in much of the country have a positive outlook, their “expectations tend to be for slight growth, weighted toward manufacturing and burdened by persistent uncertainties,” the Fed said in its latest “Beige Book” report, a compendium of survey-based data and commentary from businesses compiled by its 12 regional banks to provide a read on economic conditions.
Three of the Fed’s districts described price growth as robust and eight as moderate, with three of the eight saying it was “intensifying.” With 21 references to high diesel fuel costs — versus two in the prior Beige Book and none in the surveys taken just before the start of the US-Israeli war with Iran in late February — the report was emblematic of the concern economists have about how surging costs for that important business input are threatening to broaden the scope of inflation.
“Contacts in multiple Districts also noted continued price pressure from other commodities, tariffs, and insurance,” the report said.
But as the Dallas Fed put it: “The higher price for diesel reigned supreme in terms of the most commonly cited factor driving up costs, impacting freight, agriculture, and airline prices as well as causing widespread margin compression across numerous industries.”
The survey also acts as something of a barometer for the economic pressures voters are dealing with ahead of the November 3 midterm elections, which will determine whether President Donald Trump’s Republican Party maintains control of Congress.
The cost of living is the top issue cited by voters in a recent Reuters/Ipsos poll.
Several Fed regional banks noted the absence of mass layoffs, but five said firms had reduced staffing by not replacing departing workers or by delaying hiring. “Several Districts noted that inflation has spawned additional wage pressure in the form of higher cost-of-living demands from individuals as well as challenges from rising benefit costs,” the report said.
AI’s disruptive influence on the labor market was also evident in the report. One business services company told the Chicago Fed that productivity gains from adoption of artificial intelligence allowed it to reduce employment through attrition. A staffing firm told the Dallas Fed that it had hired new recruiters to help manage its AI expansion process — citing the example of having AI agents conduct more than 180 hours of interviews in a two-day period and needing workers to review and make decisions.
HOUSING MARKET STRUGGLES
The Fed increased its policy rate by a quarter of a percentage point to the 3.75%-4.00% range last month, and most policymakers have indicated another hike will likely be needed this year, though probably not until December.
Financial markets are pricing about a 37% chance of a rate hike at the Fed’s October 27-28 meeting after data on Wednesday showed consumer prices rose 3.7% in the 12 months through September, far faster than the central bank’s 2% target and above the consensus forecast of economists polled by Reuters.
Higher gasoline costs from the war were largely to blame for the stronger CPI reading, with fast-rising software and toy prices also pointing to the impact of AI-driven demand and higher tariffs under Trump’s trade policy.
“We are noticing lower budgets overall for our clients,” a caterer told the Minneapolis Fed. An entertainment venue in Louisville told the St. Louis Fed it was seeing lower admissions but stable revenue due to earlier price increases, with less demand for high-end tours and more for mid-range options. A Mississippi retailer reported strong sales reminiscent of conditions before the COVID-19 pandemic.
The rising cost of borrowing to buy a home is an added burden for many US households. The average rate on a 30-year fixed-rate mortgage rose last week to 7.5%, the highest in nearly three years, the Mortgage Bankers Association said on Wednesday.
The struggles of the housing market featured prominently in the report. “Existing home sales continued to decline slightly this period,” the Philadelphia Fed said. “Contacts reported that rising mortgage rates in September slowed activity in the housing market even further — higher borrowing costs forced prospective buyers out of the market, while the inventory of for-sale properties remained low.”
The New York Fed noted that rising rates were keeping homes off the market, observing that “with mortgage rates rising again, lock-in remained a key issue holding back homeowners from moving.”
The Trump administration’s hostile trade relations with Canada, which have notably soured since late summer, were also cited as a drag on manufacturing and tourism activity in the Boston, New York, Minneapolis and San Francisco Fed districts.
“Manufacturing contacts generally reported negative impacts from recent trade conflicts with Canada,” the Minneapolis Fed said. “A bakery in Michigan’s Upper Peninsula noted that, based on credit card sales, it was seeing fewer Canadian tourists.”
The data for the latest Beige Book was collected on or before October 5.
(Reporting by Ann Saphir; Editing by Paul Simao)
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