Key Point
Overall Economic Activity
District-level economic momentum is exhibiting decelerating, albeit positive, growth. While a majority of regions report modest increases in overall activity, the composition of growth is shifting, with a discernible deceleration in consumer-driven sectors offset by relative strength in manufacturing and, notably, sectors benefiting from infrastructure and defense spending. Aggregate demand appears increasingly bifurcated, with resilient high-end consumption masking softening trends among middle- and lower-income households, evidenced by trade-down behavior and increased price sensitivity. Labor market dynamics remain constrained, with persistent shortages in skilled trades and a growing trend toward offshoring professional functions to mitigate wage pressures and enhance productivity.
Price dynamics are increasingly complex. Elevated energy costs, stemming from geopolitical instability, are contributing to margin compression across multiple industries, though the pass-through to end consumers remains uneven. Input cost pressures extend beyond energy, encompassing materials, transportation, and insurance, impacting working capital intensity and necessitating strategic sourcing adjustments. Financial conditions are tightening incrementally, with rising rates and modestly deteriorating credit quality, particularly in segments exposed to consumer debt and agricultural lending.
Regional variations are pronounced. The Pacific Northwest and Mountain West demonstrate relative resilience in manufacturing and construction, driven by technology and infrastructure investment, while the Southeast and Midwest exhibit greater sensitivity to consumer spending and energy price volatility. Real estate markets are cooling, with residential activity moderating due to affordability constraints and rising inventory, while commercial real estate demonstrates mixed performance, with industrial and data center segments outperforming traditional office and retail. Overall, the outlook remains tepid, with heightened uncertainty surrounding the trajectory of energy prices, geopolitical risks, and the potential for a broader economic slowdown. Community organizations are facing increased demand for services alongside reduced funding, creating a challenging operating environment.
Labor Markets
District-level economic activity exhibited modest expansion, though a bifurcated pattern emerged between sectors. Aggregate employment remained largely static, suggesting limited net job creation despite pockets of demand in specialized fields like data center construction and defense contracting. Wage pressures, while present, appear contained, with increases generally aligning with pre-pandemic norms, though competition for skilled labor persists in select areas. A discernible uptick in non-labor cost inflation, particularly related to energy and transportation, is impacting input prices across multiple industries and eroding EBITDA margins. Consumer behavior is shifting, with evidence of trade-down activity and increased price sensitivity, particularly among middle-income households.
Manufacturing demonstrated relative resilience, driven by specific demand drivers, but broader industrial activity is constrained by supply chain disruptions and elevated working capital intensity. The services sector exhibited mixed performance, with growth in professional services offset by weakness in leisure and hospitality. Real estate markets are cooling, with residential sales declining amid affordability challenges and commercial activity remaining subdued. Banking conditions are stable, though tightening credit standards and early indications of asset quality deterioration warrant monitoring.
Agricultural conditions remain challenged by drought and rising input costs, impacting farm incomes. Community organizations are facing increased demand for services coupled with reduced funding, creating a strain on their capacity to deliver support. Overall, the outlook is tepid, with heightened uncertainty stemming from geopolitical risks and persistent inflationary pressures. While a recessionary scenario is not currently indicated, the deceleration in consumer spending and the potential for further supply-side shocks pose downside risks to the growth trajectory. The current environment favors companies with strong pricing power, efficient cost structures, and diversified revenue streams.
Prices
District-level economic activity exhibited modest expansion, though a bifurcated pattern emerged between sectors. While manufacturing and financial services demonstrated positive momentum, consumer-facing industries experienced softening demand and margin compression, attributable to elevated fuel costs and persistent inflationary pressures. Input cost escalation, particularly in energy, transportation, and select materials, is not fully offset by pricing power, suggesting a drag on EBITDA multiples for exposed firms. Labor markets remain constrained, with wage growth moderating but still exceeding pre-pandemic norms, impacting working capital intensity.
A recurring theme across multiple districts is the reluctance of firms to fully pass through cost increases to consumers, reflecting sensitivity to price points and concerns regarding demand elasticity. This dynamic suggests potential for near-term earnings pressure, particularly for companies with limited pricing flexibility. The conflict in the Middle East is identified as a key driver of energy price volatility and supply chain disruptions, exacerbating existing inflationary trends. Several reports indicate a shift in capital expenditure patterns, with increased investment in automation and offshoring to mitigate labor costs and enhance productivity.
Residential real estate markets are cooling, characterized by rising inventory and moderating price growth, while commercial real estate remains mixed, with strength in industrial and data center segments offsetting weakness in office space. Banking sector conditions are stable, though credit quality is showing early signs of deterioration, particularly in consumer lending. Agricultural conditions are varied, with commodity price increases partially offsetting higher input costs. Community organizations are facing increased demand for services coupled with reduced funding, creating a challenging operating environment. Overall, the outlook remains tepid, with heightened uncertainty surrounding geopolitical risks and the trajectory of inflation.
Key Industry Sectors
District-level economic performance exhibited modest expansion, though sector divergence was pronounced. Consumer discretionary spending demonstrated weakening trends, particularly within segments sensitive to fuel costs, suggesting potential compression of EBITDA margins for retail entities. Conversely, consumer staples maintained relative stability, indicating a bifurcation in purchasing patterns. Manufacturing activity, while generally positive, revealed a growing reliance on demand from sectors like data centers and defense, potentially creating concentration risk. Input cost pressures, notably from energy and tariffs, are eroding working capital intensity and prompting selective price increases, though pass-through rates remain constrained by competitive dynamics.
Financial sector performance was mixed. While loan growth remained moderate, tightening credit standards and early indications of delinquency increases warrant monitoring. Real estate markets presented a nuanced picture; residential activity cooled amid affordability challenges, while commercial real estate demonstrated pockets of strength, particularly in industrial segments driven by infrastructure investment. The divergence suggests potential for asset repricing and impacts to REIT valuations.
Agricultural conditions remain challenged by input costs and weather patterns, potentially impacting future commodity pricing. Service sector growth was largely stable, though concerns regarding consumer sensitivity and the potential for reduced discretionary spending loom. Overall, the outlook is tepid, with heightened uncertainty stemming from geopolitical factors and the potential for sustained inflationary pressures. Capital expenditure plans are increasingly contingent on macroeconomic stability, and firms are prioritizing efficiency gains through automation and strategic sourcing, potentially leading to structural shifts in labor demand. Community organizations face escalating needs coupled with constrained funding, necessitating operational efficiencies and collaborative models.
Special Factors
District-level economic activity exhibited modest, albeit uneven, expansion, with emerging idiosyncratic risks increasingly apparent. While aggregate demand demonstrated resilience in several regions, particularly within manufacturing tied to defense and data center buildouts, consumer-facing sectors are experiencing margin compression attributable to elevated fuel costs and persistent inflationary pressures on non-labor inputs. The confluence of tariff impacts and geopolitical instability, specifically in the Middle East, is manifesting in rising working capital intensity for firms reliant on global supply chains. Several reports indicate a shift toward prioritizing current liquidity over capital expenditure, suggesting a cautious outlook despite relatively stable credit conditions.
Labor market dynamics remain complex. While overall employment is largely flat, a bifurcation is emerging, with demand for skilled trades and AI-proficient roles exceeding supply, prompting wage increases in those segments. Simultaneously, anecdotal evidence suggests firms are increasingly leveraging automation and offshoring to mitigate labor cost pressures, potentially impacting long-term domestic employment prospects. This dynamic is particularly pronounced in professional and business services.
The agricultural sector continues to face headwinds from adverse weather patterns and elevated input costs, impacting farm income expectations. Real estate markets present a mixed picture, with residential activity cooling due to affordability constraints and rising interest rates, while commercial real estate demonstrates pockets of strength, notably in industrial and data center segments. Community organizations are experiencing increased demand for services coupled with reduced funding, creating a challenging operating environment. Overall, the current environment suggests a deceleration in the prior growth trajectory, with downside risks stemming from sustained energy price volatility and escalating geopolitical uncertainty. A modest deceleration in the overall CAGR is anticipated if these conditions persist.
Impact of BeigeBook
Economic Activity & Sentiment
Overall economic expansion across the Twelfth Federal Reserve Districts was modestly positive, though increasingly bifurcated by sector and regional nuance. Aggregate demand exhibited decelerating momentum, with consumer-facing industries reporting softening sales and margin compression, offset by resilient, albeit uneven, performance in manufacturing, financial services, and select areas of non-residential construction. Labor market dynamics remained constrained, characterized by limited availability of skilled trades and persistent, though moderating, wage pressures. This dynamic is prompting strategic shifts toward automation and, notably, a reshoring of back-office functions to lower-cost global markets, potentially impacting domestic working capital intensity.
Price levels continued to advance, driven primarily by exogenous shocks to energy markets and persistent supply chain disruptions. While pass-through to end consumers varied, the confluence of elevated input costs and tightening margins suggests a potential for sustained inflationary pressure, particularly within cyclical sectors. The agricultural sector demonstrated mixed performance, with commodity price increases failing to fully offset rising production expenses, creating a challenging environment for producers. Real estate markets exhibited a divergence between residential and commercial segments, with cooling home sales juxtaposed against stable, and in some instances, expanding, activity in industrial and data center construction.
Financial sector conditions remained stable, though emerging signs of credit deterioration, particularly within consumer lending and certain agricultural segments, warrant monitoring. Banks are exhibiting tightening lending standards, reflecting increased risk aversion and a cautious outlook for future economic performance. Community organizations are facing escalating demand for services coupled with declining funding, creating a strain on their capacity to support vulnerable populations. Manufacturing activity, while generally positive, is increasingly concentrated in sectors benefiting from defense spending and the build-out of data infrastructure, suggesting a narrowing breadth of economic expansion.
The outlook remains tepid, with contacts citing geopolitical uncertainty and elevated transportation costs as key headwinds. While some optimism exists regarding the potential for stabilization in the latter half of the forecast horizon, the prevailing sentiment suggests a continuation of modest growth at best, with downside risks skewed toward a potential deceleration in consumer spending and a further tightening of financial conditions. The interplay between persistent inflation, constrained labor supply, and evolving global trade dynamics will be critical determinants of future economic performance across the Twelfth District. A sustained increase in energy prices could materially impact EBITDA multiples and necessitate a reassessment of capital expenditure plans across multiple sectors.
Labor Market Dynamics
Recent economic performance across the Tenth District reveals a decelerating, albeit stable, growth trajectory. Aggregate demand exhibited modest expansion, though a bifurcated consumer landscape emerged, with resilient high-end spending offset by constrained discretionary purchases among middle-income households. Labor market dynamics suggest a plateauing of expansionary forces, characterized by largely unchanged employment levels and moderate wage accretion. While overall wage pressures remain contained, pockets of elevated demand for specialized skillsets, particularly in areas supporting AI implementation and data center construction, are creating localized upward pressure on compensation. Input cost escalation, primarily driven by energy price volatility and persistent tariff burdens, is increasingly impacting corporate profitability and prompting strategic shifts in sourcing and operational efficiency.
Manufacturing activity demonstrated a degree of resilience, buoyed by demand in specific subsectors like aerospace and defense, though broader industrial performance remains sensitive to macroeconomic headwinds. The services sector experienced a modest uptick, with professional and business services exhibiting relative strength. However, the retail sector continues to demonstrate vulnerability to consumer price sensitivity, with anecdotal evidence suggesting a shift towards value-driven purchasing behavior. Real estate markets present a mixed picture, with cooling residential activity—attributable to affordability constraints and rising interest rates—contrasting with stable commercial activity, particularly in segments benefiting from infrastructure investment and data center expansion.
Financial sector conditions remain generally stable, though tightening credit standards and a moderate increase in loan delinquencies suggest a cautious outlook. Banking institutions are navigating a complex environment characterized by moderate loan growth, stable deposit levels, and increasing regulatory scrutiny. Agricultural conditions, while varied across the District, are facing headwinds from elevated input costs and adverse weather patterns, impacting farm incomes and potentially constraining future production. Community organizations are experiencing increased demand for services coupled with reduced funding, creating a challenging operating environment and potentially limiting their capacity to address critical social needs.
The prevailing outlook is tepid, with contacts citing ongoing geopolitical uncertainty and elevated transportation costs as key risks. While some firms are maintaining capital expenditure plans, others are adopting a more conservative approach, delaying or scaling back investments in response to the uncertain economic environment. The observed trend of firms shifting back-office functions to lower-cost global service markets reflects a strategic response to margin compression and the need to enhance productivity. This dynamic, coupled with the increasing adoption of automation technologies, suggests a potential restructuring of labor markets and a shift towards a more skills-based economy. Overall, the District’s economic performance is characterized by a slowing rate of expansion, increasing cost pressures, and a cautious outlook among business leaders.
Inflationary Pressures & Pricing Power
Evidence suggests a bifurcated pricing environment across the Twelfth Federal Reserve Districts, with limited, though discernible, pass-through of escalating input costs to end consumers. While aggregate demand demonstrates modest expansion in several regions, particularly within manufacturing and select service sectors, consumer-facing businesses are increasingly absorbing cost pressures to maintain volume, indicative of eroding EBITDA margins. The pervasive influence of elevated fuel prices, exacerbated by geopolitical instability, is evident across multiple industries, manifesting in increased transportation expenses and heightened non-labor input costs. However, the extent to which these costs are reflected in final selling prices appears constrained by consumer price sensitivity and competitive dynamics.
Manufacturing activity, while generally positive, reveals a nuanced picture. Robust demand in specific subsectors – notably those linked to data center construction, defense spending, and, to a lesser extent, aerospace – is masking weakness in more cyclical segments. This divergence suggests a potential decoupling of industrial output from broader economic trends. The ability of manufacturers to partially offset rising material costs through price adjustments is limited, with several firms reporting a reluctance to fully pass on increases due to competitive pressures. This dynamic is likely compressing working capital intensity as firms prioritize maintaining sales volume over margin preservation.
Service sector performance is similarly mixed. Financial and professional services demonstrate resilience, benefiting from sustained demand and, in some instances, specialized skill shortages. However, leisure and hospitality sectors exhibit greater vulnerability to consumer spending patterns, with contacts noting a shift towards value-driven consumption and reduced discretionary spending. Retail sales, while stable overall, reveal a divergence between necessity goods and discretionary items, suggesting a potential contraction in consumer confidence.
Real estate markets present a complex interplay of factors. Residential construction is cooling, hampered by affordability constraints and rising interest rates, while commercial real estate activity remains subdued, particularly in the office segment. The divergence between these sectors underscores the impact of macroeconomic conditions on asset valuations and investment decisions. Banking sector conditions are stable, though emerging signs of credit deterioration, particularly in consumer lending, warrant monitoring.
Agricultural conditions remain challenging, with elevated input costs and adverse weather patterns impacting farm incomes. The combination of rising production expenses and flat commodity prices is squeezing margins and potentially reducing future investment in the sector. Community organizations are facing increased demand for services coupled with reduced funding, creating a strain on their ability to provide support to vulnerable populations. Overall, the economic outlook remains tepid, with heightened uncertainty stemming from geopolitical risks and persistent inflationary pressures. While a recessionary scenario is not currently anticipated, the potential for a slowdown in economic growth remains elevated.
Consumer Spending & Credit
Recent economic data across the Tenth District suggests a decelerating, albeit still positive, growth trajectory. While aggregate activity increased modestly, a bifurcated consumer landscape is emerging, characterized by resilience at the high end and increasing price sensitivity among middle-income households. This dynamic is manifesting in margin compression for retail entities, necessitating promotional activity and impacting working capital intensity. Manufacturing exhibited a moderate uptick, though this appears heavily concentrated in sectors benefiting from defense spending and data center build-outs, masking underlying weakness in more cyclical segments. The sustained rise in fuel costs, exacerbated by geopolitical instability, is a pervasive headwind, impacting transportation costs and contributing to elevated non-labor input prices.
Labor market dynamics remain complex. While overall employment is stable, firms are increasingly focused on productivity enhancements through automation and, notably, a strategic shift toward offshoring back-office functions to lower-cost locations. This suggests a recalibration of labor cost structures and potential long-term implications for domestic employment in professional services. Wage growth, while moderate, is not uniformly distributed, with specialized skills commanding premiums. The financial sector demonstrates stability, though tightening credit standards and early indications of loan performance deterioration warrant monitoring, particularly within consumer and agricultural lending portfolios.
Real estate markets present a mixed picture. Residential activity is cooling, with rising inventory and declining affordability constraining sales volume. Commercial real estate, while showing some resilience in specific segments like industrial and data centers, faces headwinds from elevated interest rates and evolving occupancy patterns. The divergence between these sectors underscores the impact of macroeconomic factors on asset valuations and the potential for downward revisions in capitalization rates. Agricultural conditions remain challenged by drought conditions in certain regions and rising input costs, impacting farm incomes and potentially necessitating adjustments to planting decisions.
Community organizations are facing increased demand for services coupled with reduced funding, creating a strain on their capacity to provide support. This dynamic highlights the growing social safety net challenges and the potential for increased reliance on government assistance programs. Overall, the economic outlook is tepid, with contacts citing ongoing uncertainty and the potential for further disruptions from the conflict in the Middle East. While a recession is not currently anticipated, the confluence of factors—rising costs, tightening credit conditions, and shifting consumer behavior—suggests a moderation in growth momentum and increased downside risk. The current environment favors defensive positioning and a focus on companies with strong pricing power and resilient cash flow generation.
National Summary
National Summary
Overall Economic Activity
Economic activity increased at a slight to moderate pace for ten of the twelve Federal Reserve Districts, while one District reported a slight decline and one reported no change. Consumer spending remained mixed across Districts and increasingly bifurcated across income groups amid affordability pressures. Higher-income households remained resilient and less sensitive to price increase, while middle-income households were described as "squeezing more life out of every dollar before deciding to spend it," and low-income consumers showed greater financial strain. Overall, there were reports of increased credit card usage, fewer retail visits, and stronger demand for necessities. Auto dealers reported softer new vehicle demand tied to affordability and fuel costs, alongside substitution toward used and hybrid vehicles. By contrast, manufacturing activity increased at a modest to strong pace for nine of the Districts and only one noted a slight decline from the previous period. Banking conditions were stable across most Districts; however, residential mortgages, consumer, and agricultural loan delinquencies were noted as rising in several of the Districts. Agriculture conditions were unchanged or declined for most of the Districts, with cost pressures intensifying from fuel and fertilizer spikes. Energy activity increased in two of the markets, but Districts reported that the outlook remains highly uncertain leading producers to hold off on materially expanding activity. More broadly, business outlooks for the next six months were reported to have little change in anticipated growth, as elevated uncertainty and signs of weakening consumer spending weighed on sentiment.
Labor Markets
Employment showed little to no change across eleven Districts, while one District experienced modest growth. Manufacturing hiring was the strongest sector in several Districts, supported by defense-related activity and rising data center demand. Wage growth generally remained modest to moderate and largely in line with inflation. That said, Districts reported more frequent wage adjustments and cost-of-living increases to manage increasing fuel and other household cost pressures. Most Districts described a low-hire, low-fire environment, with workers increasingly reluctant to change jobs because of economic uncertainty. Hiring remained selective and primarily focused on critical roles or attrition replacement. Professional services occupations had mixed demand conditions, partly reflecting shifts in technological and operational changes.
Prices
Prices increased at a moderate to strong pace overall, with most Districts reporting higher inflation than the previous report. Districts noted that energy-related costs tied to the conflict in the Middle East were the primary driver of inflationary pressures, with spillovers into shipping, packaging, groceries, and fertilizer. Non-labor input costs continued to rise faster than selling prices, contributing to broader concerns about margin compression. The ability to pass on higher costs remained mixed across sectors, particularly among consumer-facing firms. Consumer uncertainty and concerns about fuel prices impacting households were noted by several Districts. Several regions highlighted inflation mitigation strategies of firms that ranged from supply-chain optimization, product adjustments, reduced offerings, and temporarily absorbing higher costs to preserve customer demand.
Highlights by Federal Reserve District
Boston
Economic activity grew slightly overall. Employment was unchanged, but hiring activity picked up in places, and wages showed slight gains. Cost pressures linked to the Middle East conflict remained elevated, although output prices rose only slightly overall. Consumer spending edged higher, despite the strain on household budgets from elevated gas prices. The outlook was mixed.
New York
Regional economic activity increased slightly after a sustained period of weakness. Manufacturing activity grew strongly, consumer spending increased moderately, and housing activity picked up. Employment edged up, and wage growth eased somewhat but remained modest. Selling price increases rose to the high end of the moderate range, and input prices rose strongly, driven by rising energy costs. Businesses generally expected modest improvement.
Philadelphia
Business activity declined slightly in the current period, down from a slight increase in the last period. Employment declined somewhat, as manufacturers and nonmanufacturers reported declines in jobs overall. Wage inflation held steady at a modest pace, and firm price inflation was moderate. Expectations for future growth rose at a strong pace for manufacturers but remained below the long-run average for nonmanufacturers.
Cleveland
Fourth District business activity increased moderately, with similar growth anticipated in the months ahead. Manufacturing demand rose robustly, while retailers faced dampened demand from higher fuel prices. Home sales continued to improve, and data center buildouts drove commercial construction demand. Employment increased modestly. While wage pressures remained moderate, increases in nonlabor costs and selling prices were robust.
Richmond
The regional economy continued to grow modestly this cycle. Modest growth was reported for consumer spending, financial services, and nonfinancial business services. Manufacturing activity increased moderately amid continued concerns about economic stability. Employment was unchanged, on balance, and wage growth was modest. Price growth remained in a moderate range despite many comments about increased input costs.
Atlanta
Economic activity grew at a modest pace. Employment levels were flat and wages rose slowly. Prices and costs rose at a moderate pace. While retail sales grew modestly, travel activity slowed. Commercial and residential real estate were flat to down. Transportation and manufacturing activity expanded modestly. Energy demand rose moderately.
Chicago
Economic activity in the Seventh District increased slightly over the reporting period. Manufacturing demand rose moderately; consumer spending, employment, and construction and real estate activity increased slightly; business spending was flat on balance; and nonbusiness contacts saw no change in economic activity. Prices rose rapidly, wages were up modestly, and financial conditions tightened slightly. Farm income expectations for 2026 were unchanged.
St. Louis
Economic activity has slightly increased. Employment was unchanged and wage growth remained moderate. Prices have risen at a robust pace due to widespread higher nonlabor and energy costs. The outlook has slightly deteriorated, with contacts citing ongoing uncertainty, supply chain disruptions, and rising fuel costs linked to the conflict in the Middle East.
Minneapolis
The District expanded modestly. Prices increased sharply and input pressures were especially high. Employment grew slightly and wage growth was modest to moderate. Services, manufacturing, and construction activity grew. Oil and gas contacts reported little change in activity or plans despite oil price shocks.
Kansas City
Economic activity in the Tenth District increased slightly, though consumer-facing firms continued to report softer demand and margin compression. Restaurants noted middle-income households have become increasingly cautious with discretionary spending. Firms also reported rising input costs, with non-energy expenses exerting the greatest upward pressure.
Dallas
Economic activity in the Eleventh District rose modestly. Growth resumed in the service sector and picked up pace in manufacturing and banking. Retail sales weakened, energy activity ticked up, and the real estate sector was mixed. Employment was largely flat. Outlooks were tepid amid heightened uncertainty stemming from the Middle East conflict and sharply higher transportation costs.
San Francisco
Economic activity was stable. Employment levels were unchanged on net. Prices rose moderately, and wages grew slightly. Retail sales were roughly flat. Manufacturing activity improved somewhat, while conditions in agriculture and residential real estate weakened slightly. Activity in consumer and business services, commercial real estate, and finance was steady.
Original link
https://www.federalreserve.gov/monetarypolicy/beigebook202605.htm