Key Point
Overall Economic Activity
District-level economic momentum is decelerating from modest expansion, exhibiting a shift toward stabilization rather than accelerating growth. While several regions report continued, albeit muted, activity increases, the preponderance of evidence suggests a plateauing effect, particularly evident in consumer discretionary spending and residential real estate. Manufacturing demonstrates localized strength, often tied to defense or specialized industrial segments, but broader industrial output lacks consistent upward trajectory. Aggregate demand appears increasingly sensitive to both elevated price levels and tightening credit conditions, impacting auto sales and prompting trade-downs in retail.
Labor market dynamics are shifting. While headline employment figures remain relatively stable, anecdotal evidence points to a deceleration in net hiring, with firms prioritizing productivity enhancements via AI implementation over headcount expansion. Wage pressures, though still present, are moderating, suggesting a potential easing of broader inflationary forces. However, persistent skill gaps in specialized trades continue to exert upward pressure on compensation for qualified personnel. Input cost inflation remains a concern, compressing margins for many firms, and the ability to pass these costs onto consumers is increasingly constrained.
Financial sector activity is mixed. Lending volume is stable, but credit standards are tightening, reflecting increased risk aversion. Commercial real estate, particularly office space, presents ongoing challenges, while industrial and data center development remain bright spots. Agricultural conditions are deteriorating in several districts, driven by drought, elevated input costs, and declining commodity prices. Overall, the outlook is cautiously optimistic, contingent on stabilization of geopolitical risks, moderation of energy prices, and a sustained easing of inflationary pressures. Current conditions do not support a revision of long-term growth expectations, with a projected CAGR remaining in the low-to-mid 2% range.
Labor Markets
District-level economic expansion remains modest and uneven, characterized by a bifurcated labor market and persistent, albeit moderating, inflationary pressures. Aggregate employment figures demonstrate limited net change, though compositional shifts reveal ongoing demand for skilled trades and technical expertise, particularly in manufacturing and emerging sectors like data centers and AI implementation. Wage growth, while decelerating from prior levels, continues to outpace productivity gains, compressing EBITDA multiples for firms reliant on labor-intensive models. Consumer spending patterns exhibit increasing sensitivity to price points, with a discernible trade-down effect impacting discretionary categories and a concurrent rise in credit utilization, signaling potential strain on household balance sheets.
Manufacturing activity presents a mixed picture, with durable goods production supported by capital expenditure initiatives—driven in part by enhanced depreciation allowances—offsetting weakness in cyclical segments. Input cost volatility, exacerbated by geopolitical factors and trade policy, remains a key risk, though firms are increasingly employing strategies such as selective price increases and supply chain diversification to mitigate margin compression. Real estate markets demonstrate divergence, with residential activity constrained by affordability and inventory levels, while commercial segments—particularly industrial and data center development—continue to exhibit robust demand.
Banking sector performance is stable, with moderate loan growth and largely unchanged credit standards. However, emerging delinquencies in consumer lending and agricultural portfolios warrant monitoring. The agricultural sector faces headwinds from adverse weather conditions, elevated input costs, and declining commodity prices, potentially impacting working capital intensity and regional bank asset quality. Overall, the outlook is cautiously optimistic, contingent on stabilization of energy prices, resolution of geopolitical uncertainties, and a moderation in inflationary trends. Non-profit organizations are facing increased demand for services, coupled with funding constraints, necessitating operational efficiencies and potentially impacting service delivery capacity.
Prices
District-level economic expansion remains modest, characterized by a bifurcated cost structure and evolving consumer behavior. Upstream cost pressures—energy, raw materials, and freight—persist, impacting manufacturing and transportation sectors, though some deceleration is noted in specific commodity classes. Downstream, pass-through efficiency varies significantly; while manufacturers increasingly attempt price adjustments, retail segments demonstrate limited pricing power, absorbing margin compression to maintain volume. Heightened consumer price sensitivity, particularly among lower and middle-income households, is evident across multiple districts, manifesting in trade-downs and delayed discretionary purchases.
Labor markets exhibit a stabilizing trend, with employment growth moderating and wage inflation easing from prior peaks. While skilled labor shortages remain a constraint in select industries—particularly manufacturing and specialized services—overall demand appears to be cooling, reducing competitive wage pressures. This dynamic, coupled with increased automation initiatives, suggests a potential shift in labor cost trajectories. Financial sector activity is generally stable, though tightening credit standards and emerging concerns regarding consumer loan performance—particularly in auto and lower-tier segments—warrant monitoring.
Capital expenditure remains a key driver of growth in specific sectors, notably manufacturing and data center construction, fueled by investment tax incentives. However, broader investment decisions are tempered by macroeconomic uncertainty and concerns regarding demand sustainability. Agricultural conditions are mixed, with elevated input costs and regional drought conditions offsetting positive trends in livestock markets. Overall, the outlook is cautiously optimistic, contingent on stabilization of energy prices, resolution of supply chain disruptions, and a moderation in inflationary pressures. Continued monitoring of working capital intensity and EBITDA multiples will be crucial in assessing corporate performance across these districts.
Key Industry Sectors
District economic performance exhibited modest expansion, though sector divergence warrants scrutiny. Consumer discretionary spending demonstrated bifurcation, with resilient luxury demand offset by trade-down behavior among income-constrained households, impacting retail EBITDA multiples. Manufacturing activity, while generally positive, faces headwinds from escalating input costs—particularly energy and select metals—compressing margins despite selective price increases. Working capital intensity remains elevated due to supply chain friction. Financial sector loan growth is moderate, though emerging delinquencies in consumer credit and commercial real estate portfolios necessitate increased vigilance.
Real estate markets present a mixed picture. Residential construction is constrained by affordability issues and inventory limitations, while commercial activity benefits from data center demand, though office space fundamentals remain challenged. Capital expenditure is increasing, driven by enhanced depreciation allowances, but uncertainty surrounding interest rates and geopolitical risks tempers long-term investment horizons. Agricultural conditions are deteriorating, with drought conditions and commodity price weakness impacting farm income and potentially increasing credit risk within the sector.
Nonfinancial services demonstrate modest growth, though profitability is pressured by rising labor costs and competitive dynamics. Labor markets remain tight in specific skill sets, necessitating wage concessions. Overall, inflationary pressures persist, impacting both input costs and consumer purchasing power. While several districts report easing wage pressures, the sustainability of this trend is contingent on broader macroeconomic conditions. The outlook is cautiously optimistic, with expectations for continued, albeit modest, growth tempered by ongoing uncertainty and the potential for further disruptions to global supply chains.
Special Factors
District-level economic expansion remains modest and uneven, exhibiting decelerating momentum across several key indicators. While aggregate employment demonstrates limited growth, compositional shifts—particularly the increasing adoption of AI and automation—suggest potential for future structural disintermediation of certain labor segments. Wage pressures, though moderating, persist in specialized skill sets, impacting operating leverage for firms reliant on discretionary labor expenditure. Broad-based inflationary pressures, driven by energy costs, supply chain inefficiencies, and tariff regimes, continue to compress EBITDA multiples, necessitating selective price increases and cost optimization strategies.
Consumer behavior reveals a bifurcated pattern, with resilient high-end spending offset by trade-down activity and increased price sensitivity among lower-income cohorts. This dynamic necessitates careful inventory management and a recalibration of promotional strategies. Manufacturing activity, while showing pockets of strength in defense and automation-related sectors, is constrained by elevated input costs and ongoing supply chain vulnerabilities. Capital expenditure remains a key driver of growth, particularly in data center infrastructure, though access to credit and regulatory hurdles present headwinds.
The agricultural sector faces significant challenges stemming from drought conditions, commodity price volatility, and rising production costs, potentially impacting working capital intensity and farm income. Real estate markets exhibit a mixed profile, with sluggish residential sales countered by moderate activity in commercial segments, particularly industrial and data center development. Banking sector performance remains stable, though emerging credit quality concerns—particularly within CRE and consumer lending—warrant continued monitoring. Overall, the outlook is characterized by cautious optimism, tempered by persistent macroeconomic uncertainties and geopolitical risks, suggesting a prolonged period of moderate growth and elevated volatility.
Impact of BeigeBook
Economic Activity & Sentiment
Economic expansion across the Twelfth Federal Reserve District exhibited a decelerating, albeit positive, trajectory during the reporting period. Aggregate demand demonstrated a modest softening, particularly within discretionary consumer segments, offset partially by resilient service sector activity. Manufacturing output registered incremental gains, though constrained by persistent supply-side pressures and evolving trade dynamics. Labor market conditions remained comparatively tight, with wage inflation moderating from prior peaks but still exceeding levels consistent with long-run price stability. Non-residential fixed investment displayed a mixed profile, with capital expenditure plans exhibiting sensitivity to both geopolitical risk and the evolving cost of capital.
District-level data revealed a bifurcated consumer landscape. Elevated fuel costs and persistent inflationary pressures on essential goods prompted observable trade-down behavior, impacting retail sales of non-durable goods and discretionary items. Conversely, demand for travel, tourism, and hospitality services remained comparatively firm, suggesting a continued prioritization of experiential spending among certain demographic cohorts. Banking contacts noted early indications of increased household financial stress, manifested in rising credit card balances and a deceleration in loan growth. Agricultural conditions deteriorated in several areas, exacerbated by drought conditions and unfavorable commodity pricing, potentially impacting rural credit quality.
Manufacturing activity benefited from robust demand in select subsectors, notably industrial automation and defense-related production. However, firms continued to grapple with elevated input costs, particularly for energy, metals, and electronic components. The ability to pass these costs onto end consumers remained constrained by competitive pressures and concerns regarding demand elasticity. Inventory management strategies varied, with some firms maintaining elevated levels of safety stock to mitigate supply chain disruptions, while others pursued lean inventory models to optimize working capital intensity.
Real estate markets presented a nuanced picture. Residential construction activity remained subdued, hampered by elevated mortgage rates and limited inventory. Commercial real estate exhibited pockets of strength, particularly in industrial segments benefiting from e-commerce growth, but overall demand remained tepid. Lending activity was stable, though credit standards tightened modestly across most loan categories. Nonprofit organizations faced increasing funding challenges, prompting some to reduce staffing levels or curtail service offerings.
Overall, the outlook remains cautiously optimistic, contingent upon a stabilization of energy prices, a moderation of inflationary pressures, and a resolution of geopolitical uncertainties. While firms continue to invest in productivity-enhancing technologies, including artificial intelligence, the pace of economic expansion is expected to remain moderate in the near term. The potential for a deceleration in consumer spending and a further tightening of financial conditions represent key downside risks to the forecast. EBITDA multiples are expected to remain under pressure as firms navigate a challenging macroeconomic environment.
Labor Market Dynamics
Recent economic performance across the Twelfth District, and to a lesser extent the broader compilation of Federal Reserve districts, suggests a decelerating, yet not contracting, growth trajectory. Labor market dynamics, while still positive, exhibit signs of moderation. Wage pressures, though persistent, are easing from prior peaks, indicating a potential inflection point in the wage-price spiral. However, elevated input costs continue to compress margins for many firms, necessitating strategic pricing adjustments and a focus on operational efficiencies. Consumer spending patterns reveal a bifurcated landscape, with resilient demand in certain segments—particularly travel and discretionary services—offsetting weakness in rate-sensitive sectors like auto sales and home furnishings.
Manufacturing activity, while showing modest improvement in some areas, remains subject to supply chain vulnerabilities and the impact of trade policies. The energy sector demonstrates a complex interplay of factors, with increased drilling activity partially offset by ongoing geopolitical risks and fluctuating commodity prices. Agricultural conditions, particularly in drought-affected regions, present a headwind to overall economic performance. Real estate markets are characterized by a mixed outlook, with sluggish home sales counterbalanced by continued strength in commercial development, particularly in data center and industrial segments.
Financial institutions report stable lending activity, though tightening credit standards suggest increased caution. Non-performing loan ratios remain manageable, but emerging concerns regarding credit quality in certain segments—specifically small businesses and agricultural borrowers—warrant monitoring. Community organizations are facing heightened demand for assistance, coupled with funding constraints, highlighting the growing financial strain on vulnerable populations. The increasing adoption of AI technologies across various sectors presents both opportunities and challenges, potentially enhancing productivity but also raising concerns about workforce displacement and the need for reskilling initiatives.
Overall, the economic outlook remains uncertain, with firms citing concerns about inflation, demand volatility, and geopolitical risks. While a recession is not currently anticipated, the deceleration in growth and the persistence of inflationary pressures suggest a cautious approach to investment and hiring decisions. The current environment necessitates a focus on cost management, operational efficiency, and strategic pricing to navigate the evolving economic landscape. The interplay between monetary policy, fiscal stimulus, and global economic conditions will be critical in shaping the trajectory of economic activity in the coming quarters. A sustained recovery will likely depend on a stabilization of supply chains, a moderation of inflationary pressures, and a restoration of consumer confidence.
Inflationary Pressures & Pricing Power
Cost pressures remain pervasive across the Eleventh and Fifth Districts, though the ability of firms to fully translate these into higher selling prices is increasingly constrained, suggesting a narrowing of margins. While initial pass-through occurred, particularly in sectors with inelastic demand like energy and certain non-discretionary goods, consumer sensitivity is demonstrably rising, evidenced by trade-downs in retail, increased price shopping, and a reluctance to absorb cost increases in services. This dynamic is particularly acute in the Philadelphia and Atlanta Districts, where elevated necessities prices are impacting lower-income households and driving increased reliance on social safety nets. The Boston and New York reports corroborate this trend, noting heightened price sensitivity and a willingness to defer discretionary spending. Manufacturing sectors, while experiencing demand tailwinds in specific niches like defense and automation, are absorbing a significant portion of input cost increases, impacting EBITDA multiples.
The interplay between supply chain dynamics and raw material pricing is complex. Elevated fuel costs, exacerbated by geopolitical instability in the Middle East, are a consistent theme across all reporting regions, impacting transportation and freight expenses. Specific commodity price volatility, notably in steel, aluminum, and petrochemicals, is contributing to input cost pressures, though the Kansas City and Dallas Districts suggest some stabilization in certain materials. The San Francisco report highlights challenges in securing skilled labor for specialized roles, further compounding cost pressures. While some firms are mitigating these through strategic sourcing and inventory management, the overall trend suggests a sustained period of elevated operating expenses.
Regional variations exist in demand elasticity. The Atlanta District notes a shift toward value-driven consumption, while the Minneapolis District observes a bifurcation in spending patterns, with higher-income consumers maintaining spending levels and lower-income households exhibiting increased price sensitivity. The Kansas City District highlights a divergence between durable and non-durable goods, with the former experiencing softening demand. This suggests a heterogeneous consumer landscape, requiring firms to adopt nuanced pricing strategies. The Cleveland and St. Louis Districts indicate a generally stable consumer base, though with emerging signs of financial stress among lower-income segments.
Financial conditions are tightening modestly, with several districts reporting increased scrutiny in lending standards and a cautious approach to credit extension. While loan demand remains positive in certain sectors, particularly commercial real estate and consumer lending, the Kansas City and Dallas Districts note a reluctance among borrowers to commit to new projects given economic uncertainty. This tightening of credit conditions, coupled with persistent inflationary pressures, is likely to further constrain economic growth and limit the ability of firms to invest in capacity expansion. Working capital intensity is expected to remain elevated as firms navigate supply chain disruptions and manage inventory levels.
Overall, the economic outlook remains subdued. While employment growth is generally positive, the pace of expansion is moderating. The combination of persistent cost pressures, rising consumer sensitivity, and tightening financial conditions suggests a challenging operating environment for businesses across the Eleventh and Fifth Districts. The absence of significant downside risks, coupled with modest growth in select sectors, points to a continuation of the current slow-growth trajectory, with limited potential for substantial upside.
Consumer Spending & Credit
Recent economic performance across the Twelfth District, and to a lesser extent the broader compilation of reports, suggests a decelerating, albeit resilient, consumer. While aggregate employment metrics remain stable, underlying dynamics reveal a bifurcated labor market increasingly sensitive to cyclical pressures. Wage growth, though moderate, is exhibiting signs of stickiness, particularly in skilled trades, potentially foreshadowing persistent inflationary headwinds. Consumer spending patterns demonstrate a clear trade-down effect, with discretionary purchases moderating while demand for essential goods and value-oriented alternatives persists. This shift in consumer behavior is impacting retail EBITDA multiples and necessitating adjustments to inventory management strategies.
Manufacturing activity, while showing modest gains in some regions, is constrained by ongoing supply chain disruptions and elevated input costs. The impact of tariffs, coupled with geopolitical instability, continues to compress margins and necessitates a focus on operational efficiencies. Capital expenditure plans remain cautious, with firms prioritizing investments in automation and productivity-enhancing technologies to offset rising labor costs and maintain competitiveness. The divergence between durable and non-durable goods manufacturing suggests a sector-specific response to evolving demand dynamics.
The real estate landscape presents a mixed picture. Residential markets are characterized by limited inventory and moderating demand, leading to stable, but unspectacular, price appreciation. Commercial real estate activity is similarly subdued, with office space facing headwinds from remote work trends and industrial sectors experiencing increased competition. Lending activity remains stable, though tightening credit standards and rising interest rates are likely to dampen future investment. Non-performing loan ratios, while currently manageable, warrant continued monitoring, particularly within the commercial real estate segment.
Agricultural conditions remain challenging, with drought conditions and elevated production costs impacting crop yields and farmer profitability. This is contributing to a decline in agricultural lending and potentially impacting working capital intensity for related businesses. Energy sector activity is supported by elevated prices, but long-term sustainability is contingent upon geopolitical stability and the transition to renewable energy sources.
Community-level indicators suggest increasing financial stress among lower-income households, with demand for social services rising and nonprofit organizations facing funding constraints. This trend underscores the importance of monitoring consumer credit quality and assessing the potential for increased delinquencies. Overall, the economic outlook remains uncertain, with downside risks stemming from inflation, geopolitical tensions, and domestic policy uncertainty. While current conditions suggest a moderate expansion, the trajectory of future growth is contingent upon a resolution of these challenges and a sustained improvement in consumer confidence.
National Summary
Overall Economic Activity
Economic activity increased at a slight to moderate pace in eleven of twelve Federal Reserve Districts in late May and June, while one District reported no change. The pace of growth was quite close to that of last period, when activity expanded in ten Districts, was flat in one, and down in one. Consumer spending edged up as higher prices, particularly for fuel, dampened sales in other categories. Several Districts noted declines in spending on discretionary items or trading down to more affordable varieties. Tourism was up, with some Districts receiving a boost from World Cup visitors. Auto dealers reported little change in sales, but spending on repairs grew as consumers held onto vehicles for longer. Agricultural conditions deteriorated due to lower commodity prices, higher input costs, and tighter credit. In the energy sector, oil and gas drilling increased. Manufacturing production grew modestly to moderately in most Districts, led by stronger orders from the data center, machinery, and defense sectors. Manufacturers in several Districts said supply chain issues were more common. Construction and real estate activity increased slightly overall, with several Districts noting growth in data center building. Financial conditions were stable on net, and commercial and consumer loan volumes were both up modestly. Commercial loan quality was stable, but consumer loan quality ticked down. Transportation activity increased modestly amidst ongoing supply chain changes related to higher tariffs and the conflict in the Middle East. Overall, activity in other service industries also was up modestly, with Districts highlighting growth in health care and professional services. Social service providers were adjusting to funding declines while demand for basic supports—housing, food, health care—remained high. Contacts generally expected the economy to continue to expand in the coming months, but several Districts noted elevated uncertainty in the outlook for fuel costs.
Labor Markets
Employment rose on balance, with five Districts showing modest, moderate, or solid gains in employment, and with seven Districts experiencing little to no change. In the previous report, only one District had modest, moderate, or solid employment gains. Employment rose in a variety of industries, including manufacturing, construction, and retail. Skilled workers were difficult to find in a range of fields, notably technicians and tradespeople. Though there were reports of lower employment in a couple of Districts, the declines were small. Wage growth was modest to moderate in most Districts, though two saw only slight wage increases. Some wage increases were attributed to increased competition for skilled workers. A few Districts noted that firms had increased their usage of AI, either in the hiring and screening of potential employees or to boost worker productivity.
Prices
Prices increased moderately overall, with nine Districts reporting moderate growth, two robust growth, and one slight growth; compared with the last reporting period, price growth was the same or slower in all Districts. Non-labor input costs increased for a variety of industries—including services, construction, and manufacturing—and reflected in part higher costs for energy, transportation, and raw materials. Some contacts tied these cost increases to the conflict in the Middle East; others mentioned tariffs. Consumer prices continued to rise, and a few Districts said contacts saw greater price sensitivity among their customers. A couple of Districts reported that selling prices grew less than input costs over the period, crimping margins. Expectations for price growth over the coming months varied across Districts, with contacts in some expecting inflation to continue at its current pace, while contacts in others expected inflation to slow, in part due to falling fuel prices.
Highlights by Federal Reserve District
Boston
Economic activity expanded slightly. Employment was flat, with some isolated layoffs, and wages rose at a slight pace. Cost pressures remained elevated, but output prices increased only slightly. Consumer spending rose modestly overall, buoyed by the World Cup, but discretionary spending softened among low- and moderate-income households. The outlook improved on balance.
New York
Economic activity increased modestly, as service sector activity picked up after a long period of weakness. Employment increased modestly, with larger firms starting to hire for growth. Input prices rose strongly under pressure from tariffs and energy costs, though selling price increases remained moderate. Businesses became more optimistic.
Philadelphia
Economic activity rose slightly in the current period, up from a slight decrease in the last period. Nonmanufacturing activity picked up, while manufacturing activity again rose modestly. Employment again declined somewhat. Wage inflation held steady at a modest pace, and prices continued to grow moderately. Manufacturers have more widespread expectations for future growth than nonmanufacturers.
Cleveland
Fourth District business activity increased modestly, with faster growth anticipated in the coming months. Manufacturing demand rose moderately, while retailers continued to face soft demand due to higher fuel prices. Higher fuel costs filtered through to both selling prices and wage pressures. Selling prices rose at a robust pace.
Richmond
The regional economy expanded moderately this cycle as consumer spending continued to grow despite some shifts in consumer behavior, even among higher income consumers. Business activity was generally reported as modestly growing, and employment grew modestly as well. Manufacturing output also increased modestly while producer prices were little changed despite rising input costs. Overall price growth remained moderate.
Atlanta
Economic activity grew modestly. Employment levels remained largely flat. Wages rose moderately, and prices increased at a moderate pace. Consumer spending expanded modestly. Residential and commercial real estate were little changed. Transportation and manufacturing rose modestly. Energy activity was stable, but agricultural conditions worsened. Lending increased at a modest pace.
Chicago
Economic activity in the Seventh District increased modestly over the reporting period. Manufacturing demand rose moderately; employment rose modestly; consumer spending, business spending, and construction and real estate activity increased slightly; and nonbusiness contacts saw a small increase in economic activity. Prices rose moderately, wages were up modestly, and financial conditions tightened slightly. Farm income expectations for 2026 edged down.
St. Louis
Economic activity has slightly increased. Employment was unchanged, and wage growth was moderate. Prices rose at a robust pace, and increases were widespread. The outlook remains unchanged, with contacts noting that persistent uncertainty and elevated fuel costs continue to weigh on overall conditions.
Minneapolis
The District economy expanded slightly. Employment grew modestly, and contacts reported that labor availability increased. Wage growth was modest to moderate. Prices increased moderately, but input price pressure remained elevated. Retail contacts reported greater discretion among consumers. Services, construction, commercial real estate, and manufacturing activity increased. Agricultural conditions deteriorated.
Kansas City
Economic activity expanded slightly within the Tenth District, which was supported by increased manufacturing activity. Inflationary pressures continued to compress profit margins, prompting firms to make pricing and investment adjustments. Contacts expect slight growth over the next six months.
Dallas
Economic activity in the Eleventh District rose moderately. Growth picked up in the banking, energy, and service sectors but moderated in manufacturing. Retail sales improved, and the real estate sector was mixed. Employment strengthened, and wage pressures rose. Outlooks were stable to positive, though inflation, the level of demand, and geopolitical and domestic policy uncertainty remained sources of concern.
San Francisco
Economic activity was stable but somewhat muted. Employers held head counts steady and invested further in AI. Prices increased moderately, while wages rose slightly. Retail sales and demand for services edged down. Manufacturing activity rose modestly, while agriculture activity was unchanged but weak. Conditions were steady in real estate and financial services.
Original link
https://www.federalreserve.gov/monetarypolicy/beigebook202607.htm