Resilient consumer spending helped propel the US economy in recent weeks, offsetting weakness in other sectors like manufacturing, the Federal Reserve said in its Beige Book survey of regional business contacts.

“Consumers delivered some seasonal relief over the holidays by meeting expectations in most Districts and by exceeding expectations in three Districts, including in New York,” according to the report released Wednesday.

A majority of Fed districts reported “little or no change” in economic activity in the period, but firms were increasingly optimistic about the future.

“Overall, most districts indicated that expectations of their firms for future growth were positive, had improved, or both,” the report said. Numerous contacts pointed to the prospect of falling interest rates as a source of optimism.

The Beige Book, which was compiled by the Federal Reserve Bank of Philadelphia using information gathered on or before Jan. 8, includes anecdotes and commentary on business conditions in each of the 12 Fed districts.

Central bank officials are increasingly relying on this type of information to assess the path of the economy and inflation. While government statistics are the gold standard of economic data, the figures are generally backward-looking and subject to revision.

Overall, firms noted an easing in inflationary pressures in recent weeks, including that “increased consumer price sensitivity had forced retailers to narrow their profit margins and to push back in turn on their suppliers’ efforts to raise prices.” Businesses in most districts cited examples of steady or falling input prices.

Cooling Labor Market
Nearly all districts cited one or more signs of a cooling labor market, with over half seeing little to no net change in overall employment levels. Firms in many districts anticipate wage growth to fall further over the coming year.

The Beige Book is published two weeks before each meeting of the policy-setting Federal Open Market Committee. The FOMC is expected to leave its benchmark interest rate unchanged for a fourth straight meeting when policymakers gather Jan. 30-31. Given inflation has fallen faster than expected, they also might discuss when to begin cutting rates.

Philadelphia: “One new-home builder reported increased traffic during the holidays, another noted an uptick in contract signings in December, and all expressed increased optimism that 2024 would be a stronger construction year, with more closings and more new signed contracts.”

Dallas: “Access to affordable childcare remained a key barrier to parents’ participation in education and the workforce... An executive at a workforce development board said she has never seen so much interest in solving childcare issues, particularly among employers.”

Atlanta: “One firm said that they were choosing to hold positions open and were ‘slow walking’ new hires, as they sought to supplement productivity with generative AI across all business lines and functions.”

Cleveland: “One large general merchandiser said that lower-income households had become more reliant on credit cards and ‘buy now, pay later’ payment options in recent months and was skeptical that these customers could sustain their current level of spending once seasonal promotions ended.”

New York: “A major payroll and human resources firm reported that bonuses were up in 2023, with more employees receiving bonuses and solid increases in average bonus percentages.”

Chicago: “Contacts felt District farms generally ended 2023 in strong enough financial positions to weather whatever 2024 brings.”

St. Louis: “Some businesses are choosing not to raise prices even though labor and non-labor input costs continue to increase.”

Minneapolis: “A Montana staffing contact added, ‘We are seeing more clients settling in with who they have and not hiring unless the candidate is perfect.’”

The economy is tracking to grow at a solid annualized rate of 2.4% in the fourth quarter, according to the Atlanta Fed’s latest estimate. While that would be a moderation from the blockbuster 4.9% pace seen in the third quarter, a resilient consumer continues to power the economy forward.

US retail sales rose in December at the strongest pace in three months, surpassing economists’ expectations, Commerce Department data showed Wednesday.

Meanwhile, the Fed’s preferred gauge of inflation has fallen sharply over the past year. Excluding the volatile food and energy categories, the core metric rose 1.9% in November on a six-month annualized basis — just below the Fed’s 2% target.

This article was provided by Bloomberg News.