Fed districts see modest growth, despite rising energy costs and consumer caution

Economic activity continued to expand across much of the United States in recent weeks, though rising energy costs, inflation pressures, and growing consumer caution have tempered optimism over future growth, according to the Federal Reserve Beige Book..Ten of 12 Federal Reserve districts reported economic growth, while one district reported a slight decline and another saw no change. Manufacturing remained one of the strongest sectors of the economy, with nine districts reporting increased activity amid defense-related production and growing demand tied to data center construction.Agriculture remained under pressure as elevated fuel and fertilizer costs squeezed margins despite higher prices for some crops and livestock, according to the Beige Book. Districts in the Midwest and Plains reported profitability concerns, while drought conditions continued to impact portions of the farm sector.Banking conditions remained stable, although several districts reported rising delinquencies in consumer, residential mortgage and agricultural loans. Banks noted increased caution among borrowers and signs of growing financial stress in some rural and consumer segments.Consumer spending was mixed and increasingly divided by income levels, according to the Beige Book. Higher-income households continued spending despite higher prices, while middle-income consumers became more selective with purchases. Lower-income households faced increasing financial strain, leading to stronger demand for necessities and greater reliance on credit cards. Auto dealers saw weaker demand for new vehicles as affordability concerns and higher fuel costs pushed buyers toward used and hybrid models.Labor market conditions remained largely stable, according to the June 3 report. Employment was unchanged in most districts, reflecting a "low-hire, low-fire" environment. Manufacturers continued adding workers in some regions, while hiring elsewhere focused on replacing departing employees. Wage growth remained “modest to moderate”, but employers reported more frequent pay adjustments to help workers cope with higher living costs.Inflation accelerated across most districts, driven by higher energy prices linked to the war between the United States/Israel and Iran. Businesses reported rising costs for fuel, shipping, packaging materials, chemicals, steel, and fertilizer. While some companies passed on higher costs to customers, many consumer-facing firms reported absorbing expenses or reducing services to preserve demand.Business contacts across most districts expressed caution about the next six months. While growth expectations remained positive, heightened uncertainty, inflation, higher energy costs, and signs of weakening consumer demand continued to weigh on sentiment.District-by-district conditionsEconomic activity increased in the Federal Reserve Bank of Chicago region. Manufacturing demand rose amid defense and data center-related projects, while consumer spending and real estate activity improved. Contacts reported price increases for energy and raw materials, and lenders noted deteriorating consumer loan quality.In the Federal Reserve Bank of St. Louis region, the economy grew amid a weakening outlook. Consumer spending remained steady, while manufacturing activity softened amid delayed customer orders and uncertainty. Businesses cited rising fuel costs, supply chain disruptions, and cautious consumer behavior as concerns.The region overseen by the Federal Reserve Bank of Minneapolis experienced modest growth driven by manufacturing, construction and financial services. Consumer spending was flat and agricultural conditions remained weak. Employers reported challenges finding workers in some industries, while more households scaled back discretionary spending in response to higher fuel costs.In the region covered by the Federal Reserve Bank of Kansas City, economic activity increased despite softer demand among consumer-facing businesses. Middle-income households were cutting back on discretionary spending, while higher-income consumers remained relatively unaffected by inflation. Manufacturing activity expanded, especially in aerospace and defense, but ag producers continued facing pressure from rising fuel and fertilizer costs.