Fed: U.S. economy continues modest growth as higher costs weigh on consumers

Economic activity continued to expand in recent weeks across most of the United States at a “slight to moderate” pace, according to the Federal Reserve's latest Beige Book. However, higher prices and ongoing uncertainty over fuel costs continued to weigh on consumers and businesses..Economic conditionsEleven of the Federal Reserve's 12 districts reported economic growth, while one district saw no change. Economic activity increased in the Minneapolis region in recent weeks, supported by gains in employment, manufacturing, construction and commercial real estate. Economic growth was also reported in the Chicago region as businesses expected growth over the next year despite higher costs and continued uncertainty. Though economic activity ticked up in the St. Louis region, businesses cited uncertainty and high fuel costs due to the war in Iran as roadblocks. Economic activity expanded in the Kansas City region in recent weeks, with manufacturing leading growth while high costs and wary consumers continued to limit expansion. AgricultureAgricultural conditions deteriorated nationwide as producers faced lower commodity prices, higher operating costs and tighter credit availability. Oil and gas drilling activity increased, while transportation and professional services posted modest gains despite tariff-related supply chain adjustments and geopolitical tensions in the Middle East. Ag conditions weakened in the Minneapolis region despite healthy crop conditions. “Falling commodity prices and limited access to operating loans continued to pressure farmers, with some producers reporting financial strain,” according to the Beige Book. Conditions also weakened in the Chicago region as expectations for farm income this year declined. Falling corn, soybean and wheat prices weighed on outlooks, while livestock prices were mixed. Conditions were mixed in the St. Louis region. While some lenders saw stable farm operations, others cited drought, lower federal support and tight credit as hurting producers. Ag conditions were mixed in the Kansas City region as record-high cattle prices continued to support ranchers. However, lackluster crop prices and worsening drought across sections of the district limited farm income.FinanceFinancial conditions tightened in the Chicago region as business loan demand increased among small businesses. Demand for multifamily development loans weakened, while consumer lending was unchanged. Banking conditions were unchanged in the St. Louis region as loan demand was stable to a little weaker, according to the report. Most banks kept existing lending standards, though some tightened credit requirements. Consumer spending Consumer spending edged higher overall, but rising prices — particularly for fuel — prompted households to cut back on discretionary purchases or opt for lower-cost alternatives. Tourism strengthened in several regions, aided by visitors attending World Cup events, while auto sales were unchanged as consumers continued to keep vehicles longer, boosting demand for repair services. Consumer spending increased in the Chicago region as retailers used promotions to attract shoppers. Restaurant traffic continued to be strong, but hotel stays dropped. Consumer spending was flat in the St. Louis region as retailers saw weaker discretionary purchases due to shoppers making less frequent trips while buying less items. ManufacturingManufacturing activity increased modestly, supported by demand from the data center, machinery and defense industries, although several districts reported renewed supply chain disruptions. Manufacturers in the Minneapolis region reported higher costs for metal and polymers. Construction companies saw rising costs for steel, copper and plastics. Some manufacturers in the Chicago region reportedly delayed orders amid uncertainty over the war in Iran.Manufacturing activity increased in the Kansas City region as shipments and production rose. Firms reported higher capital spending amid enhanced tax incentives for business investment. EmploymentLabor market conditions improved modestly, with employment increasing in manufacturing, construction and retail. Skilled labor shortages persisted, especially for technicians and trades workers, contributing to continued wage growth. Several districts also reported broader adoption of artificial intelligence to improve hiring and workplace productivity. Employers in the St. Louis region faced hiring challenges in health care, according to the Beige Book, especially health care. InflationInflation remained moderate nationwide. Businesses continued to face higher costs for energy, transportation and raw materials, with many attributing increases to tariffs and the Iran war. While companies passed some of those costs on to consumers, several reported that selling prices failed to keep pace with rising expenses, putting pressure on profit margins.Retailers in the Kansas City region said continued inflation was pushing more middle-income consumers toward less-expensive products.