Fed’s Beige Book Shows Cooling Labor Market, Softer Spending Ahead of December Rate Decision

The Federal Reserve holds it final rate-setting meeting of the year on Dec. 9-10. (Samuel Corum/Bloomberg)

Key Points

• The Federal Reserve’s Beige Book indicates softening consumer spending and a loss of momentum in the labor market.
• Employment “edged lower” across many districts, with businesses relying on attrition and easier hiring conditions.
• Consumer spending weakened nationally, with declines in retail and discretionary categories, though high-end retail remained resilient.

The Federal Reserve’s latest Beige Book illustrates softening consumer spending and a labor market that has lost some momentum. Those points could give the central bank more leeway to lower interest rates at its final meeting of the year.

The report comes at an important moment. Over the past month, investors’ expectations for a December rate cut have swung sharply, moving from a 30% chance to more than about 85% within a week. Those odds fluctuated as markets parsed mixed messages from Fed officials and limited economic data, thanks to the now-ended government shutdown. With the central bank’s communications blackout beginning on Saturday and economic reports still delayed or canceled by the shutdown, Wednesday’s release is one of the last meaningful signals policymakers and markets will get before the Dec. 9-10 meeting.

Eight times a year, each of the 12 Federal Reserve Banks collect anecdotal information on current economic conditions in their districts. The resulting commentary is compiled into the Beige Book, which gets its title from the original color of its front page. Fed officials then use the report to help guide their policy decisions.

Across many districts, the Beige Book found that employment “edged lower,” marking a shift from earlier reports that emphasized steadier job gains. Several regions, including New York, Dallas, and Minneapolis, reported slight declines in head counts. Businesses generally avoided large layoffs but said they were relying more on attrition and hiring only to replace departing workers.

Labor demand was also described as weaker in multiple districts. Contacts noted easier hiring conditions and a cooling in temporary staffing—often an early sign of slowing labor needs. Wage growth remained modest, with some districts reporting flat starting wages.

There were 15 mentions of increased or potential layoffs in Wednesday’s beige book, but so far, the number of Americans filing for unemployment benefits hasn’t spiked. In fact, the latest totals released Wednesday showed jobless claims fell by 6,000 to 216,000 for the week ending Nov. 22—the lowest reading since February.

“Clearly, despite all of the talk about layoff announcements, actual layoffs are not accelerating at the moment. Far from it,” writes Stephen Stanley, chief economist at Santander. The number of people collecting benefits did tick up slightly for the week ending Nov. 15 to 1.96 million claims. That is near the highest levels recorded so far this year, but continuing claims totals were also in this range in June, July, August, and October as well.

Consumer spending also weakened across the country, the Beige Book reported, with several districts citing declines or slower activity in retail and discretionary categories. Some retailers blamed the government shutdown for softer sales, while auto dealers noted a drop in electric-vehicle purchases following the expiration of a federal tax credit.

Higher-end retail remained more resilient, but contacts highlighted “cautious discretionary spending” among households overall. That marks a shift from earlier in the year, when upper-income consumers continued spending even as middle- and lower-income households pulled back.

Newly released data showed that retail sales increased at a monthly pace of 0.2% from August to September, according to Census Bureau data. That’s slower than the 0.4% jump that economists expected, according to a FactSet survey. Sales rose 0.6% in August from July.

Wednesday’s report offers a relatively mixed picture: Employment is softening, spending is weaker, and some firms cite rising uncertainty. But price pressures remained moderate in many districts, and businesses in sectors such as manufacturing and technology reported areas of strength.

“Economic activity was little changed since the previous report, according to most of the twelve Federal Reserve Districts,” the report said.

Fed officials appear split on whether to cut rates again next month. Some policymakers have pointed to still-elevated inflation and worry that easing too quickly could stall progress toward the central bank’s 2% target. Others argue that weakening labor demand poses the greater risk, especially with unemployment edging higher and household spending slowing.

Recent comments from New York Fed President John Williams, who said there is “room for a further adjustment in the near term,” helped push rate-cut expectations higher late last week. But other officials, including Boston Fed President Susan Collins and Chicago Fed President Austan Goolsbee, have signaled caution.
With few economic releases due before the blackout begins Friday, investors are likely to lean heavily on the Beige Book’s tone as they recalibrate expectations.

Write to Nicole Goodkind at nicole.goodkind@barrons.com.