Federal Reserve Beige Book: U.S. economy expands moderately but inflationary pressures intensify; AI boosts productivity while dampening hiring demand at some firms.

The latest Beige Book on economic conditions released by the Federal Reserve on Wednesday shows that U.S. economic activity generally continued to grow, but performance varied across regions, consumer spending was broadly weak, and the labor market changed little. At the same time, rising energy prices, tariffs, and increasing insurance costs continued to push up business operating costs, further intensifying inflationary pressures in some regions. Notably, as companies increase investment in artificial intelligence (AI), some firms have begun to reduce hiring demand by raising productivity, and AI's impact on the U.S. labor market is gradually becoming apparent. This Beige Book, compiled by the Federal Reserve Bank of Philadelphia, summarizes feedback from businesses and other respondents collected through October 5. The report shows that among the Fed's 12 districts, two saw moderate economic growth, three saw modest growth, four saw only slight growth, and the remaining three saw little or no change in economic activity. Manufacturing became an important force supporting U.S. economic growth. Among them, the Dallas Fed district benefited from broad and strong manufacturing expansion, achieving moderate economic growth. Manufacturing activity in another six districts also saw slight to moderate growth, while the remaining five districts saw little or no growth. By contrast, overall growth in other industries was limited. Most districts reported that consumer spending was essentially unchanged, and of the six districts that reported on auto sales, five saw flat or slightly lower sales. The divergence in the consumer market became more pronounced. More than half of the districts said consumer spending was mainly supported by high-income households, while low-income consumers became more cautious under the pressure of persistently rising living costs. Even in the Dallas district, where retail sales were relatively solid, some businesses reported that low-income customers were cutting back on spending. Tourism overall continued to grow, but businesses in the Boston, Minneapolis, and San Francisco districts all reported a decline in spending by Canadian tourists. Looking ahead, businesses in most districts remained positive about the economic outlook, but generally expected only limited growth, with momentum mainly concentrated in manufacturing, while persistent uncertainty continued to constrain economic activity. On the employment front, the Beige Book shows that the overall level of U.S. employment changed little, but AI is affecting hiring decisions at some companies. Among the 12 districts, three reported slight employment increases, five reported modest increases, and the remaining four reported little change. Overall, labor supply was basically sufficient to meet business needs, but shortages remained for professional and technical personnel and skilled workers. It is worth noting that five districts reported that, after investing in AI and improving productivity, some companies began reducing staff through attrition, delaying hiring, or expecting fewer new positions in the future. Some large companies in the New York Fed district said that as AI becomes gradually integrated into daily operations, firms have begun cutting some positions or pausing hiring. Banking respondents in the Cleveland district also noted that automation and AI tools have improved efficiency in some roles, thereby reducing staffing needs. However, AI's impact on employment is not uniform. Although businesses in the Atlanta district are expanding the use of AI and automation tools, most respondents expected that these investments would not lead to large-scale layoffs in the short term. On wages, five districts reported moderate wage growth, four reported modest growth, and another two reported only slight growth. Some businesses said persistent inflation increased employees' demands related to the cost of living, while rising health insurance and other employee benefit costs further added to compensation pressure on companies. On prices, the Beige Book sent a clearer signal of inflationary pressure. The report shows that overall prices rose sharply in three districts, rose moderately in eight districts, and rose slightly in another district. Among them, four districts reported that the pace of price increases accelerated compared with the previous reporting period. Rising energy prices were one of the main factors driving up costs. All districts mentioned the impact of higher oil prices, and businesses generally reported that diesel prices were high, with fuel surcharges pushing costs down the supply chain. In addition, rising tariffs, other commodity costs, and insurance costs also continued to add to business operating burdens. Some businesses pointed out that because consumers are increasingly sensitive to price increases, companies find it difficult to pass all costs on to customers, squeezing profit margins. To maintain profitability, some companies chose targeted price increases, introduced promotional discounts, or reduced costs by adjusting products and food and beverage menus. The report noted that as existing procurement contracts expire and companies renegotiate raw material hedging agreements and customer delivery contracts, cost pressures from energy and tariffs may be further reflected in goods and services prices in the coming months. The report also shows that AI-related investment boosted demand in some manufacturing and infrastructure areas, but also began to create a crowding-out effect on resources in other industries. Manufacturing firms in the Philadelphia Fed district said that data centers, AI, and defense-related business remained the main drivers of manufacturing growth. The Cleveland district also reported continued growth in demand for data center construction, power generation facilities, and defense aerospace. However, businesses in the Kansas City district pointed out that data center construction is absorbing some manufacturing capacity and intensifying competition in the labor market. In the Dallas district, some businesses reported that data center projects pushed up construction labor costs and attracted workers from other industries to related projects. At the same time, the U.S. housing market continued to be constrained by high interest rates. The Philadelphia district reported that rising mortgage rates in September further suppressed housing transaction activity, with some potential homebuyers withdrawing from the market because borrowing costs were too high. Although the Atlanta district reported some improvement in home sales, many buyers still had difficulty obtaining mortgage approval, while sellers in areas such as Florida attracted buyers through price cuts and incentives. Housing supply in the New York district remained tight, limiting transaction volume and supporting home prices. At the same time, mortgage rates rose again, making many existing homeowners reluctant to sell and give up the low-rate loans they had previously obtained. In terms of regional performance, the Dallas district achieved moderate economic growth, with manufacturing expansion accelerating markedly; the Cleveland and Richmond districts also maintained growth. By contrast, economic activity in the Chicago, Kansas City, and San Francisco districts was generally flat, with signs of weakness in some consumer and real estate areas.