A New York auto parts dealer has passed on most of the increased costs due to tariffs to consumers, while a coffee roaster in Long Island stated that sales prices may only decrease after high-cost inventory is depleted.
Economic activity in most regions of the United States is rebounding at a "slight to moderate" pace, according to the Federal Reserve's national economic conditions survey (also known as the "Beige Book") released on January 14.
This report, based on information collected on or before January 5, covers the period following the longest government shutdown in U.S. history and reveals that underneath the surface recovery of the U.S. economy lie structural challenges.
I. Moderate Economic Recovery
● The latest Beige Book shows that among the 12 Federal Reserve districts, 8 reported overall economic activity growing at a "slight to moderate" pace, 3 regions reported no change, and 1 region reported a moderate decline.
● This data represents an improvement compared to the last three reporting periods, during which most regions reported little change in economic activity. Most banks in the regions reported slight to moderate growth in consumer spending, primarily due to the holiday shopping season.
II. Intensifying Consumer "K-Shaped Divergence"
● A key phenomenon hidden beneath the surface growth of the economy is the "K-shaped divergence" in consumer spending. High-income households continue to increase spending on luxury goods, travel, and experiences, while middle- and low-income consumers have become more price-sensitive and cautious about non-essential spending.
● The report from the Philadelphia region explicitly noted that wage growth has not kept pace with rising prices, putting pressure on middle- and low-income families. In contrast, high-income groups benefit from wealth effects and rising asset values.
● This divergence in the consumer market may persist into 2026, further exacerbating the gap in consumer experiences and purchasing power.
III. Cooling Labor Market
● The labor market shows signs of cooling. Among the 12 Federal Reserve districts, 8 reported that employment levels remained largely unchanged.
● Most company hiring is aimed at filling vacant positions rather than creating new jobs. The report specifically mentioned that companies are cautious about hiring and prefer to maintain flexibility during uncertain times.
● Wages are growing at a "moderate" pace, with several contacts indicating that wage growth has returned to "normal" levels. However, while wage growth slows, prices continue to rise, indicating a compression of real purchasing power.
IV. Cost Pass-Through from Tariffs and Inflation Pressure
● Prices are rising at a "moderate" pace in most regions, but the cost pressure from tariffs is a common issue across all areas. Some businesses that initially absorbed tariff-related costs have begun to pass these costs on to consumers as their pre-tariff inventories are depleted or as pressure to maintain profit margins increases.
● The report from the New York Fed provides a specific example: An auto parts dealer in Long Island stated that most of the cost increases due to tariffs on goods imported from India have been passed on to consumers.
● About 95% of the tariff costs are borne by U.S. businesses, with only a portion passed on to consumers. However, this "portion" has had a substantial impact on the macroeconomy. Tariff factors alone have raised the U.S. inflation rate by about 0.7 percentage points, reducing the average real income of American households by approximately $600.
V. Divergent Manufacturing Performance and AI Investment Boom
● Manufacturing activity is performing unevenly, with 5 regions reporting growth and 6 regions reporting contraction. Feedback from respondents in the Cleveland area indicated a moderate rebound in demand for manufactured products after several rounds of stagnation or decline.
● Some manufacturers view data center construction as a major driver of demand. At the same time, multiple regions report that businesses are exploring applications of artificial intelligence (AI), primarily to improve productivity and future workforce management.
● However, the report from the Atlanta region noted that while businesses are accelerating the adoption of AI to enhance productivity and manage workforce size, significant impacts on staffing will still take years to materialize.
VI. Significant Regional Disparities
● There are notable differences in economic performance across regions. The New York region reported a continued moderate decline in economic activity, with slight job reductions and major employers continuing layoffs.
● In contrast, the Philadelphia region's economic activity rebounded from a moderate decline in the previous period to slight growth. Contacts in the Minneapolis area also reported sharp increases in healthcare and insurance costs.
● The report also reveals the pricing dilemmas faced by businesses, particularly in retail and dining sectors, where companies are reluctant to pass on costs to customers due to concerns about consumer price sensitivity.
VII. The Federal Reserve's Difficult Decision on Rate Cuts
● After three consecutive rate cuts at the end of 2025, investors currently expect that the Federal Reserve will not cut rates again until at least June 2026. This expectation aligns with the cautious stance of Federal Reserve officials, who are concerned that inflation remains above the 2% target and that tariff policies may exert upward pressure on prices.
● The dilemma facing the Federal Reserve is evident: inflation above target and a weakening labor market create tension between its dual mandate. Inflation is expected to remain above the Federal Reserve's 2% target, although uncertainties surrounding tariffs should begin to dissipate by mid-2026.
VIII. The Danger of Delayed Structural Damage
● Gita Gopinath, a Harvard University economics professor and former first deputy managing director of the IMF, pointed out that the current apparent "stability" of the global economy is deceptively misleading, as the structural damage caused by tariffs is being obscured by multiple short-term factors.
● These short-term factors include the AI investment boom and the resulting stock market rise, as well as more expansionary fiscal policies adopted by countries like the U.S. and Germany.
● However, this state is inherently fragile, especially in the AI sector. Investors are beginning to reassess the gap between high valuations and actual returns. As the buffer effect of early imports dissipates, businesses will pass on more tariff costs to consumers, and the damage caused by tariffs to the economy and livelihoods will become more apparent.
Several respondents from the retail, consumer, and business services, construction, transportation, and manufacturing sectors in the San Francisco area reported implementing price increases to offset higher tariffs as well as rising utility fees, insurance costs, and some raw material costs.
This Beige Book provides key reference material for the Federal Reserve's monetary policy meeting on January 27-28. Faced with a complex landscape of moderate economic growth alongside structural pressures, persistent inflation, and consumer divergence, Federal Reserve officials need to find a delicate balance between supporting the economy and curbing inflation.
Whether and when the Federal Reserve will cut rates this year will depend on the trends in inflation data and the evolution of the labor market in the coming months.
Join our community to discuss and grow stronger together!
Official Telegram community: https://t.me/aicoincn
AiCoin Chinese Twitter: https://x.com/AiCoinzh
OKX benefits group: https://aicoin.com/link/chat?cid=l61eM4owQ
Binance benefits group: https://aicoin.com/link/chat?cid=ynr7d1P6Z
免责声明：本文章仅代表作者个人观点，不代表本平台的立场和观点。本文章仅供信息分享，不构成对任何人的任何投资建议。用户与作者之间的任何争议，与本平台无关。如网页中刊载的文章或图片涉及侵权，请提供相关的权利证明和身份证明发送邮件到support@aicoin.com，本平台相关工作人员将会进行核查。
