Walsh takes over a dual economy: investment boom meets consumption slump, inflationary pressures rise.

Author: Xiao Yanyan, Jinshi Data

The Federal Reserve's "Beige Book," released early Thursday morning Beijing time, shows that the US economy is simultaneously facing the dual pressures of weakening demand and rising costs. The report points out that regarding business expectations for the next six months, businesses generally believe that growth will change only slightly, and increased uncertainty and weak consumer spending are suppressing market sentiment.

This report, which summarizes qualitative information from all regions of the US, is an important reference for policymaking. The latest content shows that cooling consumption and rising inflationary pressures have appeared simultaneously in multiple industries. Among them, energy prices related to the Middle East conflict are considered a key factor driving up prices in many places, and have already affected multiple sectors such as shipping, packaging, groceries, and fertilizers.

Rising energy prices are changing consumption and production behaviors.

The report noted that rising gasoline prices prompted some consumers to switch to hybrid vehicles or simply reduce car purchases; shipping companies reduced empty container exports due to anticipated weakening domestic demand. Rising fertilizer prices directly impacted agricultural production, with New York apple growers expecting a significant drop in harvests later this year due to unaffordable costs. Feedback at the business level was also cautious. Information received by the Richmond Fed from the manufacturing sector indicated weakening demand due to tighter consumer spending; a plastics equipment manufacturer stated that its customers postponed capital expenditure plans due to concerns about tight oil supplies. Regional disparities persisted. The San Francisco Fed noted that travel demand related to concerts and corporate events in the West remained relatively robust, but demand for value-oriented local and regional travel declined. A contact at the Kansas City Fed described middle-income households as more frugal in their spending decisions, “trying to squeeze more value out of every dollar.” Amid an overall weak economic backdrop, investment remains supported. Nine out of twelve regional Federal Reserve banks cited continued investment driven by the construction of AI data centers, which also boosted employment in construction and manufacturing. However, this bright spot failed to mask the weakness in other sectors. Oxford Economics economist Nancy Vanden Houten stated that the Beige Book's findings are consistent with reality: the US-Israel war against Iran has pushed up prices, putting significant pressure on low- and middle-income groups, but the overall economy remains resilient, with GDP growth projected at around 2% this year. The renewed rise in inflationary pressures is leading to a tighter monetary policy outlook. Kevin Warsh succeeded Jerome Powell as Federal Reserve Chairman at the end of May, and prior to this, most policymakers had become more cautious about price trends. Inflation has remained above the 2% target for over five years, and has shown signs of accelerating in recent months, partly due to the US-backed war in Iraq. Public statements and the minutes of the April 28-29 meeting indicate a shift in the Federal Reserve's internal assessment: from previously expecting a rate cut later this year, to a greater inclination to maintain current interest rates for a longer period, even not ruling out further increases in borrowing costs. The policy rate range remains at 3.50% to 3.75%. Key inflation indicators continue to rise. Core inflation, which the Fed monitors, rose to 3.8% in April, up from 3.5% in March. Meanwhile, the labor market remains generally stable. According to a Reuters survey of economists, the unemployment rate is expected to remain at 4.3% in the May jobs report, to be released on June 5. Trump, when appointing Warsh, explicitly hoped he would push for rate cuts, but with the recent sharp rise in gasoline prices, this stance has shifted, and he no longer insists on an immediate rate cut. The job market structure is also changing. Several regional Federal Reserve banks have pointed out that the expansion of artificial intelligence applications is weakening hiring demand for entry-level positions. A survey by the Minneapolis Fed found that about one-third of businesses raised prices in April, and most reported that non-labor input costs had increased by more than 2% in the past two months, with a quarter of businesses seeing increases of more than 5%. The slowdown in hiring is particularly evident in some regions. The New York Fed noted that a human resources agency in upstate New York observed a surplus of entry-level labor, while a technology recruitment agency in the New York metropolitan area reported significantly longer hiring cycles, with job seekers often needing months and multiple rounds of interviews to secure a job. Although defense-related demand and data center construction have supported manufacturing employment in some areas, the overall employment environment remains characterized by "low hiring, low layoffs," with most workers choosing to remain in their current positions and reducing job mobility.