Dive Brief:

• U.S. economic activity expanded “modestly” and, although inflation eased in some regions, several industries reported significant price pressures, the Federal Reserve said in a report Wednesday. Recession fears are also rising at U.S. companies as they face cost and supply chain challenges.   
• Although the U.S. labor market remains tight, roughly half of the Fed’s 12 districts reported an easing of hiring and/or retention challenges, according to the Fed’s “Beige Book,” an anecdotal compilation from contacts across the central bank’s districts.
• “Some businesses said elevated inflation and higher costs of living were pushing wages up, coupled with upward pressure from labor market tightness,” the Fed said. “Contacts expect wage growth to continue as higher pay remains essential for retaining talent in the current environment.”

Dive Insight:

Four Fed districts reported flat economic activity while two noted declines, citing harm from inflation, rising interest rates and persistent supply chain bottlenecks, according to the report, which was compiled by the Dallas Fed based on responses collected through Oct. 7.

The decline in hiring and retention pressures in some districts follows efforts by the Fed this year to combat the worst inflation in four decades by aggressively raising the federal funds rate.

Policymakers have increased the benchmark rate by 75 basis points in each of their past three meetings and some market traders predict they will do so again at the end of a two-day meeting on Nov. 2. A basis point is one-hundreth of a percentage point.

Further slowing in demand would eventually cool the labor market, Preston Caldwell, head of U.S. Economics at Morningstar, wrote in an email, noting that the Beige Book is an informal survey.

“I expect employment growth to be around zero or slightly negative over the next 12 months,” he wrote. “Economic activity has been decelerating and is expected by all to continue to decelerate (if not outright decline), so it’s only a matter of time before hiring slows (employers obviously won’t hire more workers if it’s clear they’re not needed).”

The Fed releases the Beige Book approximately two weeks before a scheduled meeting of policymakers.

While the job market overall remains tight, some companies were “hesitant” to increase payrolls because of recession forecasts, the Fed reported. In addition, some companies said they have halted hiring.

Atlanta, for example, reported that “labor market pressures continued to ease, but labor availability largely remained tight. While wage pressures persisted, some easing was reported, and firms continued to offer a variety of incentives to employees.”

Regarding inflation, the Fed flagged “significant” input price increases, while noting price declines in commodity, fuel and freight costs.

The Fed also found that companies have grown more pessimistic amid concerns that a downturn is imminent. The Fed last month marked down its own economic outlook, predicting the economy will grow 0.2% this year compared with a 1.7% forecast in June.

Companies in some districts reported greater difficulty in passing on inflationary pressures to customers, the Fed said.

“Some contacts noted solid pricing power over the past six weeks, while others said cost pass-through was becoming more difficult as customers push back,” the Fed wrote. “Looking ahead, expectations were for price increases to generally moderate.”

Companies in Dallas reported “great difficulty” in passing on cost increases to consumers, the Fed said, adding that outside the energy industry, companies were “generally pessimistic.”

In contrast, companies in the Kansas City Fed district said price increases did not inhibit consumer spending, according to the Fed.

Although recession fears are rising, downturns come in “all shapes and sizes” and it would “be a mistake for people to think that the possible upcoming recession will be very severe or (more importantly) long lasting in impact, as for example 2008,” Caldwell wrote in an email.

“This should be a very much V-shaped recession if it occurs,” he wrote. “Once the Fed brings inflation down it can step off the brakes and the economy should be roaring again. We expect GDP growth to rebound from 0.3% in 2023 to 2.6% in 2024 and 3.9% in 2025.”