Warnings are growing that the U.S. economic growth engine is cooling. The job market is losing momentum, and a so-called "K-shaped" polarization in consumer sentiment is becoming clearer, with sharp splits by income level.
The Federal Reserve on the 26th (local time), ahead of its December Federal Open Market Committee (FOMC) meeting, said in its Beige Book on economic conditions that "overall economic activity in the United States was little changed or slightly slowed since the previous report." The Beige Book covers economic trends in the 12 Federal Reserve districts from October through Nov. 17.
The most notable point is the shift in the labor market. The Fed said in the report that "employment levels declined slightly, and about half of the 12 districts reported weaker labor demand."
Corporations have not immediately moved to large-scale layoffs. The report said, "Layoff announcements have increased somewhat, but most corporations are managing headcount by freezing new hiring or using attrition by not backfilling departures rather than cutting staff directly." Some corporations also chose to reduce working hours to cut expense.
The impact of adopting artificial intelligence (AI) technology on the job market was also identified specifically. The report said, "At some corporations, AI is replacing entry-level roles or boosting the productivity of existing staff, reducing the need for new hiring." In the New York Fed district, demand has surged for workers with AI-related skills, while AI has led to job losses in general consumer service occupations.
In the consumer market, the so-called "K-shaped" consumption pattern, in which gaps widen by income tier, has deepened. The Fed analyzed that "high earners are still spending, but other groups are slowing their consumption." Several regional Feds, including New York, Atlanta, and Minneapolis, reported that "wealthy consumers are spending regardless of economic conditions, while middle- and low-income consumers are tightening their belts."
Inflationary pressure also persisted. The report assessed that "prices rose moderately." In particular, tariff and insurance premium hikes were cited as key factors adding to corporations' expense burden.
This Beige Book also recorded the negative impact of the federal government shutdown on the economy. With the shutdown that began in October, spending by federal employees fell, reducing sales at auto dealerships in Pennsylvania. Airports in the Midwest saw commercial activity weaken as passenger traffic declined. It also noted a surge in requests for food aid to charities due to disruptions in benefits under the Supplemental Nutrition Assistance Program (SNAP).
Wall Street is watching closely to see whether the report will provide decisive grounds for a rate cut in December. Bloomberg analyzed that "with major data releases such as the Labor Department's October jobs report disrupted by the shutdown, the Fed's own survey, the Beige Book, has become more important than ever."
Inside the Fed, opinions are split between a rate cut and a hold. Doves, worried about a slowdown in the labor market, are arguing for an additional 0.25 percentage point cut, while hawks, seeking to tame still-elevated inflation, are pushing to hold rates steady. According to CME FedWatch by the Chicago Mercantile Exchange (CME), markets are pricing the probability of a December rate cut at about 85%.
The Wall Street Journal (WSJ) said, "The cooling labor market alongside persistent price pressures is complicating the calculus for Fed policymakers," adding, "This Beige Book provided evidence to support both sides." The Fed will hold this year's final FOMC meeting from Dec. 9 to 10.