The Fed's latest economic survey shows that U.S. economic activity has almost stagnated recently, and the job market continues to weaken while cost and price pressures remain, and the Fed will face a double risk trade-off at its key meeting in December.

On Wednesday, the Federal Reserve's Beige Book of Economics report showed that employers in half of the twelve Federal Reserve districts had declined in their willingness to hire. The recently concluded U.S. government shutdown and the application of AI are putting pressure on job seekers' prospects.

At the same time, rising tariffs and health insurance costs have pushed up business spending, potentially exacerbating inflation concerns. Consumer K-shaped differentiation has intensified, and high-income consumer spending in many jurisdictions has remained resilient, but low- and middle-income households are "tightening their belts".

With the recent government shutdown leading to a suspension of a large number of economic data, the Beige Book may be more important to Fed decisions than ever.

There are currently differences within the Fed on the policy direction of the December 9-10 meeting. Some officials are inclined to cut interest rates by 25 basis points due to the slowdown in the labor market, while others advocate keeping interest rates unchanged due to high inflation. The market currently expects a rate cut probability of more than 80%.

(The market currently expects an 81% probability of a Fed rate cut in December)

1. The job market continues to be weak

The situation facing job seekers over the past six weeks has not been optimistic, with half of the Fed's 12 regional branches reporting a decline in employer willingness to hire.

The report noted that while layoff announcements have increased, more companies are limiting the number of employees through hiring freezes, replacement hiring only, and attrition. Multiple employers also adjust the number of hours worked to accommodate higher or lower than expected business volumes.

A small number of companies point out that AI has replaced entry-level positions or increased the productivity of existing employees enough to inhibit new hires.

Employers in most jurisdictions find it easier to recruit, but there are still difficulties in certain skilled roles and fewer migrant workers.

Wages generally grew at a moderate rate, but industries such as manufacturing, construction, and healthcare experienced greater wage pressures due to tight labor supply.

In addition, rising health insurance premiums continue to put upward pressure on labor costs.

2. Tariffs push up costs and put pressure on corporate profits

The Fed noted that manufacturers and retailers faced higher input costs, which they blamed on tariffs.

The U.S. manufacturing and retail industries are generally facing input cost pressures, mainly reflecting the price increase caused by tariffs. Some jurisdictions point to rising costs for insurance, utilities, technology, and healthcare.

While tariffs and tariff uncertainty remain a headwind, manufacturing activity has increased. Non-financial services revenues were mostly flat to declining, with loan demand reporting mixed. The agriculture and energy sectors are largely stable, but some contacts point to low prices for oil and some crops facing environmental challenges.

The degree of transmission of higher input costs to customers varies depending on demand, competitive pressures, consumer price sensitivity, and customer opposition.

Several jurisdictions have reported that companies have experienced margin compression or financial pressure due to tariffs.

The decline in prices for certain materials is attributed by companies to weak demand, delays in tariff implementation, or reductions in tariff rates.

Looking ahead, companies generally expect upward pressure on costs to continue, but there are differences in recent price increase plans.

3. Weak consumption and the impact of government shutdown

Overall consumer spending has declined further, but the market has shown significant polarization.

High-end retail spending remained resilient, while low-end consumption was hit harder. Some retailers have made it clear that government shutdowns have had a negative impact on consumer purchasing decisions.

The Minneapolis Fed quoted a contact as saying:

High-income customers are not restrained, but those in low-income are tightening their belts. Many businesses say consumers are now less willing to accept higher prices as household budgets tighten.

The auto market has suffered a specific shock. Car dealerships reported a decline in EV sales after the expiration of US federal tax credits.

Travel and travel activity have changed little in recent weeks, with some industry insiders noting that consumers are cautious about non-essential spending.

Consumer businesses in the Philadelphia area are reporting difficulty raising prices as more consumers look for discounts. A restaurateur observes that competition has pushed unit prices into unprofitable situations despite family restaurants being full.

Community organizations observed an increase in demand for food assistance, partly due to disruptions to SNAP benefits during government shutdowns. This phenomenon highlights the direct impact of policy uncertainty on low-income groups.