By Lindsay Dunsmuir
(Reuters) -U.S. economic activity was little changed from September through early October and firms saw a slight uptick in hiring, continuing recent trends that have reinforced expectations the Federal Reserve will opt for a smaller 25-basis-point reduction in borrowing costs in two weeks.
The U.S. central bank’s latest temperature check on the health of the economy also showed that inflation pressures continued to moderate while input prices generally rose faster than selling prices, denting firms’ profit margins.
The economy, and inflation in particular, remains a key issue among voters ahead of the Nov. 5 U.S. presidential election.
“On balance, economic activity was little changed in nearly all Districts since early September, though two Districts reported modest growth,” the Fed said on Wednesday in the survey known as the “Beige Book,” which polled the business contacts of each of its 12 regional banks through Oct. 11. “Despite elevated uncertainty, contacts were somewhat more optimistic about the longer-term outlook.”
The central bank last month began an easing cycle with an unusually large half-percentage-point cut in its policy rate, lowering it to the 4.75%-5.00% range, amid increasing concerns about the labor market. The Fed hiked rates by 525 basis points in 2022 and 2023 to quash high inflation.
A string of stronger-than-expected economic data on consumer spending, job gains and inflation since then has caused investors to dial back bets on the pace and extent of rate cuts.
The resilient economy has been underpinned by firm income growth and ample household savings. Though labor market momentum has slowed, the level of layoffs remains historically low, supporting wage gains.
U.S. job gains increased by the most in six months in September and the unemployment rate fell to 4.1%, while retail sales increased solidly last month.
The steadiness of the labor market was reflected in the latest survey, with more districts than in the prior survey reporting slight to moderate growth.
Demand for workers, however, eased somewhat. A source at a Minnesota supply company told the Minneapolis Fed “I about fell out of my chair” at the interest it received for a high-skill driving position it had previously struggled to fill.
But there were few signs of outright deterioration, with layoffs remaining limited. The San Francisco Fed noted that some employers had begun hiring for open positions that had been on hold for the past year, while wages across Fed districts “generally continued to rise at a modest to moderate pace.”
OPTIMISM AMID ELECTION UNCERTAINTY
Investors currently expect the Fed to cut rates by a quarter of a percentage point at its Nov. 6-7 policy meeting, with another reduction of the same size in December.
A number of contacts across the country cited the drop in borrowing costs and the expectation for more cuts ahead as a reason for optimism.
But uncertainty around the election, the outlook for inflation, and the path of interest rates continued to weigh in many parts of the country. “Businesses remained hesitant to make hiring decisions due to uncertainty surrounding the presidential election,” the New York Fed said.
The Fed, which is aiming to keep the economy humming and unemployment low while returning inflation to its 2% target, is also still keeping a watchful eye on price pressures.
The pace of annual price increases, based on the Fed’s preferred measure, slowed to 2.2% in August from 2.5% in July. However, a different measure that strips out volatile food and energy components edged up to 2.7% from 2.6%.
Selling prices rose at a slight or modest pace in most of the Fed’s districts, the central bank’s survey showed, although prices for some everyday food items, such as eggs and dairy products, increased more sharply. In line with prior reports, consumers were also described as more sensitive to prices.
Input prices generally rose moderately. In multiple districts the price of inputs rose faster than selling prices, dampening company profits. Pressures from rising insurance and healthcare costs were particularly acute, the report said.
(Reporting by Lindsay Dunsmuir and Ann Saphir; Editing by Paul Simao)
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