US Firms Experience Slower Employment Growth Amid Economic Deceleration, Fed Survey Reveals

By Lindsay Dunsmuir

U.S. economic activity has shown slower growth from mid-July to late August, with businesses becoming more cautious about hiring. These trends highlight the rationale behind the Federal Reserve’s anticipated decision to lower interest rates later this month.

The latest assessment of economic health from the U.S. central bank indicated that inflationary pressures continued to rise at a modest rate, though input costs were perceived as generally easing across most of the Fed’s 12 districts.

According to the Fed’s recent "Beige Book" report, which surveyed business contacts through August 26, three districts noted a slight increase in economic activity, while the number of districts reporting stagnant or declining activity grew from five to nine. Employers appeared to be more selective in their hiring practices and less inclined to expand their workforces due to concerns about demand and an uncertain economic outlook.

Federal Reserve Chair Jerome Powell and his colleagues have signaled their intention to reduce the central bank’s benchmark interest rate, currently set between 5.25% and 5.50%, during their policy meeting on September 17-18. The primary question remains whether the weakening labor market conditions will warrant a quarter-percentage-point cut or a more significant half-percentage-point reduction.

The report indicated a decline in consumer spending across most districts, following a period of general stability. For instance, consumer spending in the Richmond Fed district "softened slightly," influenced by a hardware retailer reporting lower average sales, a restaurant chain looking to increase sales through promotional menus, and a drop in vehicle sales attributed to higher financing costs.

The Fed aims for a "soft landing" for the economy, hoping for gradual growth deceleration and a relatively low unemployment rate while striving to bring inflation, which peaked at a 40-year high two years ago, back to the 2% target.

After facing unexpectedly high inflation earlier in the year, the annual price increase rate declined to 2.5% in July, with Fed officials increasingly confident about achieving their goal.

In the labor market, the unemployment rate rose to nearly a three-year high of 4.3% in July, marking the fourth consecutive monthly increase. This rise has raised concerns that high borrowing costs could overly dampen labor demand.

Current trends indicate that the slowdown in the job market has primarily stemmed from reduced hiring rather than layoffs, as the Fed’s survey reported low instances of layoffs. Job openings fell to a three-and-a-half-year low in July.

While five Fed districts cited slight or modest employment growth, some reported that businesses were reducing shifts and hours, leaving advertised positions unfilled, or decreasing headcounts through attrition. Several contacts in the Atlanta Fed district mentioned a slowdown in hiring, while other districts reported reductions in workers’ hours.

On a positive note regarding inflation, companies generally expect price and cost pressures to stabilize or further ease. Several districts indicated that consumers were becoming more selective in their purchasing decisions, reflecting recent trends.

A large online retailer noted that many visitors were particularly looking for products with markdowns or promotional pricing, while a clothing retailer in the Boston Fed district planned to implement price cuts on popular items to attract customers dissuaded by previous price increases since the pandemic.

Market analysts currently anticipate that the Federal Reserve will lower borrowing costs this month, as well as in November and December.