Fed's Beige Book Warns of Weaker Consumption... Highlights 'K-Shaped' Polarization in Spending

Decline in Spending Among Middle- and Low-Income Groups,
While High-Priced Goods Remain Resilient
Slight Decrease in Employment, Moderate Rise in Prices

The Federal Reserve (Fed) has reported signs of slowing consumer spending among middle- and low-income Americans. While high-income earners continue to spend, benefiting from rising stock prices and other factors, there is growing concern that middle- and low-income groups are cutting back on expenditures due to weakened purchasing power, intensifying the so-called 'K-shaped' polarization in consumption.

Federal Reserve (Fed) building in the United States. Photo by Reuters Yonhap News

In its Beige Book, an economic conditions report released on the 26th (local time), the Fed stated, "Overall consumer spending has declined further, while spending on luxury retail items has remained solid." The report also added, "Consumers are showing caution toward discretionary spending (non-essential expenditures)."

Overall economic activity and outlook have largely remained stable.

The Beige Book noted, "In most of the 12 districts, economic activity was unchanged since the previous report," adding, "Two districts experienced a modest decline, and one district saw a slight increase." It continued, "The overall outlook has also changed little," and while some pointed out that downside risks to the economy have increased in the coming months, there were also some optimistic views among manufacturers.

Employment was assessed to have declined slightly, while prices continued to rise at a moderate pace. Although there was an increase in layoff announcements, most workforce adjustments were made through hiring freezes or natural attrition rather than actual job cuts.

The most notable change was in the consumer sector. The Federal Reserve Banks of New York, Atlanta, and Minneapolis reported that spending among high-income groups remains resilient. The Minneapolis Fed stated, "High-income earners are not constrained in their spending, but middle- and low-income groups are tightening their belts." The Beige Book also reported, "Some retailers indicated that the federal government shutdown (temporary work stoppage) had a negative impact on consumer purchases," analyzing that the shutdown, which lasted a record 43 days from the 1st of last month, added further pressure to already subdued consumption.

Since the COVID-19 pandemic, accumulated inflation and recent concerns over a slowing labor market have further eroded the purchasing power of middle- and low-income groups. In September, retail sales increased by just 0.2% from the previous month, signaling a loss of momentum in the recovery. The Conference Board's Consumer Confidence Index for November dropped 6.8 points from the previous month to 88.7 (1985=100), marking the lowest level in seven months since April. Analysts attribute this to high prices and a deteriorating employment outlook weighing on consumer sentiment.

The Beige Book is a comprehensive report assessing economic conditions across the 12 Federal Reserve districts. The Fed uses it as a foundational reference for the Federal Open Market Committee (FOMC) meeting scheduled for December 9-10. According to CME FedWatch, the market currently reflects an 82.9% probability that the Fed will cut its benchmark interest rate-currently at 3.75-4.0% per year-by 0.25 percentage points in December.

This content was produced with the assistance of AI translation services.