Hiring and Investment on Hold... Beige Book: "U.S. Companies Take Wait-and-See Approach Amid Iran War"

April Beige Book. U.S. Federal Reserve (Fed)

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"Let's wait and see."

The Iran war is shaking the foundations of the U.S. economy. The closure of the Strait of Hormuz has caused a sharp rise in international oil prices, leading to heightened uncertainty. The U.S. Federal Reserve (Fed) reported that companies across the United States are taking a wait-and-see approach, putting hiring, investment, and pricing decisions on hold. Notably, while the Beige Book in February focused on 'productivity improvement' with the adoption of artificial intelligence (AI), this edition refers to AI as a 'reason for layoffs,' drawing attention.

On April 15 (local time), the Fed stated in its economic conditions report, the "Beige Book," that "the Middle East conflict was cited as a major source of uncertainty complicating decisions related to hiring, pricing, and capital investment," and assessed that "many firms have adopted a wait-and-see attitude."

Regarding prices, the report noted, "Energy and fuel costs have surged sharply in all districts due to the Middle East conflict," and pointed out, "As a result, transportation and delivery costs, as well as prices of plastics, fertilizers, and other petroleum-based products, have risen."

While overall inflation was moderate, energy and fuel costs soared in all 12 Fed districts. The report also explained that inflationary pressures are spreading beyond the energy sector to other areas. The Wall Street Journal (WSJ) reported that the Iran war has rapidly become the biggest risk factor for executives, with this trend appearing nationwide.

Companies in the Northeast region told the Federal Reserve Bank of New York that "energy costs, including fuel surcharges, have increased due to the Middle East conflict." One company reported that these price hikes also affected transportation expenses and raw material costs for agricultural products.

Some companies in the Midwest region told the Federal Reserve Bank of Chicago that the war has created the potential for shortages of certain chemicals. The Federal Reserve Bank of St. Louis reported that the war "has caused significant volatility in the agricultural sector, affecting sales of farming equipment and leading to a sharp rise in fertilizer prices."

A supermarket located in Manhattan, New York, USA. New York (USA) ? Yoonju Hwang, Correspondent

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In particular, 'K-shaped' polarization is intensifying. There has been an increase in demand for food banks among low-income groups, and consumption has shifted to lower-priced products. On the other hand, high-income groups have maintained resilience in spending on luxury goods, asset management, and travel.

The report explained, "Many districts continued to report signs of consumer financial pressure, increased price sensitivity, and growing demand for food banks and other social service agencies; however, spending among high-income consumers remained resilient."

This phenomenon was especially pronounced in New York. The Federal Reserve Bank of New York noted in the report, "Consumers have become more cautious due to the Middle East conflict," and observed that "a restaurant owner reported that rising costs for cars, insurance, and food have limited spending by working-class consumers." There has also been an increase in the shift from cash to credit card payments; the New York Fed assessed that "this suggests a tendency for consumers to borrow more to support spending."

The U.S. labor market remained mostly stable in terms of employment. However, the report noted, "While companies have become more cautious about hiring full-time employees, demand for temporary or contract workers has increased in some regions."

For the first time, there was widespread evidence that productivity gains from artificial intelligence (AI) are causing hiring delays and reducing demand for employees with less experience. New York, Atlanta, and San Francisco mentioned that "AI has reduced hiring," while Boston cited AI as "one of the causes of layoffs."

Manufacturing activity experienced little change. Instead, manufacturers reported higher costs due to steel and aluminum tariffs and increased fuel expenses, according to the report.

Additionally, the report stated that heightened uncertainty from the Iran war has led to a rise in mortgage rates, which has dampened demand for home purchases. In contrast, the commercial real estate market has improved, with industrial real estate-including data center projects-showing strong performance.

Meanwhile, the Beige Book is a report evaluating recent economic trends in the 12 Federal Reserve districts and is used as a reference for the Federal Open Market Committee (FOMC) meetings.

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