Fed Beige Book: Slight Economic Growth, Rising Business Optimism

PYMNTS Intelligence, through the last several months, has taken stock of where consumers are spending, and how they contend with inflation.

Among their strategies has been a willingness to trade down, to buy cheaper goods that may be a bit of a tradeoff in quality, but in the end means consumers are not going completely without the item itself.

As we reported earlier this year, our studies show that 36% of consumers have traded down from their go-to grocery products to cheaper versions of them, and 35% did the same for retail products.

The trend may continue.

The Federal Reserve’s eighth and last 2024 installment of its Beige Book — wherein the 12 regional banks weighed in about consumer and business demand, and general economic conditions — appeared Wednesday (Dec. 4).

And while the survey noted that there was slight economic growth overall, through November it may be the case that things are about to ramp up. The qualitative assessments by the banks noted that businesses are sanguine about end demand.

And consumers, in addition, are showing (mostly) steady to positive spending trends.  But they remain price sensitive, and for the businesses serving those consumers, passing along their own higher operating costs remains a challenge.

“Growth in economic activity was generally small, expectations for growth rose moderately across most geographies and sectors,” and the release that accompanied the report added that “business contacts expressed optimism that demand will rise in coming months. Consumer spending was generally stable.”

Elsewhere, the Fed noted, “Many consumer-oriented businesses across districts noted further increases in price sensitivity among consumers, as well as several reports of increased sensitivity to quality.”

The chart below indicates that only two banks were negative on consumer spending; the remainder were neutral to mixed, or at least somewhat positive on spending.

The sentiment may be underscored by the fact that wage growth has softened to what was called a “modest pace” across districts; expectations for wage growth were modest too. Hiring activity was called “subdued.”

Margin Pressure Ahead?

Despite flattening inflation, increased price sensitivity was reported for 7 out of 12 branches in the Federal Reserve System. Both consumer-oriented and business-oriented contacts reported greater difficulty passing costs on to customers.

There are indications that margin pressure may be coming to bear on Main Street firms. Respondents told the Fed that some input prices were rising faster than selling prices for most businesses, resulting in declining profit margins. Several reports indicate this as a growing concern with 2025 in mind, with businesses in most regions reporting some degree of uncertainty about the impact of potential tariff changes on their supply costs.

Rising costs, we note, may spur smaller firms to tap external financing — when they can get it. Slightly more than a third of these firms have access to credit cards. As PYMNTS Intelligence has reported in a separate study, among small businesses that have access to financing, more use it out of necessity than as a deliberate strategy. While 37% percent use financing out of necessity, 35% use it more strategically.