Fed Beige Book Shows K-Shape Upper-Income Strength, Middle Class Struggle

The economy is teetering, especially in the middle class and below.

Fed Beige Book Activity

The Fed Beige Book is a Summary of Commentary on Current Economic Conditions by each of 12 Federal Reserve Districts.

• Slight or Sluggish Expansion: 3 – Boston, Chicago, Cleveland
• Modest Expansion: 1 – Richmond
• No Change: 3- Atlanta, St. Louis, Minneapolis
• Slight Contraction: 2 – Texas, Kansas City,
• Modest Contraction: 2 – New York, Philadelphia
• Mixed: 1 – San Francisco

On average, the Beige Book is slightly net negative. Modest declines in New York and Philadelphia more than offset the modest gain in Richmond.

San Francisco is an interesting case with “Activity in retail trade, agriculture, and residential real estate eased slightly while activity in services and commercial real estate remained largely unchanged on balance.”

That looks like a net slight contraction to me.

National K-Shaped Fed Comments

• Overall consumer spending declined further, while higher-end retail spending remained resilient.
• Reports of travel and tourism activity reflected little change in recent weeks, with some contacts noting cautious discretionary spending among consumers.
• Community organizations saw increased demand for food assistance, due in part to disruptions in SNAP benefits during the government shutdown.
• Revenues in the nonfinancial services sector were mostly flat to down, and reports of loan demand were mixed.
• Prices rose moderately during the reporting period. Input cost pressures were widespread in manufacturing and retail, largely reflecting tariff-induced increases. Some Districts noted rising costs for insurance, utilities, technology, and health care. The extent of passthrough of higher input costs to customers varied, and depended upon demand, competitive pressures, price sensitivity of consumers, and pushback from clients.
• There were multiple reports of margin compression or firms facing financial strain stemming from tariffs. Prices declined for certain materials, which firms attributed to sluggish demand, deferred tariff implementation, or reduced tariff rates. Looking ahead, contacts largely anticipate upward cost pressures to persist but plans to raise prices in the near term were mixed.

Regional K-Shaped Fed Comments

• New York: Consumer spending declined slightly, though higher-end retail spending remained resilient
• New York: Many firms continued to report that tariffs were driving up their costs and selling prices. A consumer-facing firm dependent on imported goods filed bankruptcy while a brass machining company said it may go out of business, both a consequence of tariffs.
• New York: A New York City area contact reported that the combination of congestion pricing, property taxes, and other regulatory expenses were a significant burden on its business. Some contacts reported sharp jumps in health insurance premiums. Looking ahead, firms expected pricing pressures to remain significant.
• New York: While smaller retailers reported sharp declines, higher-end retail spending remained resilient.
• New York: An upstate New York retailer near the Canadian border reported weak sales due to declining visits from Canadian shoppers.
• Philadelphia: Price pressures continued to pop up with increasing harm to low- and now middle-income households.
• Philadelphia: Small businesses have also been struggling to survive amid uncertainty driven by state and federal government actions.
• Philadelphia: Firms continued to report cost pressures from tariffs, insurance, health care, and energy. In our monthly surveys, the diffusion indexes for prices paid and prices received broadened among manufacturers and were well above their nonrecession averages.
• Philadelphia: A restaurateur observed that although family restaurants are full, competition has driven menu pricing into unprofitable territory.
• Philadelphia: One manufacturer noted that “our larger competitors will raise prices in the first quarter of 2026. Not because it is justified, but because they can.”
• Cleveland: Manufacturers reported tariff-related cost increases for equipment and materials, and one observed that most manufacturers had run out of lower-cost pre-tariff inventory. One large retailer’s average costs had increased around 20 percent year-overyear because of tariffs, and it was trying to determine how it would distribute these increases. By contrast, another large retailer did not anticipate further cost increases, stating that tariff impacts had stabilized.
• Atlanta: Smaller businesses have found little ability to negotiate with suppliers alongside limited pricing power. Alternatively, larger firms have been “sharing the squeeze” on margins through the supply chain, with various suppliers absorbing portions of the tariffs. However, many firms have exhausted cost-cutting methods and plan to implement price increases in the coming months by targeting increases toward products with stronger demand to minimize broader demand erosion.
• St. Louis: Consumer spending has declined modestly, with contacts attributing the slowdown to uncertainty and tighter budgets. Auto dealers reported that sales had fallen short of expectations as consumers were cautious with spending and some customers were also more credit challenged.
• St. Louis: A restaurant owner reported seeing fewer customers and declines in spending per visit. Another restaurant contact noted their daily regulars were now coming in just two or three times a week and not ordering full meals like they used to.
• Minneapolis: Prices increased moderately, a faster pace of growth than the previous report.
• Minneapolis: Business contacts continued to report increases in employee health-care premiums for the coming year. Meanwhile, a medical provider said insurance payments were not keeping pace with increased costs for medical supplies and labor.
• Minneapolis: A brewery reported that aluminum can prices recently increased 18 percent.
• Dallas: Employment fell on net, and prices increased moderately. Outlooks generally worsened, with contacts citing an economic slowdown, tariff concerns, interest rates, and heightened uncertainty.
• Dallas: A health-care contact cited hiring challenges for residency positions because of much-higher H-1B visa fees.
• Dallas: A manufacturer noted rising raw material costs from international vendors as well as national suppliers. Another said tariffs have now begun to more deeply impact their overall margin and profitability, and that they expect this to continue for the next several months. Some contacts said customers were pushing back on price increases. One noted difficulty in collecting outstanding customer payments.
• San Francisco: One contact in agriculture highlighted increased difficulties in hiring workers due to immigration visa revocations.
• San Francisco: Higher local minimum wage requirements or recent labor union contract negotiations contributed to wage pressures in some areas.
• San Francisco: Conditions for community support and services organizations worsened this reporting period. Demand increased for food assistance in particular, which a number of contacts attributed to the government shutdown and reductions in SNAP benefits. Inventories at some food banks were strained by the increase in demand.

Four Key Takeaways

1. The poor and middle classes are having a harder time than the wealthy.
2. Small businesses are struggling more with tariffs than large companies.
3. Consumers turn cautions on discretionary spending.
4. Tariffs still apply upward cost pressures

Point of No Return

The anecdotes suggest we have finally reached the point of no return. Businesses have exhausted their lower-cost tariff front run inventories.

Businesses will now have to eat the costs or pass them on. Many small businesses that cannot raise prices will be forced out of business.

What’s the Fed Doing?

Spending at the upper end is still strong. So are reported price pressures.

One has to wonder if the Fed pivot from no rate cut in December to an 87 percent chance now was to bolster the stock market to keep high end spending up.

There was no news to explain the round trip in rate cut odds from 80 percent to 30 percent back up to 80 percent.

The longer the Fed tries to stave off recession, the worse it will be when the dam finally breaks.

Meanwhile, affordability talk by Congress and Trump is ridiculous.

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