The unexpected acceleration in the U.S. services sector in August was substantiated by anecdotes in the Fed’s latest Beige Book. The latest report used information on current economic conditions collected by the Kansas City Fed on or before August 28. In the previous report, economic activity was reported as increasing slightly (five Districts reported slight or modest growth, five noted no change and two indicated slight and modest declines). In the September issue, most Districts indicated economic growth was modest with the caveat that tourism spending was stronger than expected amid the "last stage of pent-up demand" from pandemic times.

Labor Markets: Employment growth was "subdued" though most Districts still mentioned that imbalances persisted, amid a shortage of skilled workers and applicants. Consequently, wage growth pressures continued in most areas although many contacts suggested “the second half of the year will be different”. The expected moderation in wages is a positive for corporate profit margins and the Fed as it attempts to push inflation lower.

Prices: This paragraph was decidedly mixed. Most Districts saw a slowdown in price growth, but several Districts reported a sharp rise in property insurance premiums. Others mentioned that selling prices slowed versus input costs, implying some difficulty passing along cost increases to consumers. In turn, this suggests consumer demand has weakened.

Bottom Line: Economic growth is moderating, along with hiring activity and slower labor costs are expected in the second half of the year. All of these are positive signs for the Fed as it seeks to tamp down inflation and engineer a soft landing. But, there are signs that consumer demand could moderate in the months ahead.

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