U.S. economy is sagging with Iran war one major source of uncertainty for business, Fed’s ‘beige book’ finds
The U.S. economy is losing momentum as businesses confront a murkier outlook shaped by higher borrowing costs, uneven consumer demand, and mounting geopolitical risks tied to conflict involving Iran, according to the Federal Reserve’s latest Beige Book survey of regional conditions.
The report, a compilation of anecdotes from companies and community contacts across the Fed’s 12 districts, points to growth that is flat to slightly positive overall, with more firms describing a cooling in activity than an acceleration. While inflation pressures have generally eased from their 2022–2023 peaks, input costs remain volatile and price-setting power continues to erode in many consumer-facing sectors.
A central theme running through business comments is uncertainty. Executives cited the potential for wider conflict in the Middle East—particularly scenarios that disrupt energy supplies or shipping lanes—as a key swing factor for costs, inventories, and investment plans. Several contacts reported building precautionary stocks, renegotiating contracts to address delivery risks, and facing higher insurance and freight charges tied to elevated tensions, even absent a direct hit to their operations.
Consumer and labor trends cool
Retailers and consumer-goods producers described a slower pace of spending, with households trading down to lower-priced options and showing greater sensitivity to promotions. Durable goods demand was soft, and order books thinned in categories like furniture and appliances. Services spending, especially in travel, leisure, and restaurants, held up better but has cooled from earlier in the year as price fatigue sets in.
Labor markets, while still tight by historical standards, continue to loosen at the margin. Businesses reported easier hiring and longer candidate pools, slower wage growth, and reduced turnover. More firms are freezing headcount or limiting backfills, and signing bonuses are less common. Some districts noted rising availability of part-time work and a pickup in hours reductions, though outright layoffs remain targeted rather than broad-based.
Prices and margins under pressure
Companies broadly indicated that disinflation is progressing but uneven. Goods prices have softened in several categories due to discounting and inventory management, while services prices remain stickier given labor and rent costs. Energy, shipping, and select commodities are injecting renewed volatility into input costs. Many firms said they can no longer pass through increases as readily as in 2022–2023, compressing margins and prompting cost cuts in other areas.
Manufacturing and trade adjust to shocks
Manufacturers cited a mixed picture: aerospace, defense-adjacent, and select electronics remain resilient, but producers tied to construction, consumer durables, and industrial machinery reported weaker new orders and shorter backlogs. A number of contacts said buyers are keeping inventories lean and are more reluctant to commit to large or long-dated orders.
Logistics providers flagged higher uncertainty around routing and insurance, with some shippers diversifying away from choke points that could be affected by Middle East tensions. Longer lead times and precautionary re-routing add cost and complexity, even when physical disruptions are limited. Businesses also noted that hedging strategies for fuel and key inputs have become more expensive given headline risk.
Energy, real estate, and finance
Energy sector contacts described cautious capital spending plans amid price volatility and persistent investor pressure for returns over growth. Exploration and production activity is steady to slightly softer, with firms prepared to adjust quickly if prices swing on geopolitical developments.
Commercial real estate stress remains centered in office, where vacancies are elevated and refinancing conditions tight. Industrial and data-center demand is relatively firmer, while multifamily shows signs of stabilization in some regions but faces supply overhangs in others. Banks reported softer loan demand overall, tighter credit standards, and a modest uptick in delinquencies among lower-income households and in certain commercial portfolios.
Geopolitics as a business planning risk
Across sectors, the possibility of a broader conflict involving Iran looms as a planning variable rather than a baseline assumption. Many firms sketched scenario trees: a contained conflict that nudges oil and transport costs higher but leaves demand intact; an escalation that meaningfully disrupts shipping lanes or energy supply, risking a fresh inflation impulse; or a de-escalation that allows disinflation to resume and planning visibility to improve. The lack of clarity, executives said, is itself a drag—encouraging delays in capital expenditure, expansions, and hiring.
Outlook and policy implications
On balance, contacts expect little to modest growth over the next six months, with the balance of risks tilted to the downside. The softening in demand, cooling labor markets, and slower price gains suggest the economy is bending rather than breaking, but businesses emphasized they are prepared to tighten belts quickly if costs spike or orders falter.
For the Federal Reserve, the Beige Book’s portrait reinforces a cautious stance. Disinflation appears to be progressing, yet service-sector stickiness and potential energy shocks argue for patience in declaring victory. A renewed oil-price surge tied to Middle East tensions could complicate the path to the 2% inflation goal and prolong higher-for-longer interest rates. Conversely, if geopolitical risks recede and demand continues to cool, the door could open to a gradual easing of financial conditions.
As always, the Beige Book is not a forecast but an aggregation of on-the-ground sentiment. Right now, that sentiment suggests a U.S. economy that is still expanding, but more slowly—and increasingly at the mercy of forces far from America’s shores.
