Fourth District Beige Book

Summary of Economic Activity

Fourth District reports suggested that business activity increased slightly in recent weeks, and contacts expected flat activity in the months ahead. Demand for professional and business services increased moderately, partly driven by tax policy changes. By contrast, demand for manufactured goods declined slightly, though some manufacturers reported a boost from AI data centers. On balance, contacts said that their employment levels were flat and that wage pressures grew modestly. Nonlabor cost pressures remained robust, and selling prices grew moderately.

Labor Markets

Reports indicated that employment levels were flat on net in recent weeks. Several contacts across industries restricted hiring through freezes or replacement-only policies in response to softening demand and elevated labor costs. Meanwhile, many contacts reported prioritizing revenue-generating positions while reducing support roles. Some large retailers proceeded with usual holiday season hiring, while other retailers decreased staffing levels because of slow sales. Several manufacturers mentioned using AI tools and automation technologies to enhance worker productivity, which enabled one to reduce its office staff by 15 percent. Moreover, some manufacturing and freight contacts reported laying off staff because of declining orders and uncertain outlooks.

On balance, wage pressures grew modestly in recent weeks. Improved worker availability and reduced turnover contributed to moderating wage growth across industries. Still, pockets of upward pressure remained for specific sectors and for workers with specialized skillsets. Services firms reported that competition for skilled workers continued to push wages up in engineering, accounting, trades, and health care. Manufacturing and freight contacts implemented strategic wage increases to retain workers with critical skillsets. Some retailers noted that competition for entry-level workers drove wages up, while others indicated that reduced sales prohibited them from raising wages further.

Prices

Overall, nonlabor input costs increased at a robust pace in recent weeks, continuing the trend seen over the past four reporting periods. 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-over-year 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. Outside of tariffs, many contacts continued to report rising utilities and insurance costs. In general, nonlabor costs were expected to grow at a strong pace in the coming months.

Contacts generally indicated that selling prices rose moderately in recent weeks, continuing the upward trend that started in late 2024. Contacts across industries continued to raise prices to cover elevated costs, with several manufacturers and retailers passing along tariff-related cost increases to customers. Some commercial construction contacts reported gaining pricing power because of increased demand, while weaker residential demand prompted some real estate contacts to offer “significant discounts” on apartment leases and “heavy incentives” on single-family-house purchases. Several manufacturing and professional and business services contacts reported holding prices steady because of competitive pressure and softer demand in what one contact called a “price war.”

Consumer Spending

Consumer spending was flat in recent weeks, and contacts expected demand to decline modestly in the coming months. Among retailers reporting flat sales, one noted continued pressure on lower-income consumers and early signs of strain on middle-income consumers, while a higher-end grocery store observed price-conscious behavior among customers. Several contacts connected changes in consumer spending to federal policies. A grocery store reported a decline in sales, citing the pause in SNAP and WIC funding alongside a general pullback in spending due to economic concerns. A food and hospitality contact reported that customers, many of whom are federal workers, were spending cautiously. Purchases made ahead of expiring EV tax credits boosted EV sales, but an auto dealership said that lack of affordability suppressed other new vehicle sales, and another dealership’s middle-income consumers had “sticker shock.”

Manufacturing

Contacts reported that demand for manufactured goods fell slightly after declining modestly in the prior reporting period. Several producers reported softer orders from light vehicle manufacturers, a circumstance which they attributed to slower auto sales and a chip shortage that disrupted some production. Although multiple contacts continued to report strong demand related to rapidly expanding AI data center construction, some described a “collective holding of breath” as these fast-paced buildouts became a primary driver of demand even as other industry segments remained weak. Multiple contacts added that demand from data centers was not enough to offset softer activity in other industries. Still, manufacturers generally expected demand to increase slightly in the coming months.

Real Estate and Construction

Residential construction and real estate contacts reported that demand declined slightly in recent weeks as still-high mortgage rates continued to hinder activity. One homebuilder who said that demand had been strong in 2025 cautioned that bids on new projects had slowed considerably in recent months. Residential contacts generally expected flat demand in the coming months.

On balance, commercial construction and real estate contacts reported a slight increase in demand in recent weeks. While some reported stronger activity as clients’ confidence in the overall economy improved and data center construction continued, others reported slowdowns related to regulatory delays or still-soft demand for consumer-facing spaces, including hotels, restaurants, and apartments. Commercial contacts generally expected activity to increase slightly in the coming months.

Financial Services

Bankers reported that loan demand increased moderately in recent weeks as clients were encouraged by declining interest rates and decreasing economic uncertainty. Looking ahead, bankers expected loan demand to increase slightly ahead of anticipated interest rates declines, although one banker indicated that commercial clients remained cautious about investing. Overall, core deposits increased slightly. While most bankers indicated that delinquencies were flat, a few said that delinquency rates had increased for certain loan categories, including indirect auto loans, loans issued under Special Purpose Credit Programs, and loans issued to firms facing margin pressure from increased tariffs.

Nonfinancial Services

Demand for professional and business services grew moderately in recent weeks. Several accounting firms cited changes to tax law as driving demand for their tax planning services. The evolving data needs of businesses stimulated growth for some contacts’ services. One software firm saw increased demand due to customers seeking more granular operations data, while an accounting firm reported increased activity because of AI adoption. Contacts expected demand to be flat in the coming months, and a law firm believed that clients were hesitating on deals because of economic uncertainty. Freight contacts reported a modest decline in demand in recent weeks and expected a moderate decline in demand over the coming months.

Community Conditions

Reports were mixed from Community Development Financial Institutions (CDFIs), specialized financial institutions that serve low- and moderate-income communities, including small businesses and nonprofits seeking investments. Some CDFIs that serve small businesses saw increased inquiries about starting a business, providing financing, or opening a line of credit. Meanwhile, some loan-fund CDFIs reported a decline in investment activity by businesses due to economic uncertainty and by nonprofits concerned about future funding streams. Several contacts were monitoring federal policy changes related to CDFI certifications and tax credit administration, and one was concerned that changes to the CDFI infrastructure would impede economic development in low- and moderate-income communities.