Beige Book Shows Cooling Consumption, Labor Softening, and Stubborn Inflation

The Federal Reserve's Beige Book serves as a critical pulse check for U.S. economic health, gathering qualitative snapshots from each district through interviews with businesses and economists. This November 2025 edition synthesizes regional activity across sectors, offering policymakers raw material to gauge inflationary pressures and labor market trends in near real-time.

District reports reveal growing caution. Consumer spending slowed, with retailers noting cautious shopping habits amid price sensitivity. Hiring activity weakened sharply, as companies leaned on hiring freezes, AI-driven productivity gains, and cuts to entry-level roles to control costs. Rising health insurance premiums and tariff impacts also squeezed input expenses, though some material prices softened due to lower demand. These mixed signals underscore persistent challenges in balancing inflation control with labor market sustainability.

The Beige Book directly feeds into monetary policy debates. Recent district findings have bolstered arguments for easing policy, with officials like New York Fed President and Minneapolis Fed's pointing to the softing job market as justification for a December rate cut. However, dissent persists – notably from Boston Fed's – who warns against complacency on inflation risks even as markets price over 85% odds of a move. While the Beige Book alone won't dictate policy, its ground-level insights provide essential context for FOMC deliberations, highlighting both near-term frictions and longer-term structural shifts like 's labor market impact.

Discretionary Pullback Masks Premium Resilience

Consumer spending showed clear income-tier divergence in late 2025. Overall activity stayed flat, but discretionary purchases weakened notably. Auto sales, a key discretionary indicator, declined significantly as middle-income households grew cautious. This pullback reflected broader economic caution, amplified by a slowing retail activity. Employers reduced hiring and hours, particularly impacting entry-level roles through , pressuring middle-income budgets.

Despite this softening, higher-end retail demonstrated unexpected resilience. Luxury goods and premium department stores held up better than mass-market retailers, suggesting affluent consumers maintained spending even as conditions tightened. This divergence highlights differing consumption patterns based on financial security.

However, this premium resilience faces headwinds. Rising price pressures, partly driven by , are creating friction. While pass-through to consumers varied, input cost increases in manufacturing and retail squeezed margins. The government shutdown further disrupted activity, delaying purchases and creating uncertainty. These factors, combined with a cautious labor market outlook, mean the strength in high-end retail may not fully offset the broader discretionary slowdown. Earnings pressure appears concentrated below the premium tier, but durability of the resilience hinges on whether tariff costs and policy disruptions ease or worsen.

Labor Market: Hiring Freezes and AI-Induced Pressure

Hiring freezes are becoming a widespread tool as companies navigate softer demand and rising costs, contributing to labor market headwinds. Employment in the Second District fell slightly in November 2025, with layoffs concentrated in construction, education, and healthcare. New data confirms employers are actively limiting workforce growth through hiring freezes, gains and significantly reducing entry-level roles. This shift is pressuring overall wage growth, which slowed despite stronger gains persisting in some labor-intensive sectors.

The rise of artificial intelligence is reshaping job markets, creating competition for tech/AI roles even as it reduces demand in areas like customer service. Companies are using this productivity tool not just to cut costs but to manage headcount expansion directly. Combined with reduced entry-level hiring, this points to a more rigid workforce composition. However, these cost-saving measures face counter-pressure. Rising health insurance costs and import tariffs are squeezing labor and input expenses, complicating the equation for businesses trying to balance efficiency with compensation.

While AI boosts productivity, its impact on overall hiring remains mixed. The widespread adoption of hiring freezes signals caution among employers facing muted consumer spending. This cautious approach, coupled with the pressure from rising non-labor costs, suggests the sustainability of these labor market adjustments is uncertain. The Federal Reserve's anticipated rate cut reflects growing concern over this softening job market, though officials remain divided on the appropriate response amid persistent inflationary pressures.

Tariff-Driven Input Cost Inflation

Businesses are grappling with sharply higher input costs, driven significantly by tariffs and persistent energy expenses, according to the November 2025 Beige Book. While these supply-side pressures intensified, companies faced challenges passing all these increases onto customers, as selling price hikes moderated. This disconnect between rising input costs and more measured selling price adjustments creates clear margin compression risks across affected sectors.

The moderation in price pass-through reflects competitive market dynamics and growing , especially among . Firms are finding it increasingly difficult to fully absorb or transfer the full burden of tariff-induced cost shocks without risking lost sales. This situation forces difficult trade decisions: absorb higher costs to maintain volume, risk margin erosion; or raise prices cautiously, potentially sacrificing market share.

Margin sustainability becomes a critical question. If tariff costs remain elevated while consumer demand softens, particularly in discretionary categories, the ability of companies to maintain historical profit levels could be severely tested. Businesses reliant on imported materials face a persistent headwind, and the lack of full price recovery threatens to squeeze operating margins unless offset by other efficiencies or demand resilience.

Policy Risks and Downside Scenarios

Government shutdown disruptions add noise to economic data and slow retail activity, complicating near-term business outlooks for steelmakers like ArcelorMittal and masking true demand trends. While markets now price over 85% odds of a December Fed rate cut due to softer hiring and spending, dissent exists within the Federal Reserve, with officials wary of if cuts are premature. This policy uncertainty creates a "wait and see" environment that often dampens major capital allocation decisions.

The path to any rate cut faces a compliance hurdle. Even if the Fed acts in December, simultaneous regulatory evolution around carbon border taxes could offset cost benefits. New EU CBAM rules, while simplifying compliance for 2026, leave the core carbon pricing mechanism and potential future fee structures ambiguous during the initial phase. This regulatory gray area forces ArcelorMittal to plan cautiously, delaying investment decisions tied to clear carbon cost signals and limiting upside from any rate-driven liquidity relief.

Margin compression remains a tangible threat. Rising health insurance costs and persistent tariffs directly squeeze input expenses, pressures that may not ease with monetary policy easing. Furthermore, if the Fed delays cuts due to unexpectedly sticky inflation, higher borrowing costs extend pressure on steel producers already facing volatile demand. The combination of delayed monetary support, unresolved carbon pricing, and input cost pressures creates a challenging environment where ArcelorMittal's profitability could face sustained headwinds if policy actions fall short or regulatory clarity lags.