U.S. Economy Contracts as Tariffs Fuel Price Hikes, Hiring Freezes

The Federal Reserve's latest Beige Book report, released on Wednesday, indicates that the U.S. economy has experienced a slight contraction over the past six weeks. The report highlights that businesses have slowed their hiring efforts, and both consumers and enterprises have become more cautious due to price increases related to tariffs.

The report states, "Economic activity has slightly decreased since the last report on April 23." All 12 regions of the Federal Reserve reported high levels of economic and policy uncertainty, leading to hesitation and caution among households and businesses in their decision-making processes.

In terms of employment, most regions reported that hiring has "remained nearly unchanged," with seven regions describing employment as "stable." Despite an increase in the number of job seekers and a decrease in employee turnover, labor demand has declined across all regions. This includes reduced work hours, decreased overtime, hiring freezes, and layoff plans. Some regions reported layoffs in specific industries, but these instances were not widespread.

Regarding inflation, the report notes that prices are rising at a moderate pace. However, there is a widespread expectation that the rate of cost and price increases will accelerate in the future. Some regions described these expectations as "strong," "significant," or "substantial." The report emphasizes that higher tariffs are driving up costs and prices across all regions.

Despite these concerns, there are differing views on the extent of price increases. Some businesses indicated that they might absorb the costs by reducing profit margins or imposing "temporary surcharges." The report states that companies planning to pass on tariff costs expect to complete this process within three months.

This report comes at a critical time as President Trump has recently adjusted tariff policies. The market remains concerned about the inflationary effects of tariffs and their potential to dampen hiring activities and overall economic growth.

The term "tariffs" appeared 122 times in the June report, up from 107 times in the April report, indicating that this issue has become a central concern for businesses. Regionally, Boston, New York, and Philadelphia reported a decline in economic activity, while Richmond, Atlanta, and Chicago showed signs of growth. The New York Fed noted "high uncertainty" in the region, citing significant increases in input prices due to tariff-related cost increases. Despite efforts by the Trump administration to reduce federal government spending, the Richmond region reported a slight increase in hiring.