Fed report shows weak U.S. growth outlook with inflation cooling

High prices and a tight labor market weighed on U.S. economic prospects over the next year, though inflation showed signs of decelerating, the Federal Reserve said.

"The outlook for future economic growth remained generally weak, with contacts noting expectations for further softening of demand over the next six to twelve months," the Fed said Wednesday in its Beige Book report, typically published two weeks before each meeting of the policy-setting Federal Open Market Committee. 

Price levels "remained highly elevated," but nine districts reported some degree of moderation in their rate of increase, the report showed. The price of food, rent, utilities and hospitality services, in particular, rose substantially across all 12 Fed districts.

Labor markets remained tight and labor shortages weighed on several sectors. That — plus continued supply-chain snarls — hampered manufacturing, the Fed said. Wages rose in all districts but at a slower pace than in early July, when it last published the Beige Book.

The Fed has been raising interest rates aggressively to try and cool demand to bring down consumer inflation that has remained above 8% for five straight months. A separate release Friday showed U.S. hiring remains robust, and a report next week will detail consumer prices for the month of August.

Low-income Americans, who spend a larger portion of their pay on essentials such as food and gas, were spreading out back-to-school purchases, according to one business in the Cleveland district. Lower overall demand and a reduction in fuel prices helped alleviate price pressures, the Fed said.

Chair Jerome Powell has pledged to raise interest rates and keep them there "for some time" to curb price increases. In a highly anticipated speech at the Fed's annual Jackson Hole conference last month, he said the central bank's tight policy would likely bring "some pain" to households and businesses.

Fed officials raised interest rates by 75 basis points in June and July and said that a move of the same size, or a half point increase, was on the table when they meet Sept. 20-21, depending on the data.

Business contacts reported that residential real estate weakened amid a drop in home sales in all districts, the Fed said. The central bank's rate increases have helped push the 30-year fixed mortgage rate to above 6%, which has damped demand for home loans. 

Leisure and hospitality establishments reported strong growth during the survey period, which covered the summer period before the end of August. But labor issues kept some businesses from fully taking advantage of the robust travel season. The popular New England vacation spot of Cape Cod said labor shortages forced restaurants to cut back hours even while demand remained high.

European tourists led hotel and leisure spending in the New York district, while the number of visitors from Asia remained subdued, the Fed said.