Economic momentum in the United States is no longer moving in one direction — it is fragmenting.
The Fed’s latest Beige Book paints a picture of a two-speed economy: five out of twelve Fed Districts now reporting flat or declining activity — up from four last time.
Beneath the surface, the report outlines an increasingly uneven expansion marked by weak consumer demand, stronger manufacturing tied to data-center infrastructure, and persistent cost pressures, partly driven by tariffs.
The Consumer Engine Is Losing Power
Consumer spending edged higher overall, but the Beige Book repeatedly describes a consumer becoming more cautious.
Across multiple districts, businesses said customers were more price sensitive and increasingly delaying major purchases amid economic uncertainty.
In the New York region, retailers reported that while total revenues rose, gains were largely driven by higher prices rather than stronger volumes.
“Sales revenues surpassed last year’s levels but were driven by elevated selling prices due to the cost pass-through from tariffs,” the report said.
Lower-income households appear particularly strained.
In Philadelphia, contacts said low- and middle-income households were struggling to pay for necessities, while nonprofit organizations reported rising demand for food assistance.
Vehicle sales remain one of the clearest weak spots. Several districts reported declining auto purchases, with Cleveland dealers warning that “low-income consumers were priced out of new car purchases.”
A Manufacturing Revival — Driven By Data Centers
While consumer activity shows cracks, manufacturing activity strengthened across much of the country.
Eight districts reported factory growth, with several citing a surge in demand tied to data centers and related energy infrastructure.
In the Cleveland district, contacts said “the majority of activity came from data center buildouts,” boosting orders for electrical equipment, metal products, and commercial construction.
The Chicago region reported a similar pattern: steel sales rose as demand from data centers and energy infrastructure investment offset weakness in other construction sectors.
Even in areas where manufacturing was mixed, companies serving AI infrastructure are seeing surging orders.
A Virginia electrical equipment manufacturer reported a “record year driven by one data center equipment customer.”
The Beige Book suggests a structural shift: AI investment is no longer confined to software and cloud spending — it is increasingly flowing into physical infrastructure such as electricity networks, industrial equipment, and construction.
This dynamic is consistent with the performance divergence between asset-heavy and asset-light U.S. industry ETFs thus far in 2026.
Meanwhile the iShares Expanded Tech-Software Sector ETF (NYSE:IGV) is down 16.5%.
Labor Markets Enter A Holding Pattern
Employment conditions remained largely stable across the country.
Seven districts reported no meaningful change in hiring, reflecting what one Chicago contact described as a “no hire, no fire” environment.
Companies cited uncertainty, rising costs, and softer demand as reasons for keeping payrolls steady. At the same time, firms in several districts said they were investing in automation and artificial intelligence to boost efficiency.
A Memphis manufacturer told the St. Louis Fed that capital budgets were shifting toward robotics and AI because “persistent hiring frictions make robotics and industrial AI the most reliable way to preserve throughput and quality.”
Wage growth continued at a modest to moderate pace, though rising health insurance premiums and other benefits costs remain a concern for employers.
Tariffs Continue To Push Costs Higher
Price pressures remained widespread across the economy.
Eight districts reported moderate price growth, and nine districts specifically cited tariffs as contributing to rising costs, particularly for metals and other raw materials.
Manufacturers said tariffs were pushing up material prices and forcing companies to pass along increases to customers.
In Cleveland, one manufacturer raised prices 4.25% instead of the planned 3% increase to offset additional steel tariffs.
Yet companies also noted growing resistance from customers. Across districts, businesses said they were sometimes absorbing higher costs because consumers had become increasingly price sensitive.
The Outlook: Slow Growth, Rising Uncertainty
Despite the uneven landscape, most districts remain cautiously optimistic about the months ahead.
Businesses generally expect slight to moderate growth to continue, even as uncertainty around tariffs, policy changes, and consumer demand lingers.
What the Beige Book ultimately portrays is not an economy in retreat — but one undergoing a quiet realignment.
Consumer demand is softening, infrastructure investment tied to artificial intelligence is accelerating, and companies are increasingly relying on automation to manage rising costs.
The expansion continues.
But it is no longer moving in a single direction.
Photo: Shutterstock
