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People shop at Macy's Department store in New York City on March 11, 2019.BRENDAN MCDERMID/Reuters

The U.S. economy expanded at a slight to modest pace in September and early October but many firms are more downbeat about the months ahead, a Federal Reserve report said on Wednesday, the latest sign that the impact of U.S. trade policies continues to cloud the country’s economic outlook.

The latest temperature check of the economy, collated from the central bank’s discussions with business contacts around the country, also said the pace of price increases remained modest.

“Business contacts mostly expect the economic expansion to continue; however, many lowered their outlooks for growth in the coming six to 12 months,” the Fed said in its report.

Some districts suggested that persistent trade tensions and slowing global growth weighed on economic activity. For example, a business contact told the Boston Fed chip manufacturers were delaying new plant construction due to uncertainty over trade policy.

Likewise, an industrial supplier in the district now planned to cut capital expenditures by as much as 25 per cent compared to a previously planned 5 per cent increase.

The U.S.-China trade war, now 15 months long, has dragged on economic growth. U.S. manufacturing activity dropped to a 10-year low in September and business investment has cooled as firms delay making decisions due to the uncertainty over tariffs.

Earlier on Wednesday, data showed U.S. retail sales fell for the first time in seven months, suggesting that manufacturing-led weakness could be spreading to the broader economy.

U.S. President Donald Trump last Friday outlined the first phase of a deal to end the trade war and suspended a threatened tariff hike, but officials on both sides said much more work needed to be done before an accord could be agreed.

“A number of districts reported that manufacturers reduced their headcounts because orders were soft,” the Fed said, as it noted both retailers and manufacturers were seeing rising input costs, “often for items subject to new tariffs.”

Reports on retail sales from businesses across the country were mixed but household spending remained solid on balance, the Fed said.

The Fed has cut interest rates twice this year, reversing course after three years of periodic rate hikes. Fed Chair Jerome Powell has characterized the rate cuts as a pre-emptive strike against slowing global growth, trade tensions and moderate inflation in order to keep the longest economic expansion on record going.

On Tuesday, the International Monetary Fund warned the trade war will cut global growth this year to its slowest pace since the 2008-2009 financial crisis.

Elsewhere in the report, contacts reported the job market remained tight and overall, employment rose slightly amid an ongoing struggle to find workers.

Investors currently see the Fed cutting rates by another quarter percentage point at its next meeting at the end of October, according to an analysis of Fed funds futures contracts compiled by the CME Group.

The Beige Book was prepared by the Cleveland Fed with information collected on or before October 7.

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