If we look at common metrics of the economy’s health, like the unemployment rate and inflation, things look pretty sunny at the moment. As of August 2024, unemployment stands at 4.2 percent, and inflation has plummeted from 9.1 percent in June 2022 to 2.5 percent in August of this year.
However, the Index of Consumer Sentiment, an indicator from the University of Michigan that measures how Americans feel about their personal finances as well as the U.S. economy as a whole, shows that the public is not feeling good about the state of the economy. In fact, consumer sentiment in August 2024 was lower than it was during the depths of the coronavirus pandemic, when many businesses were shut down and unemployment skyrocketed.
What is going on with the U.S. economy? The Federal Reserve’s Beige Book can help reveal what is going on behind the numbers. The Beige Book, which the Federal Reserve releases eight times a year, is a collection of summaries and comments from interviews the Fed conducts with people involved in a wide range of economic markets, including economists and other experts. The report provides a national-level summary, and it also includes descriptions of economic conditions in each of the Federal Reserve’s 12 districts.
The Beige Book is a valuable resource for revealing the nation’s economic story. One key aspect of that story that helps to explain the current economic pessimism is interest rates. After a long series of interest rate increases that began in 2022, the Federal Reserve’s interest rate (which plays a significant role in setting interest rates across the economy) peaked at 5.3 percent, the highest level since 2001. Higher interest rates make borrowing money more expensive, increasing the costs of car loans and home mortgages and generally making life more expensive for many Americans.
Examples of the economic burden caused by high interest rates show up throughout the most recent Beige Book (August 2024). In the Richmond, Virginia, district, the Beige Book report cites high interest rates as a reason for “an unseasonably low level of volume” in the area’s trucking industry as well as a decrease in the number of drivers employed. The Atlanta district also reported drops in trucking demand.
But the impact of interest rates is by no means confined to the trucking industry. In the Chicago district, some business leaders noted that high borrowing costs meant they had to pull back on investments in new equipment for their firms. The farming industry in the area is also experiencing financial stress from the combination of high interest rates and low prices for crops — and this potent mixture is hitting smaller farms the hardest. In the Minneapolis district, an architecture firm has had a lot of projects put on hold because of the financial difficulties caused by high interest rates. And the Kansas City district’s banking industry also mentioned high interest rates as “the most significant impediment to loan growth.”
Yet, as the interviews for August’s Beige Book were being conducted, the Fed had already begun signaling that interest rate cuts were likely coming soon. Setting expectations for future economic conditions in an attempt to decrease uncertainty is an important part of the Federal Reserve’s job. In this case, the expectation of lower interest rates led to increased economic activity in some areas as businesses sought to position themselves to take advantage of the lower interest rate future they assumed was on the way.
One sector seeing hopeful signs because of the expected drop in interest rates is housing and building projects. A law firm in the Cleveland district noted that they expect real estate transactions to pick up alongside a decrease in interest rates. In the St. Louis district, the Fed’s interviews revealed some signs that the number of houses for sale was increasing as homeowners expected lower interest rates to lead to a seller’s market. Similarly, the Richmond district reported some signs that the manufacturing industry was benefiting from an increase in the number of new building projects (and an increased demand for the materials needed for these projects).
On September 18, the Federal Reserve announced that it was cutting interest rates by a half percentage point, an aggressive move, on the larger end of what market watchers were expecting. The lower rate should filter through the economy and lower lending costs for businesses and consumers in various ways, but only time will reveal the precise impacts of the policy change on the economy.
Still, for the truckers, business owners, architects, and bankers who mentioned the economic pain of high interest rates in the Beige Book, the rate cut will come as welcome news. And after years of historically low levels of consumer confidence, maybe lower interest rates will lead to an economy that the American public can finally feel better about.
