WASHINGTON – The U.S. economy grew at a steady pace in late May and June and hiring was solid, yet the improvements weren't enough to accelerate wage or price growth.
The Federal Reserve said Wednesday that the economy expanded in 10 of its 12 districts. It grew just slightly in St. Louis and Philadelphia. The anecdotal information in the Fed's survey, known as the Beige Book, is used to supplement its economic data and will be considered when Fed officials next meet July 25-26.
The report suggests the economy is still largely healthy and hasn't been disrupted by the four interest rate hikes the Fed has implemented in the last 18 months. Manufacturing output, consumer spending and home sales are solid in most of the country, though consumers reined in spending in Philadelphia and Atlanta. Auto sales weakened in half the districts, the Fed said, after sales reached a record high nationwide in 2016.
Fed Chair Janet Yellen said in congressional testimony Wednesday that the central bank plans to continue gradually raising rates. She pointed to solid hiring and rising household wealth — resulting from strong home price gains and a higher stock market — as fuel for ongoing growth.
While the report found that many businesses were raising pay in an effort to attract more workers, overall the pace of increases remained at a "modest to moderate pace," the Fed said. Typically, when the unemployment rate falls to low levels, businesses raise pay more quickly to compete for a smaller supply of workers.
The unemployment rate is at 4.4 percent, near a 16-year low. Yet the government reported last week that average hourly pay rose just 2.5 percent in the past year. The last time unemployment was at this level, wages were rising at roughly a 4 percent rate.
Economists point to a range of factors limiting pay hikes. The number of older workers retiring has been inflated by the baby boom generation, and they are being replaced by younger, lower-paid employees. Many employees, scarred by the 2008-2009 recession, are too cautious about demanding raises. Businesses are also reluctant to raise prices to cover the cost of higher pay.
Inflation was largely in check in most districts, the report said, and even weakened a bit in several districts. Nationwide, inflation has slipped in recent months, falling further below the Fed's target of 2 percent. That has caused some economists to question the Fed's focus on raising rates, a step that is usually taken to ward off higher prices.
Yellen said at the congressional hearing that inflation has weakened mostly because of temporary factors, such as cheaper wireless pricing plans. The Fed generally targets 2 percent inflation as a hedge against deflation.
Most analysts expect Fed officials will lift rates one more time this year. They also expect the Fed to sell some of its massive bond holdings, which could push up longer-term interest rates.