The Federal Reserve Bank of Richmond recently addressed the state of the U.S. economy and the role of consumers during a presentation at The Health Management Academy in Chicago. The speech, delivered to health care sector leaders, focused on economic trends, consumer behavior, and monetary policy considerations.

Tom Barkin, President and CEO of the Richmond Fed, highlighted his regular engagement with business and community leaders to inform national monetary policy decisions. He noted that while the health care sector is a significant part of the U.S. economy, recent changes in government funding continue to pose challenges for industry visibility.

Barkin described recent economic uncertainty as "foggy," causing businesses and consumers to hesitate before making major decisions. "This hesitation, present among consumers as well, appears to have quieted the economy’s momentum. GDP growth slowed to 1.2 percent in the first half of the year, down from 2.5 percent last year. Job gains have also slowed, with the three-month average down to 35,000 (less than a third of the average 127,000 added in February through April)."

However, Barkin suggested that some clarity has returned: "But the fog is lifting. The tax bill has passed. Net immigration is down. Deregulation is underway. Tariff deals are being nailed down. Business, consumer and market sentiment have started to rebound."

He emphasized that much depends on consumer spending: "We have the American consumer to thank; consumer spending makes up nearly 70 percent of GDP, and it has remained remarkably resilient." He observed shifts in purchasing habits due to inflation but noted continued overall spending levels: "Consumers...are trading down...So, the level of spending has stayed solid, but we have seen real changes in the mix."

Barkin pointed out that recent softening in consumer spending coincides with positive labor market fundamentals: low unemployment rates and rising real wages.

On inflation and prices, Barkin said: "Twelve-month core inflation, at 2.8 percent, remains above the Fed’s 2 percent target for overall inflation...Current policy has raised the average tariff rate to over 17 percent." However, he argued that today's consumers are more cautious than those during earlier periods of stimulus-driven demand.

Addressing employment concerns if higher prices persist and margins are squeezed by businesses adopting new technologies like artificial intelligence, Barkin explained: "That has not happened to date...Unemployment remains low at 4.2 percent...year-over-year compensation increases remain above pre-pandemic levels." He expects any future rise in unemployment may be less severe due to slow hiring practices since before an anticipated recession.

Labor force growth was another concern cited by Barkin due to declining immigration numbers and demographic trends such as baby boomers leaving workforces.

Concluding his remarks on monetary policy direction following July's Federal Open Market Committee meeting—where interest rates were held steady—Barkin stated: "We may well see pressure on inflation, and we may also see pressure on unemployment, but the balance between the two is still unclear. As visibility continues to improve we are well positioned to adjust our policy stance as needed."

The Richmond Fed continues its mission by conducting research for policymaking support within its district while engaging with regional stakeholders across sectors.