Fed Beige Book: Data Center Investment Drives U.S. Economic Growth

Expansion in Manufacturing Driven by Data Center and Defense Demand

Employment Posts Only Marginal Growth

Persisting Cost Pressures from Energy and Raw Materials

Consumption Sees Slight Increase as Price Sensitivity Rises

The U.S. economy has maintained modest growth over the past two months, with investments in data centers driven by the proliferation of artificial intelligence (AI) emerging as a key growth engine for both the manufacturing and construction sectors. However, consumers have become more price-sensitive, and cost pressures stemming from rising energy, transportation, and raw material prices have persisted.

On September 2 (local time), the Federal Reserve (Fed) stated in its Beige Book, a report on economic conditions, that “since early July, economic activity has increased at a modest pace.” Out of 12 regions, 10 reported slight to modest growth, while 2 saw no change. The economic outlook for the coming months was generally positive. However, sentiment across industries was mixed due to uncertainties surrounding high energy prices, government policies, and international conflicts.

Data Center Investments Expand Their Contribution to U.S. Economic Growth

Report from the regional Federal Reserve Banks specified in the Beige Book. Fed

The most notable point in this Beige Book is that data centers are now playing a more significant role in economic growth. Manufacturing activity expanded in most regions, and some attributed this to robust demand for defense industry and data center-related orders. Nonresidential construction also increased overall, with new projects in some regions primarily focused on data centers.

Although previous Beige Book reports have consistently mentioned data center demand, this time it emerged more clearly as a core driver supporting both manufacturing and construction. In April, data centers were cited as a strong segment in commercial real estate and certain nonresidential construction. In May, their importance broadened as a factor supporting manufacturing employment and commercial construction demand. By July, data centers, along with machinery and defense, became central to the increase in manufacturing orders. In this August report, their influence expanded further into construction and power demand.

Statements from the regional Federal Reserve Banks back this up. In the Cleveland Fed's district, manufacturing demand increased sharply, driven by data centers and defense spending. In the Chicago Fed region, data centers and large-scale projects formed the core of nonresidential construction; a local official commented, “Without data centers, the construction industry would have fallen into a slump.”

Electricity demand has also been significantly impacted by the expansion of data centers. In the Kansas City Fed’s area, data center development has pushed power demand to historically strong levels. Local sources noted that technology companies are more focused on how quickly they can secure electricity rather than its price.

Employment Grows Slightly...AI’s Impact Is Mixed

On the other hand, employment growth remained limited, with nationwide employment rising only marginally. Three regions reported modest increases, four regions slight increases, and five regions noted no change. While demand for labor in manufacturing, construction, and some service sectors remained solid, it declined in retail and hospitality. The shortage of skilled technical and professional workers also persisted.

The impact of AI on employment was mixed. Some regions hired new staff for AI-related roles, while in other cases, demand for entry-level and managerial positions fell as automation and productivity improvements took hold.

In the New York Fed's district, there was strong demand for manufacturing workers in aerospace and semiconductors, and companies still struggled to hire AI engineers. However, demand for entry-level workers in technology and administrative fields weakened as a result of AI's influence.

Price Pressures Persist...Impact of Energy Prices and Tariffs

Prices Mentioned in the Beige Book. Fed

Price pressures also continued. In eight regions, prices rose modestly, and cost pressures were high, especially for manufacturing and construction. Prices for energy, transportation, and raw materials such as metals and petrochemical products increased broadly, and the impact of tariffs persisted. However, some consumer-focused firms said it was difficult to fully pass increased costs onto sales prices due to heightened consumer price sensitivity.

In the New York region as well, while the pace of sales price increases slowed slightly, input prices rose sharply. Rising energy and fuel costs squeezed corporate profit margins, and tariffs further increased cost burdens. Some companies, facing higher consumer price resistance, could not fully incorporate cost increases into their prices and instead absorbed the added costs themselves.

Consumer spending grew only slightly overall, but price pressures remained. The Beige Book noted, “Consumption of high-priced goods and services remained solid, but consumers have become more sensitive to prices.” Auto sales were weak due to subdued consumer sentiment, higher fuel costs, and rising financing expenses. In contrast, tourism activity increased, and airlines reported robust demand despite higher ticket prices.

This content was produced with the assistance of AI translation services.