Beige Book Report: Cleveland
September 7, 2022
Summary of Economic Activity
After declining slightly during the prior reporting period, Fourth District business activity steadied in recent weeks. Retailers reported that higher inflation had constrained households' ability to spend on some items, particularly among lower-income households. In addition, higher prices and interest rates dampened demand for automobiles and homes. Manufacturing and nonresidential construction activity held up better, but growth was softer than earlier in the year. While, on balance, contacts did not expect a meaningful increase in activity in the fall, they continued to add to their payrolls. Supply chain disruptions remained prominent, but there were more frequent reports of relief from these disruptions. Generally softer economic conditions and slight relief from supply disruptions appeared to alleviate some inflationary pressures. Though still high, both the share of contacts reporting higher input costs and the share reporting higher selling prices dipped to their lowest levels in more than a year.
Labor Markets
Employment increased modestly. While most contacts said that staffing held steady, nearly a third indicated that they had added to their payrolls in the prior two months. Several business contacts acknowledged that they had curbed hiring plans from earlier in the year, but many indicated that because of persistent worker shortages they continued to run shorthanded and were playing catch up with staffing. A manufacturer said his firm "will continue to hire until we can gain a full staff, even if the economy slows." Based on contact reports, labor availability recently increased somewhat.
Increased availability of workers along with a modest pullback in hiring may have contributed to a slight easing in wage pressures. The share of contacts reporting pay increases has been edging down since the beginning of the year but remained elevated. In many cases, contacts suggested that they had paused pay increases after generous pay hikes in prior periods. While the percentage of contacts offering higher pay decreased, those who hiked wages often did so "to blunt the effects of inflation" on their workers. In addition, many said that pay increases were still high by historical standards.
Prices
Weaker demand appeared to relieve some upward pressure on prices. The share of contacts reporting increased nonlabor input costs fell to its lowest in more than a year, though it remained high by historical standards. Several freight contacts noted that falling fuel prices helped alleviate overall cost pressures, while those in construction and manufacturing reported lower prices for lumber and steel. One nonresidential builder said that "an endless chain of 10 percent increases every 30 days has subsided." Moreover, a manufacturer who did experience higher costs said that they were "moderate increases, not as outrageous as in previous periods." Looking ahead, contacts expected cost pressures to ease somewhat further in coming months.
While still elevated, the share of contacts reporting an increase in selling prices also dipped to its lowest in more than a year. In some cases, firms passed lower input costs along to customers. One manufacturer said that "most of our contracts have pass through provisions. As our raw material costs have decreased, so have prices." In other cases, slower demand growth and higher inventories led to more intense price competition. One general merchandiser, citing public reports of higher inventories at the retail level, said "markdowns are coming."
Consumer Spending
Retailers reported weaker sales, particularly for discretionary items, as higher prices for food and other essentials depleted households' discretionary income. One general merchandiser said that lower-income consumers were spreading out their back-to-school purchases rather than purchasing everything at once. First, they bought school essentials, and will likely purchase school apparel later. Restaurateurs and tourism contacts reported that sales remained steady over the summer and are optimistic that customer demand will remain steady into the next quarter. Auto dealers reported a decline in demand for both new and used vehicles, which they attribute to higher prices, rising interest rates, and general inflation taking up more of households' incomes.
Manufacturing
Demand for manufactured goods was mixed but generally stable. Several contacts said that their customers were working down inventories, a situation which resulted in fewer orders, and some noted a reduction in demand from abroad. Still, others indicated that demand was relatively steady, and several were cheered by plateauing or declining costs for some inputs. On balance, manufacturers expected little change in demand in coming months.
Real Estate and Construction
Demand for residential construction and real estate remained well below levels experienced earlier in the year. Contacts attributed softer demand to high construction costs and rising interest rates. One homebuilder noted that his firm's construction starts have outpaced sales over the past couple of months, raising the concern that his backlogs may soon diminish. Contacts anticipated activity would remain slow and did not expect to see any significant improvement in demand in the coming months.
Most nonresidential construction and real estate contacts reported that demand has remained stable despite increasing interest rates. Demand for warehousing space in particular has remained strong as firms continue to shift toward more ecommerce activity. While contacts expected demand to remain stable in the near future, a few worried that higher construction costs and rising interest rates could lead to declines in overall demand.
Financial Services
Overall loan demand was generally unchanged as a decline in new mortgage and auto originations was offset by an increase in commercial lending. Bankers reported a notable increase in demand for commercial loans and credit that they attributed to firms' initiating projects earlier than planned to get ahead of anticipated interest rate increases. On the household side, contacts noted a continued decline in auto, mortgage, and refinancing applications related to higher borrowing costs and low inventories. According to bankers, commercial and consumer loan delinquency rates remained low and core deposits flat. However, one banker noted that customers have started drawing down their savings to meet financial obligations. Looking ahead, bankers expected inflationary pressures and higher interest rates to cause consumers and businesses to delay major purchases, a situation leading to weaker loan demand in the near term.
Nonfinancial Services
Demand for nonfinancial services was mixed in recent weeks. Freight activity softened further as demand from customers in certain markets (such as residential construction) slowed. Meanwhile, demand for technology services remained strong, including for human resources- and payroll-related software. Digital authentication services also continued to see strong activity because online purchasing remained robust. Going forward, contacts anticipated freight demand would remain soft, though professional and business services firms expected demand for their services to remain strong.
Community Conditions
Community organizations experienced heightened demand for services in recent months. Several contacts mentioned that the number of families seeking food assistance increased because of higher prices. One contact said inflation "impacts what families are able to purchase with their SNAP benefits and their own resources, which means they are coming to our foodbanks in larger numbers." Adding to the challenge, declines in donations and general constraints in the food supply chain led food banks to ration food. Several contacts also noted an uptick in the number of unsheltered families and longer stays in shelters.
For more information about District economic conditions visit: https://www.clevelandfed.org/en/region/regional-analysis