January 18, 2023
Summary of Economic Activity
Business activity in the Fourth District slowed slightly since the previous report, though activity varied considerably by industry sector. District retailers indicated that sales over the holiday shopping season did not meet their growth expectations because inflation led households to spend more on necessities and less on discretionary items. Auto dealers, homebuilders, and residential realtors said that higher interest rates, along with persistent inventory shortages, constrained sales. Bankers reported that loan volumes declined further. By contrast, manufacturers said that demand increased slightly in recent months, particularly in goods categories with longer lead times. Looking forward, contacts are generally more pessimistic about the near-term outlook for demand. However, contacts' near-term hiring plans remained little changed, which suggest they will continue to hire. Upward wage pressures appeared to ease, as did the pressure on nonlabor input costs and selling prices.
Labor Markets
Employment increased moderately in recent weeks despite slightly softer current business activity. Firms in manufacturing and professional and business services were most likely to report staff increases, while those in construction and freight were most likely to report staffing reductions. Reports of layoffs remained rare, and most contacts preferred to reduce employment through attrition when needed. One staffing services firm reported that demand had slowed noticeably in November and December, though the contact was "hoping" that it was a seasonal decline and would pick up in January. On balance, contacts expected to add more workers at a relatively steady pace in coming months.
Wage pressures eased over the past year, though they did not change meaningfully in recent weeks. There were a few new reports of increased worker availability, but most contacts suggested that labor markets remained very competitive, keeping wage pressures from easing further. While fewer firms raised pay compared to those that did a year previous, some offered their employees more generous yearend bonuses or accelerated the timeline for merit increases to help employees mitigate the impact of higher inflation.
Prices
Cost and price pressures have also eased over the past several reporting cycles, though they changed little in recent weeks. Roughly half of contacts reported higher input costs recently compared to about three-quarters of them who reported the same this time last year. Manufacturers and nonresidential builders were most likely to report relief from rising input costs, often citing lower prices for steel, lumber, and freight. By contrast, costs were said to be rising for concrete, electronics, and electrical components. In many cases in which prices continued to rise, contacts pointed out that the rate of increase had declined noticeably. Looking forward, the share of firms expecting cost increases in the months ahead fell to 54 percent, its lowest since early 2021.
The share of firms raising selling prices was unchanged in recent weeks, at 45 percent, but well below the peak of 73 percent in the spring of 2022. Some contacts noted that they were not increasing prices to remain competitive, while others said they were waiting to see if input costs increase further. However, weaker demand led homebuilders to use more incentives and discounts to close sales, while general merchandisers and apparel retailers used more promotions over the holiday shopping season to move goods and reduce inventories.
Consumer Spending
Retailers reported further softening in demand as consumers faced continued pressure from inflation and increased interest rates. Multiple retail contacts said that holiday sales had fallen short of expectations, with one large general merchandiser noting that his customers continued to focus spending on everyday essentials while minimizing discretionary purchases. Reports from restauranteurs were mixed. While one fast food contact said her sales had increased as consumers "dined down" because of inflation, sit-down restaurants reported unchanged or decreased sales. Auto dealers continued to report flat or decreasing sales amid increased interest rates, higher vehicle prices, and limited inventory.
Manufacturing
Demand for manufactured goods moved slightly higher in recent weeks. However, reports varied by industry segment. Demand increased for firms whose products have longer lead times, such as those producing parts used in commercial aircraft, and for manufacturers tied to the ongoing creation of new electric vehicle production capacity. By contrast, softer consumer spending led to a decline in orders for some firms as their customers rebalanced inventories. One packaging producer said that customer destocking had reduced demand for its cardboard-related products, leading to "historically high downtime" in production. While reports of supply chain disruptions were less frequent than in recent reporting periods, one HVAC producer said that her firm's sales had declined slightly because of customers' inability to secure necessary components. Manufacturers generally expected demand to change little in the coming months.
Real Estate and Construction
Residential construction and real estate activity declined further. Contacts continued to cite elevated interest rates as the main factor hindering demand. One real estate agent said that the housing market was in a recession and stated that the only reason that there had not been significant declines in home prices was because of extremely low inventory levels.
Demand for nonresidential construction and real estate remained weak. Real estate brokers indicated that sales had dried up amid elevated interest rates. Despite tepid demand for new construction, nonresidential construction contacts were slightly less pessimistic about demand going forward. One general contractor was hopeful that funds from the Infrastructure Investment and Jobs Act would begin to result in more projects available for bid.
Financial Services
Overall, lending continued to decline during the reporting period, a situation which bankers attributed to higher interest rates that are increasing borrowing costs. Bankers noted moderate slowing in commercial lending, and some contacts reported weaker loan pipelines. On the household side, lenders said that residential and auto loan volumes continued to decline as higher interest rates and selling prices dampened activity. Bankers indicated that delinquency rates for commercial and consumer loans remained low. Core deposits declined, and some lenders attributed this decline to customers' seeking higher-yielding alternatives and to increased deposit rate competition among banks. Looking ahead, bankers expected that loan volumes would continue to decline through the first quarter because of a decrease in applications in the pipeline.
Nonfinancial Services
Freight activity continued to decline. One contact attributed the softening demand to the slowdown in home purchases and a decline in shipments of consumer goods as households shifted more of their spending to services. Another freight contact noted that demand had been diminished because of a reduction in imports. Demand for professional and business services increased on balance. One accounting firm noted that activity had increased in recent weeks because of yearend planning work, and another firm that provides digital authentication services noted that demand for its services remained strong as households continued to shift spending from brick-and-mortar stores to online businesses.
Community Conditions
Nonprofit contacts suggested that job opportunities for lower-wage workers increased in recent months. Several noted that jobs in hospitality and retail were particularly plentiful, likely boosted by seasonal hiring. Contacts cited the largest barriers to lower-wage workers' participating in the labor force continued to be a lack of affordable childcare and transportation followed by flexible scheduling, wages, and whether those wages would make up for any loss of government benefits (the "benefits cliff"). Regarding affordable housing, a plurality of contacts was concerned about rising rents and the exhaustion of programs such as emergency rental assistance in 2022. Several contacts said these factors are likely to exacerbate a trend toward homelessness and overcrowding, and individuals might "double up" and move in with family or friends.
For more information about District economic conditions visit: https://www.clevelandfed.org/en/region/regional-analysis