July 12, 2023
Summary of Economic Activity
Overall, Fourth District business activity changed little since the prior reporting period. While consumer spending on services remained solid, higher interest rates continued to constrain households' big-ticket purchases. Meanwhile, several contacts suggested that higher interest rates led many businesses to delay projects. Accordingly, bankers reported lower loan volumes for both household and business loans. Manufacturers reported little growth in orders, but many continued to work through solid backlogs. Contacts have recently become more optimistic about the near-term outlook for their firms, and many have lowered their expectations for a US recession in 2023. Still, uncertainty remained elevated and was likely reflected in cautious capital spending plans and slower employment growth. Wage pressures continued to ease somewhat as labor demand lessened and labor availability improved for many firms. Input cost pressures also eased, and the share of firms reporting increased selling prices dipped to its lowest level since late 2020.
Labor Markets
Contact reports suggested modest employment growth in the Fourth District during the most recent reporting period, with demand for labor varying by industry segment. Demand was particularly strong among manufacturers that continued to report solid backlogs for their goods. Still, a few manufacturers (and contacts in other industries) reported that they were only hiring to fill key production positions while leaving others unfilled (such as those in support). The hesitance to fill support roles was mainly a function of general economic uncertainty or expectations for weaker demand for goods and services.
On balance, wage pressures eased slightly during this reporting period, with the share of contacts holding wages steady (67 percent) at its highest in more than two years. Some bankers, transportation firms, and restauranteurs reported that they did not need to increase wages because workers were more readily available. By contrast, several manufacturing and construction firms reported that wage pressures remained high amid continued difficulty filling key openings.
Prices
Nonlabor input costs pressures eased since the previous report. About a third of contacts said that costs had increased in the prior two months, the smallest share since September 2020. Construction contacts noted that steel and lumber prices were falling but concrete prices were rising. On balance, these contacts suggested that costs were "stabilizing." Manufacturers reported meaningful relief from input cost increases, as well, with one plastics manufacturer stating that suppliers were raising prices less often and by a smaller percentage than in the past. Looking forward, contacts expected further relief from nonlabor input cost pressures.
Price pressures eased, as well. Less than 40 percent of firms recently raised selling prices, the lowest share recorded since the end of 2020. Several goods producers raised prices to maintain margins or to "catch up" to past cost increases. However, many also said they did so cautiously. One manufacturer said it couldn't raise prices "without hurting demand or damaging customer relationships." Similarly, a logistics contact noted that customers were increasingly resistant to any price increases and that freight prices fell further. Consumer prices continued to increase on balance, but one discount retailer said that its prices eased somewhat as it passed along "the disinflation…seen from some suppliers."
Consumer Spending
Consumer spending was mostly unchanged. Warmer weather and resilient consumers bolstered sales for restauranteurs and some non-auto retailers. Still, one large general merchandiser noted that household budgets had tightened because of reduced SNAP benefits and high inflation. He added that sales for discretionary items, such as televisions and video game systems, had declined and that some customers had begun to choose less expensive store-brand food items over national brands. Some auto dealers said that sales rebounded despite higher interest rates, while others stressed that interest rates and elevated vehicle prices remained the primary deterrents for potential customers. Contacts generally expected consumer demand to hold steady in the coming months.
Manufacturing
On balance, demand for manufactured goods was stable. Orders remained strong for aerospace-related products and for heavy trucks and trailers, and strengthening international markets continued to bolster activity for some firms. However, orders softened or remained weak for some firms tied to consumer products as inventory corrections continued. Steel manufacturers said that orders were steady or slightly lower compared to those in recent months, and industry contacts generally expected demand for their products to pick up in the second half of July following an expected seasonal slowdown earlier in the month. Likewise, manufacturers across industry segments were notably optimistic and expected demand for their products to increase in the coming months.
Real Estate and Construction
Demand for residential construction and real estate changed little in recent weeks. Contacts reported that higher interest rates and elevated home prices continued to hinder demand. One homebuilder noted, "we're getting sales, but on the slow side." Going forward, contacts were optimistic that demand would improve. One homebuilder noted that the limited supply of existing homes would help to boost demand for new home construction.
Nonresidential construction and real estate activity remained soft. Several general contractors indicated that high borrowing costs were dampening demand for construction, and several commercial real estate contacts noted slowing in the commercial real estate investment market.
Financial Services
Lenders reported weaker activity amid economic uncertainty and higher interest rates. Loan demand decreased, with declines noted for both household and business lending. One banker said that many businesses were putting projects on hold because of economic uncertainty unless the project is being subsidized by the government. On the funding side, deposits were generally flat to down as banks continued to face competition for deposits, particularly from entities such as money market funds. On balance, delinquency rates remained low by historical standards and were little changed in recent weeks, with one lender describing the delinquency rate environment as "benign." Looking forward, lenders expected further declines in loan volumes and little change in deposits.
Nonfinancial Services
Demand for nonfinancial business services generally declined recently. Contacts in professional and business services noted that demand had flattened. Transportation services firms reported declines in activity, in large part because firms continued to work down inventories, some of which had been built up as a hedge against supply chain disruptions earlier in the recovery. Looking forward, firms in professional and business services generally expected demand to rebound in the months ahead. By contrast, logistics and freight contacts anticipated further declines, though one freight contact was optimistic that "the bottom is in the not-too-distant future."
Community Conditions
Community organizations reported a sharp increase in the number of families seeking food assistance recently, with one noting that it had seen a 35 percent jump since March. Multiple contacts said that the loss of pandemic-era Supplemental Nutrition Assistance Program (SNAP) benefits in March, along with elevated food prices, contributed to the increase. One food pantry operator said, "people are experiencing food insecurity more now than I have seen in my seven years with the organization." Some organizations were forced to limit the frequency of visits and quantity of food provided to households, exacerbating the strain on struggling families. Looking forward, some contacts expected food insecurity to rise further during the summer as families whose children received free and reduced lunches during the school year seek additional support.
For more information about District economic conditions visit: https://www.clevelandfed.org/en/region/regional-analysis