Beige Book Report: Cleveland
October 18, 2023
Summary of Economic Activity
Overall, Fourth District business activity was relatively unchanged in recent weeks. Consumer spending was flat to down, as discretionary goods spending softened further. Manufacturers noted an uptick in activity but expressed concerns over potential adverse effects of the UAW strike. Bankers reported lower loan volumes for commercial and consumer loans because of higher borrowing costs. Similarly, demand for new and existing homes was dampened by higher rates, with sales of existing homes also constrained by limited inventories. While nonresidential construction activity was solid, many contacts suggested that new projects were at risk because of higher financing costs. Overall, firms expected activity to remain flat in the coming months. This will likely impact capital spending plans and hiring, which were flat in recent weeks. Contacts more frequently reported holding wages steady following sizeable increases over the past few years. Input costs stabilized for manufacturers, while service sector firms indicated broad cost increases from their vendors. Price pressures continued to ease, with contacts citing increased competition and greater resistance from customers to price increases.
Labor Markets
On balance, contact reports suggested little employment growth during the most recent reporting period, though demand for labor varied by industry segment. Some business services and freight contacts noted increasing staffing levels to expand operations. One management consultant said that the "stability of the last year has allowed for expansion of staff instead of [outsourcing of] work." By contrast, some manufacturers and auto dealers reported that weaker profits and slower demand led them to reduce staffing levels. Still, other firms across industries reported maintaining staffing levels. Some firms did so because demand was flat, and others said they had reached their target staffing level.
Wage pressures continued to ease slowly. More firms across industries reported holding wages steady to stabilize labor costs after larger-than-normal increases over the past few years. One manufacturer noted that his firm plans to offset the cost of its annual wage increase by decreasing the employer's contributions to medical coverage costs, a change it had not enacted for the past two years. Still, some auto dealerships and manufacturing firms continue to increase pay to compete for technicians and skilled laborers.
Prices
On balance, nonlabor cost pressures changed little in recent weeks but were down from those earlier in the year. Many manufacturers reported that many of their input costs have stabilized despite remaining elevated. Indeed, one manufacturer noted that raw materials' prices have not gone up since earlier in the year, and he has found new suppliers offering lower prices. Nevertheless, several service sector firms noted broad cost increases from vendors, in particular for health and car insurance, software subscriptions, and other technology services. And construction contacts stated that costs were increasing for some materials such as cement.
Price pressures eased recently, continuing a trend that began at the start of the year. Contacts noted that they were not raising prices because of increased competition and greater resistance from customers to price increases. One retailer said, "We will try our best to hold the line as consumers seem to be tightening their belts." Several manufacturing and construction contacts noted steadying or reducing prices in accordance with input costs. However, other manufacturers and freight contacts were able to raise prices during contract renewals.
Consumer Spending
Consumer spending was flat to down in recent weeks. One large general merchandiser noted that discretionary-goods spending had softened further as households faced continued pressure from higher prices for necessities, adding that many lower-income customers had increased their reliance on credit cards. Auto dealers said that sales had slowed because of higher interest rates and higher vehicle prices. Reports from restauranteurs were split, with lower-priced establishments reporting steadier sales than their higher-end counterparts. On balance, contacts expected sales to stay flat in the coming weeks, and many hoped that the approaching holiday season would help boost demand.
Manufacturing
Overall demand for manufactured goods increased slightly in recent weeks, though activity varied by industry segment. An aerospace parts manufacturer reported heightened orders for both civilian and military products, and a heavy truck and trailer parts producer noted strong demand. Steel producers reported steady demand but said some of their customers had been hesitant to place new orders out of concern about the ongoing UAW strike. One steel wholesaler said that recent declines in steel prices had divergent impacts on demand; spot customers delayed orders in the hope that prices would fall further, while many contract customers sought to negotiate next year's agreements early and lock in low prices. Manufacturers generally expected demand to increase modestly in the coming months.
Real Estate and Construction
On balance, residential construction and real estate activity slowed. Contacts reported that new-home sales declined slightly as higher interest rates discouraged potential buyers. Demand for new and existing homes was dampened by higher rates, with sales of existing homes also constrained by limited inventories. Residential construction and real estate contacts anticipated activity will slow in the coming months because of seasonality and higher interest rates.
Nonresidential construction activity increased slightly. General contractors reported strong activity from ongoing projects, but many contacts across industry segments noted that new deals had been difficult to complete because of higher financing costs and, in some cases, hesitance on behalf of lenders. Reports on office demand varied. One commercial property manager said that many of his customers had surrendered existing, underperforming office properties to lenders rather than refinance at higher interest rates. Another contact noted that the return of in-office work continued to boost his firm's leasing activity for office space. Nonresidential construction and real estate contacts expected activity to increase modestly in the months ahead.
Financial Services
Overall, loan demand continued to soften this reporting period. Bankers cited higher interest rates as the primary reason behind the decline in borrowing from households and businesses. One banker reported that because of higher interest rates, firms increasingly used cash-on-hand to meet their financing needs rather than apply for additional loans. Lenders reported that delinquency rates remained at historically low levels for both commercial and consumer loans. Core deposits declined slightly as customers sought higher-yield alternatives. In the coming months, bankers expected loan demand to continue to decline as interest rates remain elevated.
Nonfinancial Services
On balance, freight contacts noted a slight uptick in activity this reporting period. One hauler indicated that his firm's volumes increased in part because the firm absorbed the clients of a large carrier that closed. Looking ahead, haulers expected conditions to improve slightly as the holiday season draws nearer. Professional and business services contacts reported relatively flat activity as uncertainty led some clients to pull back on spending. However, contacts expected activity to remain relatively flat outside of some seasonal pickup in demand.
Community Conditions
Nonprofit contacts noted that small businesses and low- and moderate-income households experienced declines in credit access, while the latter also saw affordable-housing conditions deteriorate over the past six months, according to a semiannual survey. Several contacts said higher interest rates and tight credit requirements impacted businesses' and households' ability to qualify for loans. One contact indicated that businesses with long-standing banking relationships had difficulty securing traditional financing. Rising rents and a shortage of affordable housing continued to impact low- and moderate-income households' ability to secure housing. Moreover, some landlords stopped accepting housing choice vouchers in order to get higher rents in the open market.
For more information about District economic conditions visit: https://www.clevelandfed.org/en/region/regional-analysis