Beige Book Report: Cleveland
November 29, 2023
Summary of Economic Activity
Overall, reports from contacts suggest that business activity in the Fourth District declined slightly in recent weeks, ending a period of stable activity that began in late spring this year. Contacts generally expected similar business conditions to persist in the coming months. Consumer spending was down, and general merchandisers reported discretionary goods spending declined, a trend they were hopeful would reverse with the holiday shopping season. Manufacturers that produce intermediate goods used in auto production noted that orders slowed, a situation which one contact attributed to the UAW strike. Higher interest rates continued to dampen loan demand, and several bankers reported that delinquencies edged up for specific loan categories but remained low on balance. Employment levels were flat as many firms restructured staffing for efficiency and as wage pressures continued to ease. According to contacts, nonlabor cost pressures changed little in recent weeks, while the proportion of firms reporting price increases was the lowest since 2020.
Labor Markets
On balance, contact reports suggested little employment growth in the recent reporting period. Several financial services firms restructured staffing to gain efficiencies, including limiting hiring to revenue-generating roles and reducing staff in underperforming product or market areas. Some manufacturing firms reported lowering head counts through attrition and layoffs because of softening demand for their goods.
Wage pressures eased further in recent weeks. Many firms across industries reported returning to annual wage adjustments and not offering unscheduled raises like they had over the past few years. For example, one commercial real estate contact said, "after 18–24 months of increases, wage growth has seemingly leveled off." And a hospitality contact noted that his firm was at a "good wage level." Nevertheless, some firms said they increased wages for workers in high demand. For instance, one freight hauler gave raises to drivers, but not to other employees. Some bankers and manufacturers also continued to increase pay to attract and retain skilled workers.
Prices
Nonlabor cost pressures changed little in recent weeks according to contacts, though they've generally trended down since the start of the year. Many manufacturing and construction contacts said input costs, in particular for steel and lumber, were flat to down. One contact added that some construction subcontractors were now reaching out to offer reduced fees to fill their project pipelines. Still, other firms continued to report cost increases for health insurance, software licenses, and technical support services, while some restauranteurs and wholesalers noted a recent uptick in the cost of beef, chicken, and dairy products.
Nearly two-thirds of contacts reported leaving their prices unchanged. Many contacts in manufacturing and freight said they were holding prices steady or, alternatively, reducing them to stay competitive, even in cases in which costs were increasing. Meanwhile, a homebuilder and an auto dealer sought to alleviate consumers' affordability concerns through incentives and interest-rate buydowns by the former and increased discounting by the latter. Another homebuilder noted cutting the size of homes and amenities to keep average unit prices from rising. Nevertheless, two restauranteurs who had not increased prices recently reported that they planned to do so at the start of next year. Contacts who were raising prices generally did so selectively to make up for increased costs.
Consumer Spending
Consumer spending softened in recent weeks. Multiple general merchandisers reported declines in discretionary goods sales. Likewise, reports from restauranteurs and wholesalers tied to the restaurant industry suggested slower spending on discretionary services. Auto dealers continued to report sluggish sales that they attributed to higher financing costs and vehicle prices; one dealer also noted that customers were holding off on purchases because of unusually low trade-in offers for used vehicles. Contacts across retail segments generally expected demand to remain soft in the near term, though some were hopeful that the coming holiday shopping season would boost sales.
Manufacturing
Overall demand for manufactured goods was flat. Orders slowed for producers of intermediate goods used in auto production, including paints, coatings, and suspension systems, likely as a result of the UAW strike. Firms tied to commercial construction also experienced declines in orders, with one HVAC parts producer reporting considerable order declines. Reports from primary and intermediate metals producers were mixed. One steel producer reported increased orders as his firm's customers worked to boost their inventories. By contrast, orders for other metals producers were flat to down, and one producer said demand for his firm's products had reached its lowest level in 25 years. Manufacturers generally expected little change in demand in the coming weeks.
Real Estate and Construction
Overall, residential construction and real estate contacts indicated that activity slowed this reporting period. Higher interest rates and increasing construction costs dampened demand for new homes. On the existing homes side, the market continued to suffer from a lack of inventory. Looking ahead, contacts expected demand to weaken further as interest rates remained elevated.
Nonresidential construction slowed in recent weeks. Multiple general contractors reported that their clients had delayed or reconsidered projects because of higher financing costs or economic and political uncertainty. Demand for commercial real estate was soft, in particular for older office space. In addition, one commercial realtor noted that demand for industrial, retail, and apartment space had begun to weaken. Nevertheless, many contacts expected conditions to improve in the coming months.
Financial Services
Loan demand declined in recent weeks as higher interest rates discouraged both households and businesses from borrowing. Bankers expected loan demand to weaken further in the coming weeks because of elevated interest rates and economic uncertainty. Several bankers reported that delinquencies increased slightly for certain loan categories such as credit cards. One banker attributed the uptick in credit card delinquencies to a rise in utilization by low- to middle-income consumers who had spent down excess savings. Core deposit growth continued to be soft amid persistent rate competition.
Nonfinancial Services
Demand for professional and business services was solid, while demand for freight services was mixed. Professional and business services firms reported increased demand for their technology-related and engineering services. One contact noted that consumers' continuing shift to online buying had increased demand for his firm's services. These contacts generally anticipated that demand would remain steady going forward. Freight contacts reported an increase in certain markets such as grain and chemical transport. However, demand decreased for freight related to retail products and construction materials, for which the decrease for the latter was linked to customers' pausing projects. Freight firms typically expected demand to be flat in the coming months.
Community Conditions
Nonprofit contacts noted that while demand for skilled tradespersons remained elevated, barriers to entry persisted for many lower-wage jobseekers. To meet the need for skilled labor and mitigate some of these barriers, one workforce-development contact described a construction apprenticeship program that recently opened an onsite childcare center and provided transportation to the job site. Demand for affordable housing remained high, and availability of affordable units was tight. Several contacts said homelessness had spiked recently and cited multiple reasons, including elevated rents, fewer landlords accepting housing choice vouchers, and more competition for affordable-housing units. One nonprofit indicated that construction costs were too high to build affordable housing because of current tight credit conditions and higher interest rates.
For more information about District economic conditions visit: https://www.clevelandfed.org/en/region/regional-analysis