Beige Book Report: Cleveland
January 17, 2018
Summary of Economic Activity
Business activity in the Fourth District grew at a moderate pace since our last report. Labor markets continued to tighten. Challenges in attracting and retaining qualified workers, especially for low-skills jobs, contributed to wage pressures. Manufacturers and professional services providers experienced pushback when attempting to increase their selling prices. Retailers reported higher-than-expected sales for the early part of the holiday shopping season. Manufacturing output grew, albeit at a slow pace. Freight transport and nonfinancial services firms saw moderate to strong gains in activity. The housing and commercial real estate markets remained healthy.
Employment and Wages
District labor markets continued to tighten during the survey period. The strongest activity was found in the construction and nonfinancial services sectors. After softening late in the second quarter, hiring by manufacturers has been trending slowly higher. A large majority of contacts reported they are replacing departed workers; the share of firms creating new jobs was stable. The main labor-related challenge reported was attracting and retaining workers for low-skills and, to a lesser extent, middle-skills jobs. In response, firms are raising wages and creating career paths within these job categories. A professional services contact reported boosting wages for select low-skills jobs by up to 20 percent, while a fast food executive said that wages at her restaurants are now up to $11 per hour. Higher labor costs were difficult to pass through to customers because of competitive markets. Turnover is reportedly much less of an issue in high-skills and STEM jobs.
Prices
Upward pressure on input costs remained strong, especially in the construction and nonfinancial services sectors. Building contractors generally attributed higher materials prices to rebuilding efforts from last summer's hurricanes. Trucking firms cited rising prices for fuel and maintenance products. Price spikes for petrochemical products resulting from the hurricanes are beginning to moderate. Reports on selling prices were mixed. Building contractors, trucking firms, and railroads all reported rate increases in response to higher input costs, including labor costs, and a desire to widen margins. One construction contractor reported raising rates up to 10 percent during the past two months. A trucking firm cited across-the-board rate increases of 6 percent to 12 percent. In contrast, reports indicated a decline in manufacturer selling prices on net, mainly because of competitive pressures. Professional services firms described their billing rates as flat. Some of these firms are feeling pressure from clients to lessen the rate of increase in billing rates or to reduce rates overall for the next year or two.
Consumer Spending
An improving outlook, on the part of most retailers, continued into the holiday shopping season. Retail chains that invested in technology to enhance customers' shopping experiences saw improving same-store sales. One chain reported that a growing share of online orders are for in-store pickup. This model has been good for generating increased in-store sales when the customer comes in to pick up an order. Another smaller chain is testing same-day delivery options in order to keep up with consumer expectations set by big retail players. A fast food chain observed that the average revenue per transaction from recently installed self-service kiosks was higher than transactions generated by cashiers. Anecdotes suggest that revenues for the early part of the holiday shopping season are moderately higher when compared to those of the same period a year ago, and they are also higher than expected. Cold weather across the District and the use of promotional discounting are believed to be contributing to higher revenues. One large chain reported that this is the first holiday season for which gains from e-commerce are expected to offset losses from brick-and-mortar operations. Year-to-date unit sales through November of new motor vehicles rose 3 percent compared to those of a year ago. One dealer commented that interest rate changes have not yet made an impact on new-car transactions.
Manufacturing
Manufacturing output continued to strengthen, albeit at a slow pace. Several contacts cited an improving economy as the primary reason for new orders, while others pointed to ongoing strength in the construction and motor vehicle industries and stability in the energy sector. Contacts linked to the petrochemical industry reported a residual boost in activity resulting from hurricane-related damage. Steel producers saw rising activity, which they generally credited to increased manufacturing output. One steel producer noted that some of his customers are concerned that the domestic economy may be reaching the peak of the current business cycle, resulting in a dampening in capital investment. Year-to-date production through November at District auto assembly plants declined about 20 percent when compared to that of the same period a year earlier. The decrease can be attributed to retooling for a next-generation sport utility vehicle and cutbacks in small passenger car production. Contacts reported a pull back on spending for plant expansions and product development after spending rose during most of the second half of 2017. Our contacts' outlook calls for a moderate pickup in the pace of growth in the near term.
Real Estate and Construction
Several homebuilders reported that they have not seen the typical seasonal decline in demand. One builder attributed this situation to low interest rates, a healthy economy, and low inventory of existing homes. Looking across the District, unit sales of new and existing single-family homes during November 2017 were almost 4 percent higher when compared to unit sales of November 2016. The average sales price rose more than 6 percent. Homebuilders are concerned about declining lot inventory and the availability of land.
Demand for nonresidential construction services remains at a high level. A majority of contacts cited their customers' confidence in the economy as the primary driver for the strong demand. Property development was broad based. We heard reports about a pickup in office construction and owners' expanding the scope of their projects. Backlogs increased during the survey period and were at high levels. A moderate increase was reported in selling prices for office and industrial properties during the first nine months of 2017 compared to those of the same period in 2016. During the same time frame, reports indicated a decline in the number of apartments coming on the market. Apartment rents continued to trend moderately higher.
Financial Services
Business lending trended up slowly across loan products, and bankers saw higher loan balances on a year-over-year basis. Increasing confidence in the economy was frequently cited for rising credit demand. Merger and acquisition financing remains strong. An accounting executive said that his firm has performed more acquisition work during 2017 than in the past five years combined. A large-bank contact reported that although his pipeline for loans remains strong, the closure rate is relatively weak. He attributed this situation to seasonal factors and uncertainty spawned by political activity at the federal level. Consumer lending weakened along seasonal trends, with several contacts reporting declines in credit card balances and drawdowns on HELOCs.
Nonfinancial Services
Freight volume increased at a moderate to strong pace during the period. Demand was broad based but was driven especially by demand for steel products and by the energy sector. Strong growth in e-commerce was also mentioned as driving up volume. Capacity constraints and labor shortages were cited as factors contributing to escalating shipping rates. Current freight volumes are expected to continue in the near term. Professional services firms experienced moderate gains in activity. The strongest gains were reported by firms that assist customers in applying digital technologies to both production and back-office activities.