Beige Book Report: Cleveland
April 18, 2018
Summary of Economic Activity
Business activity in the Fourth District expanded at a moderate pace as customer demand strengthened broadly and confidence remained high. Firms' demand for labor increased, but difficulty finding qualified candidates is limiting the pace of hiring. In response, employers are raising wages to compete for workers, albeit only moderately. Rising commodity prices, particularly for steel, are pressuring goods producers. Meanwhile, services firms mostly noted stable input prices. Goods producers and transportation companies were generally successful at raising their selling prices. Service producers, however, tended to hold the line on their prices. Retailers reported continued growth in customer demand, although auto dealers reported higher inventories of passenger cars. Housing and commercial real estate markets remained strong, but builders are increasingly concerned about rising input costs. Manufacturing output trended higher.
Employment and Wages
District employers continued to hire at the same moderate pace as in the past few months. Contacts generally reported stronger demand for their goods and services, but worker turnover and difficulty finding qualified workers restrained net job gains. Notably, manufacturing employment has been steadily trending higher since mid-2017. Nonfinancial services firms cited strong confidence in the economy and rising freight volumes as boosting business and demand for workers. Retail showed the weakest gains in hiring. Replacing departed workers was the most prevalent labor-related activity, though several contacts in nearly all industries reported creating new positions. Nonresidential builders overwhelmingly reported creating new field and office jobs. Contacts continued to report difficulty finding qualified candidates across a broad array of occupations. Nevertheless, no meaningful changes to wage pressures were noted. In general, employers are raising wages to stay competitive, but incremental increases are in keeping with recent trends.
Prices
Upward pressure on input prices remained strong, particularly for commodities used by goods producers. According to contacts, recently imposed tariffs have accelerated price appreciation of steel products, in some cases at double-digit rates. Independent of policy, prices for other commodities have also increased. One producer of industrial packaging noted that resin prices were still elevated because of lingering impact from hurricanes in 2017. Professional services mostly reported little change to their nonlabor input costs. Firms' ability to pass through price increases to their customers was little changed from the previous survey period, though there was considerable variation across industries. Transportation companies across the board were able to raise freight rates in response to strong demand relative to available capacity without pushback from customers. To a lesser extent, manufacturers have been steadily raising their prices since the beginning of the year to pass along their higher raw materials and transportation costs. Construction firms are also finding success in passing along their higher costs. In services, however, firms' ability to pass through prices remains relatively soft. Retailers held their prices steady.
Consumer Spending
The retail sector reported improved customer demand since the beginning of the year and on a year-over-year basis. Reasons cited included improvements in product quality, marketing, customer service, and business strategies. Vendor and shelf prices were generally stable. New motor vehicle unit sales across the District declined about 2 percent during February when compared to those of the same period a year ago. Year-to-date unit sales fell 5 percent. One auto dealer reported that banks are tightening credit, which could negatively impact future sales activity. Dealer inventory was higher than usual, which one contact attributed to lower incentives and less demand for passenger cars.
Manufacturing
Demand strengthened during the past two months in most industries. Some contacts attributed this to seasonal fluctuations and a recovery from slow growth in previous months. Contacts in primary metals and electrical and industrial products manufacturing noted that probusiness fiscal policy and corporate tax reform spurred capital expenditures and drove up demand. One steel manufacturer mentioned that customers are attempting to stock up as prices rise because of increased demand and tariffs on primary metals imports. Elsewhere, an electronics manufacturer noted that high consumer confidence encouraged demand for discretionary items, a situation which is good for manufacturers of higher-end products. The majority of contacts indicated that demand was better than it was a year ago. A supplier to the HVAC industry mentioned that they saw increased demand for finished products previously produced by downstream OEMs because those companies were struggling with capacity constraints and labor shortages.
Real Estate and Construction
New-home builders reported that customer demand was either steady or improving and that current trends are expected to continue into the spring selling season. That said, builders are becoming concerned that rising construction costs (materials and labor) are driving up new home prices and that this may dampen buyer enthusiasm during the prime selling season. Construction costs are expected to increase through the summer. Year-to-date unit sales through February of new and existing single-family homes declined 2 percent compared to those of a year earlier. The average sales price rose more than 7 percent. Buying patterns and inventory levels remained steady.
Among nonresidential construction firms, demand generally improved during the survey period and on a year-over-year basis thanks to more opportunities for projects emerging, especially as the weather improves. Increases in backlogs, inquiries, and bidding were observed. Current levels of activity are expected to continue into the summer months. Almost all nonresidential contractors reported that rising construction costs (materials, labor, and transportation) are among the biggest challenges they are facing currently.
Financial Services
Growth in demand for bank products and services was little changed, though contacts noted that conditions remain favorable. Demand for commercial loans was healthy, but some contacts worried that businesses increasingly are relying on cash savings to fund capital investments before looking for bank credit. Most contacts seemed optimistic about the outlook for business investment in the coming quarter. On the consumer side, demand for loans was flat or declining. Some contacts, particularly in rural areas, reported that lack of inventory and depreciation of the housing stock dampened growth in home mortgages. Also, a lack of construction labor was constraining new home construction, thereby constraining opportunities for mortgages. More broadly, demand for consumer loans was flat, mostly because of seasonal factors. Reports indicated that competition from fintech firms and the nonbank sector continued to stifle growth in consumer loans and, to a lesser extent, in deposits.
Nonfinancial Services
Activity in the nonfinancial services sector continued to grow at a moderate-to-strong pace. Rising freight volumes across product segments were attributed primarily to solid economic growth. There is concern about the sustainability of increasing volume because of newly enacted tariffs and potential outcomes from NAFTA negotiations. Railroad contacts attributed some of their volume growth to ongoing capacity constraints in the trucking industry. Within the professional services sector, contacts from engineering, software development, and accounting firms reported the strongest growth, which they said was due to strong confidence in the overall economy. One accounting firm noted that its work in mergers and acquisitions was the strongest that it has been in the past 10 years.