Beige Book Report: Cleveland
July 18, 2018
Summary of Economic Activity
Business activity in the Fourth District grew moderately during the survey period. Demand was strong in many sectors, but hiring continued at about the same pace as in the previous survey period as a dearth of qualified workers constrained hiring. Wages rose moderately, and increases were in line with recent trends. Upward pressure on input costs was strong, notably for fuel and metals. Contacts widely attributed the cost increases to import tariffs. However, final selling prices rose only moderately. Firms raised their prices to cover, at least partially, their increased raw materials and transportation costs. Otherwise, businesses were cautious about raising their selling prices. Consumer demand, including for autos, was stable to slightly higher. Manufacturing capacity utilization rose to meet strong demand, but a number of producers remarked that they were struggling to keep up with orders. Freight volumes trended higher. Construction activity remained strong.
Employment and Wages
District businesses added workers at a pace that was moderate and similar to that of the previous survey period. Most firms reported strong customer demand and optimism about the economy's near-term prospects as supporting their hiring decisions. Very few firms reduced headcount, and a sizable share reported creating new positions. Hiring was strongest among construction firms thanks to high project volumes. Also, strong demand for technology services enabled professional services to add workers at a healthy clip. Contacts reported the dearth of qualified workers constrained hiring across an array of occupations. The problem was most often highlighted by manufacturing, construction, and transportation companies. One steel contact noted the company had significantly increased overtime hours to cope with the worker challenge. A nonresidential builder noticed that worker turnover was somewhat higher than normal. Despite tightness in the overall job market, wage pressures remained consistent with recent trends in the District. In general, employers raised wages moderately as part of cost-of-living increases or annual merit raises or to fulfill union contracts.
Prices
Upward pressure on input costs remained strong, especially for fuel and metals. Manufacturers and builders commented widely that import tariffs were lifting steel and aluminum prices. In some cases, manufacturers noted a rush to purchase metals in anticipation of additional price increases. To a lesser extent, construction contacts also noted lumber price increases. Aside from the manufacturing, construction, and transportation sectors, contacts noted moderate cost increases that were consistent with recent trends. Retailers pointed out that prices for cotton and raw food ingredients rose for their suppliers. Final selling prices rose moderately, with little change compared with those of the previous survey period. Overall, firms managed to raise their prices to compensate, at least partially, for rising raw materials and transportation costs. Aside from that, firms either held their prices or cautiously nudged them higher.
Consumer Spending
Retail demand improved moderately, extending a streak that started in the final months of 2017. In addition to a seasonal boost, food retailers and clothing retailers noted that continued strong consumer confidence lifted sales. A few contacts noted slight improvement in sales of discretionary items and higher quality products. Retail sales in the Fourth District were reported to be mostly in line with activity in the rest of the country. Inventories and profits were stable.
Auto demand and vehicle financing conditions held steady. One auto dealer noted that leasing activity had weakened as manufacturers reduced their support. All contacts reported that sales of passenger vehicles lagged those of crossovers, SUVs, and trucks. One contact speculated that the market share for such vehicles would increase because of increased vehicle fuel economy, older customers' need for comfort, and a younger generation of customers starting families. Expectations for vehicle sales in the near-term were mixed. One dealer was concerned that price increases and higher interest rates could sap demand. Another dealer was optimistic that activity in the energy industry could lift sales in the region.
Manufacturing
The strong manufacturing demand seen earlier in the year showed no signs of letting up in the current survey period. Contacts mostly attributed the momentum to strong US economic growth that broadly supported demand in end markets. One pump and motor manufacturer noted increased demand from customers in primary metals manufacturing and extractive industries. An industrial metals producer cited strong demand from the construction sector. Some manufacturers noted that capacity utilization had risen to meet demand and that a few contacts mentioned they struggled to keep up with orders. Contacts remarked that concerns about future trade- and inflation-related price increases had prompted some customers to accelerate purchases. Most manufacturers expected that continued economic growth would lead to stronger customer demand in the near term. However, one auto-related manufacturer expected import tariffs to lead to weaker sales because of the consequent increase in prices.
Real Estate and Construction
Demand for new homes grew modestly in the current survey period. Homebuilders noted that rising interest rates and concern about rising materials prices motivated some customers to move their purchases forward. Contacts widely expected stable demand in the coming quarter. Real estate agents noted demand for Section 8 vouchers was stable. However, reports of first-time buyers' home demand were mixed. Sales of houses priced below $400,000 and those priced between $600,000 and $800,000 strengthened, according to some contacts. Financing conditions for homebuyers were mostly stable.
Nonresidential builders noted that the strong demand of recent periods continued in the current period and that backlogs ticked higher as firms struggled with labor constraints. Capital investment plans were mostly unchanged, although one commercial builder stated that the firm boosted spending to use drones for surveying to make up for the shortage of workers. Most contacts expected the current momentum in customer demand to continue in the near term. However, there was some concern that demand from industrial clients could weaken depending on the course taken by trade disputes.
Financial Services
Most banking contacts reported that steady economic growth had kept loan demand stable. Deposits fell during the last two months because of seasonal changes following the tax-filing season. Some bankers noted that strong revenue growth combined with higher borrowing costs drove some customers to fund capital expenditures and expansions with cash rather than with credit. Most contacts reported that delinquency rates remained steady, although rising interest rates were cited as a risk to the outlook.
Nonfinancial Services
Nonfinancial services firms reported strong demand thanks to generally favorable economic conditions. Business advisory firms and software developers reported strong activity. In addition to tax savings and ongoing strong confidence, contacts remarked that their services were in demand because businesses were modernizing their IT infrastructures and attempting to understand the implications of worker scarcities. Capital investments held steady, although one financial consultant remarked that Chinese capital controls had caused an expected investment to fall through. Transportation firms reported continued increases in freight volumes. Railroad contacts attributed some of their volume growth to ongoing capacity constraints in the trucking industry. One trucking contact noted an increase in demand for home deliveries.
For more information about District economic conditions visit: www.clevelandfed.org/region/