Beige Book Report: Cleveland
April 15, 2020
Summary of Economic Activity
The Fourth District economy contracted sharply in the second half of March as business disruptions resulting from COVID-19 mitigation efforts spread quickly. Consumer spending decreased materially, with restaurants, tourism, and nonessential retail spending particularly hard hit. Residential realtors and builders noted that stay-at-home orders curbed walk-in traffic, and pending home sales fell. Meanwhile, many new nonresidential projects were delayed, and commercial realtors expressed concern that cash flow will suffer as tenants defer rent payments. Manufacturers' orders declined amid virus-related work stoppages along with pullbacks in capital equipment spending. Banking and a few business services sectors saw activity pick up as a result of the pandemic, but, on balance, service sector activity was down. Reports from freight and logistics firms were mixed. Looking forward, contacts generally expected economic conditions to worsen further in coming months. Consequently, many planned to conserve cash by reducing capital spending and cutting staffing levels in the months ahead. Weakening demand across industries generally resulted in less upward pressure on costs and prices.
Employment and Wages
Fourth District employment fell significantly in recent weeks as firms realigned their staff with suddenly diminished demand for their goods and services. There was very little new hiring taking place and contacts in most industries reported cutting hours, staff, or both. Of those firms that were cutting staff, the majority indicated that they were furloughing workers rather than firing them outright, with the hope of bringing them back once business activity resumes. Employers appeared eager to do everything in their power to help underutilized workers. Many reportedly increased wages temporarily for essential workers whose hours had been cut, while others were extending healthcare benefits to furloughed workers or offering them help finding new employment. Banks, grocery stores, and health services firms were among the few industries that were not cutting back on staffing. Outside of the temporary pay increases, upward wage pressures generally diminished. Looking forward, greater than one in two surveyed firms expected staffing levels to fall in coming months, compared to fewer than one in 10 that expected them to rise.
Prices
Selling prices generally declined in recent weeks, while nonlabor input costs increased at a noticeably slower pace. For the first time since late 2015, more contacts reported that selling prices had declined compared to those who said they had increased. Those who said that prices decreased generally cited reduced demand resulting from COVID-19 mitigation efforts. While this trend was evident across most industries, it was particularly pronounced among nonessential retailers, many of which had been seeing increased pricing power during the past several reports. By contrast, freight haulers noted higher selling prices. At the same time, a considerably smaller share of contacts reported higher prices for nonlabor input costs compared to the prior Beige Book period. While firms in most industries expected cost pressures to remain muted in coming months, some manufacturers and construction contacts said that supply chain disruptions may push prices up for some materials.
Consumer Spending
Retail activity in the Fourth District declined sharply as a result of social distancing measures taken to mitigate the spread of COVID-19. With a large number of dine-in restaurants and nonessential retailers ordered to close, many establishments lost a significant portion of their expected revenue. A national restaurant group indicated that revenues were lower by 60 percent year over year, even as stores remained open for takeout and delivery, while a smaller regional holding group shut down all of its establishments because costs far exceeded revenues. Meanwhile, one luxury auto dealer reported that while its doors remained open with reduced hours, it had not sold a car in the second half of March. By contrast, a handful of essential grocery stores saw a large spike in demand recently as consumers stocked up on food and home supplies. Contacts in the retail sector generally expected economic distress to persist into the summer, followed by a slow and gradual recovery.
Manufacturing
Manufacturing conditions worsened as more than half of contacts reported that demand had declined during the last two months. Contacts noted a pullback in capital spending along with work stoppages because the spread of COVID-19 reduced orders. Several contacts noted in particular that the two-week shutdown of US auto production would have ripple effects throughout their supply chains. More than a third of manufacturers reported that capacity utilization was below a normal range because demand had weakened and because employees were increasingly missing work because of illness, concern about the virus, and school closures. Although a few contacts noted an uptick in demand because of precautionary behavior, they expected that demand would drop off in the future as customers work through their built-up inventory.
Real Estate and Construction
Reports from realtors and builders (residential and nonresidential) indicated that activity fell sharply in mid-March. On the residential side, real estate professionals suggested that sales in 2020 had been off to a very strong start through the first half of March, but they weakened subsequently. Thus, while existing home sales were relatively robust in the first quarter, pending sales fell notably in March. Builders indicated that work on homes under contract continued, although sales had slowed. However, one builder noted that cancellation rates had increased, and another was concerned that homes under contract may not close in coming months if rising unemployment befalls some of his buyers. Nonresidential real estate professionals indicated that demand fell recently. Moreover, several contacts suggested that tenants have reached out to ask for rent deferrals or concessions. Nonresidential builders reported that work continued on large projects that were underway in areas that allowed it, but they have seen some job postponements and cancellations. Contacts on both the residential and nonresidential sides expected demand to weaken further in coming months.
Financial Services
Loan demand grew substantially; one banker described it as "unprecedented," saying that one-month growth was likely to match what would typically be expected in a year. Corporate clients drew down credit lines to keep cash on hand in light of COVID-19-related revenue shocks, while consumers rushed to refinance home mortgages at lower rates. This activity largely offset declines in demand for auto loans. Delinquency rates remained low as banks worked to assist clients in these unusual times, although many contacts speculated that delinquency rates will climb in the coming months as economic duress persists.
Professional and Business Services
Contacts in the professional business services sector reported a significant decline in demand for their services in recent weeks. Multiple firms indicated that clients have delayed the implementation of new projects in addition to cancelling some projects already underway. However, there were a couple of firms that provide legal, human resources, and online commerce consulting services that reported an increase in demand in recent weeks. Overall, the majority of firms interviewed expected economic conditions to remain significantly subdued through the second quarter.
Freight
Reports from the freight sector were mixed. While freight activity as a whole had declined since the onset of COVID-19, firms that ship consumer staples such as food, cleaning supplies, and medical supplies saw a significant increase in demand. However, freight firms that typically ship manufactured or imported goods continue to see reduced volumes. Because manufacturing output is expected to remain weak and the elevated demand for consumer staples is expected to wane, contacts in the freight sector generally anticipated that business conditions will worsen further in the second quarter.