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Beige Book Report: Cleveland
April 14, 2021
Summary of Economic Activity
The pace of business activity accelerated in recent weeks, and the pickup appeared widespread across the Fourth District and by industry segments. Contacts often suggested that additional government stimulus and progress in the fight against the COVID-19 pandemic were the key factors supporting the recent improvement in current conditions. Those same factors were cited as leading to a decidedly more optimistic outlook for demand moving forward. The improved outlook likely contributed to an increase in capital spending plans as some firms appeared more willing to move forward with projects that had been delayed as a result of uncertainty surrounding the pandemic and its effects on demand. More firms also appeared ready to increase staffing, although their plans to do so were often constrained by a dearth of qualified applicants for open positions. These labor constraints contributed to supply chain disruptions such as shortages of key inputs and freight and shipping delays. The effects of supply chain constraints included longer lead times and project delays and higher nonlabor input costs. Many firms reported that they were trying to pass through these higher costs to their customers, with varying degrees of success.
Employment and Wages
Staffing levels increased modestly, according to our contacts, even as firms continued to face a dearth of available talent. Staffing services firms said that demand for their services increased further from already strong levels, with search requests coming from clients in a wide array of industries. Among these were manufacturers, some of which had been using overtime to keep up with demand but had recently decided to add more permanent workers rather than overextend their existing workforce. Even some firms in the hard-hit energy and accommodation sectors recently added to their staffs. Quite often, however, plans to add workers were hampered by the limited availability of qualified applicants to fill open positions. In some cases, contacts indicated that they were planning to adopt more technology (in lieu of more employees) to keep up with demand.
A little more than 40 percent of our survey respondents reported that they had raised wages over the past two months, with the remainder indicating that wages had not changed. Reports of wage increases spanned a variety of industries but were particularly prominent in reports from staffing services firms, construction contacts, manufacturers, and transportation firms. One staffing services firm, which has been surveying its employees for five years, noted that in its latest survey for the first time pay had surpassed the type of work as the top priority of job seekers.
Reports of increases in input costs and selling prices have grown more frequent in recent weeks. Two-thirds of our contacts reported that nonlabor input costs increased in the last two months. This is the highest share to report an increase in more than two years. As was the case with wages, the increases were widespread across industries, with contacts' suggesting that prices were rising meaningfully for many materials (such as wood, steel, plastics, and glass products) and for some services (such as shipping, logistics, and advertising). In many instances, rising input costs were attributed to supply chain disruptions that have been rippling through the economy for several months.
At the same time, about half of our survey respondents said that selling prices had increased over the prior two months. This number compares with roughly a third who reported the same toward the end of 2020. As was the case with input costs, reports of price increases were evident in every industry. Some contacts said they increased prices to offset higher costs, in most cases only partially. But a few acknowledged that strong demand allowed them to boost margins. Contacts generally expected cost pressures to persist in the near term, with one suggesting that "the imbalances causing costs to rise are not likely to be resolved quickly." However, many expect supply chain challenges to dissipate later in the year, and this will ease cost and price pressures.
Reports suggest that consumer spending grew significantly toward the end of the reporting period, primarily supported by recent fiscal stimulus and continued progress in the fight against the pandemic. General merchandisers and apparel retailers said that demand was up notably in recent weeks, and auto dealers commented that sales remained very strong. Restauranters and hoteliers reported improvements in leisure activity and group events, and one hotelier said that although business travel remained weak, there was an uptick in recent weeks. Contacts were optimistic that consumer spending will continue to recover in the coming months thanks to fiscal stimulus, rollback of government-mandated restrictions, and expanded vaccination efforts.
Manufacturing orders increased strongly across a range of end-user markets. Some firms reported stronger orders from customers who are seeking to replenish inventories. Conversely, aerospace remained depressed but saw modest gains. As a sign that activity in this sector might improve, one supplier said it recently received double the normal number of requests for quotes. Supply chains continued to be disrupted for many manufacturers, especially for products sourced from abroad. A number of contacts said that future delays in acquiring raw materials and intermediate products from foreign suppliers were likely. On balance, the majority of respondents expected conditions to improve in the coming months, though difficulty in hiring, rising input and transportation costs, and material shortages tempered expectations for continued growth.
Real Estate and Construction
Demand for residential construction and real estate remained strong. However, exceptionally lean inventories and elevated materials costs pushed up home prices, a situation which, along with moderately higher mortgage interest rates, has reduced average affordability. Looking ahead, contacts worried that demand will begin to diminish if home prices continue to rise.
Nonresidential construction and real estate activity increased since our last report, although this increase was uneven across segments. Demand for light-manufacturing and industrial space remained solid, and demand for office and retail space, while still weak, experienced a modest rebound. Contacts attributed the increase in activity to the loosening of business restrictions and improved consumer confidence. Overall, contacts were optimistic that demand would increase further as governments continue to roll back restrictions and vaccines become more widely distributed.
Banking activity increased moderately during the reporting period. Contacts noted that demand for auto loans and mortgages remained strong, although the recent uptick in mortgage rates dampened refinancing activity. While business lending remained relatively soft, multiple contacts reported an improvement in demand, especially for commercial real estate loans. Lenders said that delinquency rates for consumer and commercial loans were still low and that the number of active forbearance agreements continued to drop. Most banks saw growth in core deposits as households received fiscal stimulus funds. Looking ahead, bankers were optimistic that loan demand would continue to pick up as COVID-19 restrictions ease and more vaccines are distributed.
Professional and Business Services
Strong demand persisted for professional and business services firms as many of their client businesses began to return to normal operations. The owner of a construction and real estate publication noted that business optimism had increased significantly, and an increasing number of firms was willing to put more of a focus on advertising. Contacts anticipated demand will continue to grow as the business climate improves and the broader distribution of vaccines gives firms the confidence to implement projects and initiatives that had previously been put on hold.
Demand for freight services remained strong in recent weeks as the recovery continued to spread across geographies and sectors. While many freight haulers reported a need to increase freight capacity, a scarcity of truck drivers made growth difficult. Looking forward, more than two-thirds of transportation contacts expected demand to improve further in coming months even as driver shortages persist.
For more information about District economic conditions visit: clevelandfed.org/region