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Cleveland: October 2021

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Beige Book Report: Cleveland

October 20, 2021

Summary of Economic Activity
Economic activity in the Fourth District remained strong in recent weeks, although the pace of growth moderated somewhat amid persistent supply chain disruptions. Broadly speaking, demand for both consumer and business goods and services remained solid, but contacts in some sectors suggested that product shortages were resetting customers' expectations. For example, one auto dealer said that customers weren't coming into showrooms because they knew inventories were limited, and a manufacturer said that demand for its products was shifting based on the availability of close substitutes. On net, contacts expect demand for their goods and services to increase in coming months, but their optimism has been moderating since early summer as supply disruptions intensified and COVID cases rose. That waning optimism was accompanied by lowered expectations for capital spending. Meanwhile, most contacts indicated that input costs (labor and nonlabor) increased in recent weeks, and a majority had raised selling prices. Finally, in a now familiar refrain, labor demand remained solid, but many contacts continued to suggest that hiring was limited by a dearth of job applicants.

Employment and Wages
Employment increased modestly in recent weeks. More than 40 percent of our contacts reported increases in staffing, and half said that employment was steady. Many of those who reported no change said that they would hire more workers if workers were available. Several contacts noted that turnover had increased. In fact, some of those who reported declines in staffing said they could not fill recently vacated positions. Many firms said worker shortages hindered their ability to meet demand, thereby exacerbating supply chain disruptions. But one auto dealer said that supply chain disruptions were causing his labor challenges, adding, "nothing to sell makes it hard to keep employees." Contacts noted very little change in labor availability since supplemental unemployment insurance benefits programs expired and many children went back to in-person instruction.

Heightened competition for workers pushed wages up for more firms. Nearly 60 percent of contacts raised wages recently, while the remaining 40 percent said that wages had not changed. Increasingly, firms raised wages to retain employees "as a preventive measure after losing some to poachers," as one contact stated it. In addition, many firms reportedly enhanced other parts of compensation (such as health insurance, tuition reimbursement, and time off) to attract and retain workers.

Nonlabor input costs continued to rise. Nearly three-quarters of our contacts reported cost increases in the prior two months, while a quarter saw no change. Reports of cost increases were widespread across industry sectors but were most prominent in manufacturing and construction, in which supply chains were most disrupted. Many contacts in these sectors suggested that prices were rising "across the board." The remaining firms often reported that just as some input costs decreased, others rose, resulting in higher overall costs. Looking forward, two-thirds of contacts expected costs to rise in the months ahead because they did not anticipate meaningful relief from supply chain disruptions.

Selling prices continued to rise. Nearly 65 percent of all contacts, and 75 percent of retailers, said they increased prices in the prior two months. Many contacts argued that they increased prices to protect margins amid rising input and labor costs. However, others said that strong demand conditions allowed them to raise prices and boost margins. One manufacturer said that some of his largest multinational customers had recently initiated conversations with him offering "generous" price increases in order to secure delivery of product in the future. He said this is the first time a customer has come to him offering to pay higher prices.

Consumer Spending
Consumer spending increased modestly. General merchandisers and apparel retailers said that demand for goods remained strong, and many noted solid back-to-school sales. Hoteliers and restaurateurs that cater to regional leisure customers reported continued improvement in activity, though one hospitality contact said that business travel continued to lag behind leisure travel. Auto dealers reported a dip in sales despite generally strong demand as tight inventories and higher prices deterred some buyers. Contacts were optimistic that nonauto consumer spending would continue to improve in the coming months. However, auto dealers suggested that sales will remain weak until inventory levels recover.

Demand for manufactured goods grew strongly, though manufacturers' ability to meet that demand varied by sector. For example, steelmakers said that orders from automakers fell as chip shortages constrained vehicle production, while orders from agricultural equipment manufacturers rose as output in that sector increased. Supply chain disruptions remained broad, motivating some customers to order inputs ahead of time as a precaution against future delays or price increases. Some producers continued to sit on goods for which they could not secure shipping or could not finish assembling because of a shortage of labor or parts. On net, contacts expected conditions to improve in coming months, although the continued shortage of microchips, rising materials prices, and inflation fears tempered expectations.

Real Estate and Construction
Demand for residential real estate and construction remained strong. One real estate agent noted that home sales experienced a typical seasonal slowdown in recent weeks, but demand was stronger than usual for this time of year. Homebuilders also reported that demand was solid despite persistent supply chain disruptions that have led to price increases and extended lead times. Overall, contacts anticipated that activity would remain robust throughout the remainder of the year.

Nonresidential construction and real estate activity continued to increase as firms revisited expansion plans previously put on hold. One developer suggested that many clients have begun to move forward with new construction projects despite elevated prices to avoid losing their market share. Overall, contacts were optimistic that demand would remain robust, though many expressed concerns that persistent supply shortages could delay projects and dampen activity.

Financial Services
Banking activity increased modestly, although growth cooled somewhat from that of recent reporting periods. Contacts noted that demand for auto loans and mortgages remained somewhat elevated even though limited inventories in both markets dampened activity. While business lending remained relatively soft, multiple contacts reported an improvement in demand and a stronger loan pipeline. Lenders said that delinquency rates for consumer and commercial loans were still low and that the number of active forbearance agreements for each continued to decline. Looking ahead, bankers were optimistic that loan demand, especially business lending, would continue to improve in the near term as the economy continues to grow.

Professional and Business Services
Demand for professional and business services remained robust as their clients' outlooks for the overall economy continued to improve. Technology firms experienced robust demand as businesses furthered their investments in technology software and solutions. The need for authentication services also remained strong as consumers continued to favor remote transactions. Contacts expected demand to increase further throughout the remainder of the year as more businesses look to plan for the future and invest in additional technology.

Freight activity grew moderately from an already high level both because of an increase in international trade flows and continued economic recovery in the United States. Contacts reported that continued shortages of truck drivers and tractor trailers limited the sector's ability to meet demand, fueling the poaching of workers from competitors and preemptive wage increases. Looking forward, there is general optimism that strong demand will continue into next year and that carriers will maintain their above-prepandemic levels of pricing power.

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