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Cleveland: January 2022

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Beige Book Report: Cleveland

January 12, 2022

Summary of Economic Activity
On balance, the Fourth District economy expanded at a moderate pace in recent weeks, although growth varied by segment. Demand generally remained solid, but the emergence and spread of the Omicron variant of COVID-19 reportedly constrained sales in some high-contact service-providing industries, especially food services and leisure and hospitality. Moreover, persistent supply chain challenges continued to limit growth for manufacturing firms, construction companies, and some retailers. Despite these supply constraints, general merchandisers and apparel retailers suggested that holiday sales were solid. Looking forward, contacts generally expected demand to continue to grow in coming months, but at a somewhat slower pace than currently as renewed uncertainty about the path of the pandemic tempered their optimism. Supply challenges were expected to persist in coming months, keeping upward pressure on costs and prices. However, most contacts expected meaningful relief from disruptions in 2022, especially in the second half of the year.

Employment and Wages
Labor demand remained solid in the District in recent months and hiring picked up. Staffing services contacts indicated that firms across a wide array of industries were hiring to keep up with strong demand. Several contacts noted a continued trend toward higher turnover amid a persistently competitive job market. Moreover, several contacts suggested that increased retirements led to more openings. Looking forward, businesses expected to continue boosting staffing levels in coming months, although they anticipated that labor availability would remain constrained.

With labor demand outpacing labor supply, wages continued to rise. Nearly 70 percent of business contacts indicated that they had increased pay rates during the prior two months, a share that was virtually unchanged since our last report. While wages are rising most notably among hourly workers, salaried workers are seeing meaningful increases, as well, according to our contacts. Anticipating little relief from labor shortages in the near term, firms expected competition for workers to remain intense, keeping upward pressure on labor costs.

Nonlabor input costs continued to rise, albeit at a slightly slower pace than in our last report. The share of contacts reporting higher costs declined from around 85 percent to roughly 75 percent. While cost pressures reportedly intensified for firms in the transportation sector, contacts noted some relief in manufacturing and construction. Firms in the latter two industries suggested that costs remained high, but prices for inputs such as steel, aluminum, and resins had stabilized and in some cases had come down. Looking forward, firms expected input cost pressures to continue easing in coming months as supply chain disruptions dissipated, although they anticipated that costs will remain elevated.

Pressure on selling prices remained elevated. Roughly two-thirds of contacts suggested they had increased selling prices over the prior two months, similar to in the prior report. Firms continue to indicate that they raised prices to offset higher nonlabor input costs and protect margins. Also, contacts more frequently reported that they were factoring in the cost of higher wages in pricing strategies as well.

Consumer Spending
Consumer spending increased modestly. General merchandisers and apparel retailers said that demand for goods remained strong, and many noted favorable holiday sales. Restaurateurs and hoteliers reported a pickup in sales in recent weeks, although some restaurateurs said that news of the omicron variant dampened activity. Auto dealers reported limited sales despite generally elevated demand as tight inventories and higher prices deterred buyers. Contacts expected nonauto consumer spending to remain relatively strong in the coming months, and multiple auto dealers were optimistic that sales would increase along with inventory levels in the first quarter of 2022.

Growth in demand for manufactured goods slowed somewhat in recent weeks, although it remained solid. Some contacts attributed softer growth to persistent supply chain disruptions and long lead times, both of which limited availability of essential inputs. For example, one steel manufacturer said that a customer reduced its purchases until diesel engines and truck chassis were more readily available. Many manufacturers also noted that the shortage of production workers inhibited their ability to keep up with demand or build inventories to desired levels. Looking forward, many manufacturers expected that supply constraints will continue to limit production through the next several months.

Real Estate and Construction
Housing demand has remained elevated. But one homebuilder noted that he no longer had time to build spec homes to take advantage of strong demand because of the number of projects already under contract. Supply chain disruptions also slowed current construction activity. A homebuilder indicated that he had been unable to complete homes that were already sold because of labor and materials shortages. Going forward, contacts expected demand to remain strong as consumers look to lock in low interest rates, although supply chain disruptions were expected to continue impeding new home construction.

Demand for nonresidential construction and real estate remained stable on net but continued to vary by sector. Leasing activity for industrial space remained robust, while office occupancy rates continued to decrease. Contacts reported that nonresidential construction activity has remained solid overall, with the strongest demand centered on industrial spaces. Going forward, contacts were less optimistic about future construction demand because concerns about supply chain disruptions, labor availability, and inflation have led some firms to delay construction projects.

Financial Services
Loan demand increased moderately. Contacts reported growth in business lending despite elevated cash balances, and many bankers reported a stronger loan pipeline. Lenders said that demand for auto loans and mortgages was slightly down because limited inventories and higher selling prices in both markets dampened activity. Lenders said that delinquency rates for consumer and commercial loans were still low and that core deposits had increased in recent months. Looking ahead, bankers expected that business loan volumes will continue to increase because of a large number of applications in the pipeline.

Professional and Business Services
Professional and business services firms continued to experience robust activity. Demand for HR and IT software and solutions remained strong, while the recently passed infrastructure bill increased demand for engineering firms. Accounting and wealth management firms also reported increases in activity, in part because of potential changes in federal tax laws. IT firms anticipated that demand will remain strong as businesses continue to shift to more online work. Other professional and business services firms were also optimistic about the future and anticipated that an increasing number of public agencies will be seeking project proposals related to the infrastructure bill.

Demand for freight services increased moderately in recent weeks from an already high level. As in other industries, capacity constraints and supply disruptions were limiting growth. When asked if his firm had seen increased activity in recent months, one contact said his firm was "running at capacity, (so) no change is the only possible response at this point." Moreover, a logistics firm noted that problems getting containers in from overseas contributed to lower-than-expected volumes just prior to the Black Friday–Cyber Monday period. While the scarcity of drivers and trucks is likely to persist well into 2022, multiple contacts expected supply chain disruptions to ease late in the year and improve at least truck availability.

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