Beige Book Report: Cleveland
March 2, 2022
Summary of Economic Activity
The Fourth District economy grew at a slower, more modest pace in recent weeks. Demand was generally solid, but the surge of Omicron-related coronavirus infections temporarily dampened activity in some high-contact services such as restaurants and retail stores. Contacts reported that their outlooks were largely unchanged and that they continue to expect a strong year for sales. There were scattered reports that supply chain disruptions may have eased for some materials. That said, contacts expected it could be the second half of this year or even 2023 when supply chains normalize. Amid persistent labor shortages, employment increased moderately, while pay increases were widespread. Reports of rising input costs and prices were also widespread. Contacts expected that nonlabor costs will continue to increase in the near term, possibly at a slower rate than last year. However, they expected price pressures to remain elevated in the coming months as they keep up with cost increases and, in some cases, as they try to recover lost profit margins.
Labor Markets
Employment rose moderately during the reporting period. A few firms indicated it had become slightly easier to hire, but for the most part reports of labor shortages remained widespread. Contacts with customer-facing operations noted that the spread of the Omicron variant had temporarily disrupted operations in early January as staff absences increased. However, such disruptions quickly abated as the month progressed. Many firms commented that employee turnover was high for various reasons, including a greater desire to work remotely, receive higher wages, change careers, or find better working conditions. One university representative expressed great concern that educators were leaving the profession in large numbers because the current work environment was "not what they had signed up for." Generally, contacts saw few reasons to believe labor supply will soon improve meaningfully.
Reports of wage increases were widespread across sectors as firms struggled with the scarcity of workers. Contacts indicated that recent pay raises were often in the high single-digit or low double-digit percentages and that wage pressures were broad across the pay scale. Despite substantial pay raises, contacts had mixed results in attracting or retaining workers. A few staffing agents expected wage growth for lower-paid workers to slow in the coming year, saying that businesses cannot afford to pay much more. However, contacts expect wage pressures for higher-skilled workers to remain elevated.
Prices
Nonlabor input costs rose for most contacts. In a few instances, contacts noted that some costs, such as for steel, had stabilized or come down somewhat. However, such reports were the exceptions. Higher transportation costs were commonly cited as a major strain on firms. One manufacturer noted that freight costs had almost doubled in the past two months. Also, builders noted that lumber prices trended back up after a brief respite late last year. Materials shortages forced some firms to purchase in spot markets or from retailers (as opposed to wholesalers), a situation which greatly added to their costs. Contacts generally expect costs to rise in the coming months, but some indicated the rates of increases could slow from what was seen last year.
Most firms raised prices as they passed through higher costs of materials, labor, and transportation to customers. A little less than half of contacts who had tried to raise prices indicated that customers had been more accepting of price increases in the past few months, partly because they were seeing cost increases everywhere and had few alternatives. Contacts expected price pressures to remain elevated in the coming months as they keep up with cost increases and, in some cases, as they try to recover lost profit margins.
Consumer Spending
Reports suggested that consumer spending softened following the holidays. Retailers noted that spending was strong in November and December, but the rapid spread of the Omicron variant following the holidays weakened sales. Restaurateurs reported that concerns about the pandemic and poor weather conditions weakened dine-in activity, although some restaurateurs said that the impact of the new variant waned toward the end of the January as case rates dropped. Auto dealers reported limited sales despite generally elevated demand as tight inventories and higher prices deterred buyers. Contacts were optimistic that nonauto consumer spending on goods and services would pick up in the coming weeks as concerns about the Omicron variant abate, and multiple auto dealers expected sales to increase along with inventory levels in coming months.
Manufacturing
Manufacturing orders increased slightly from already high levels. Contacts noted that output was stifled by shortages of raw materials and workers. Aerospace equipment manufacturing continued to recover, but auto suppliers said that carmakers purchased less than they had expected because of shortages of microchips and other parts. High staff turnover and rising wages prompted some firms to spend more on labor-saving technology. That, in addition to increased overtime hours and alternative work arrangements (for example, having non-floor staff step into hands-on roles) allowed some firms to boost production. Most manufacturing contacts expected demand to increase in the coming months, although they expected supply chain disruptions to persist.
Real Estate and Construction
Housing demand remained strong despite rising home prices. One homebuilder compared current housing demand to a fever and noted that customers were buying houses at any price without pushback. An increasing number of homebuilders noted that demand has been so strong that they no longer have the capacity to build spec homes. In addition, supply chain difficulties impeded construction activity. Contacts anticipated that housing demand would remain robust in the near term, although supply chain challenges would continue to constrain construction.
Nonresidential construction and real estate activity continued to increase, driven largely by the heightened demand for industrial space. One contractor indicated that demand for industrial space was so great that rental prices for existing spaces have been increasing to rates comparable to those for newly constructed spaces. Contacts were optimistic that nonresidential construction would increase further, though persistent supply chain disruptions and labor shortages were expected to be constraints.
Financial Services
Overall, loan demand increased modestly. Contacts reported growth in business lending, especially for commercial and industrial loans, and many bankers reported strong loan pipelines. By contrast, demand from households for auto loans and residential mortgages was stable or slightly down as limited inventories in both markets dampened activity. Lenders said that delinquency rates for commercial and consumer loans remained low and that core deposits increased. Looking ahead, bankers expected business loan volumes to improve as clients make capital investments.
Professional and Business Services
Demand for professional and business services remained robust. Contacts noted that clients continued to invest in software upgrades and that demand for cybersecurity services increased. Activity related to mergers and acquisitions was strong, as was demand for human resource services. Furthermore, increased infrastructure investments by state and local governments lifted demand for engineering services. Contacts anticipated demand would remain strong as businesses continue to invest in technology improvements and as infrastructure investments become more widespread.
Freight
Freight volumes increased slightly from already high levels amid strong demand for goods and large backlogs at distribution facilities. Persistent shortages of drivers and vehicle parts was a common complaint among contacts, who noted such shortages restricted their ability to meet demand. One contact said that a third of the firm's drivers reduced their driving hours when awarded a higher wage, thus driving fewer miles while earning the same salary. Looking forward, contacts expected demand to remain strong and their ability to move freight to remain constrained.
For more information about District economic conditions visit: https://www.clevelandfed.org/en/region/regional-analysis