Beige Book Report: Cleveland
May 31, 2023
Summary of Economic Activity
Fourth District contact reports suggested little change in aggregate business activity, though conditions continued to vary by sector. Retail sales were relatively flat as a seasonal uptick in consumer services spending, such as at restaurants and tourist locations, was offset by weaker goods spending. Some manufacturing and freight contacts suggested that customers were drawing down inventories, a situation which constrained demand for their own goods and services. Housing markets stabilized with the start of the peak sales season. However, interest rates remained elevated and were reported to be constraining nonresidential construction. Bankers noted declines in commercial and consumer lending. A majority of contacts expressed some concern about the impasse in Congress over raising the debt ceiling, but, on balance, this issue did not appear to alter their expectations for business activity in the near term. Employment was stable in recent weeks. Wage growth remained elevated, particularly for bankers and manufacturers troubled by persistent hiring challenges. Nonlabor input cost pressures and price pressures changed little in recent weeks.
Labor Markets
Employment was stable in recent weeks. Some manufacturing and construction firms reported delaying hiring because of economic uncertainty, while others were reducing "noncritical" staff to cut costs in preparation for future softer demand. In contrast, leisure and hospitality contacts reported a seasonal increase in staffing, as did one manufacturing contact who also mentioned that hiring was less difficult than in the recent past. That said, hiring remained challenging for many firms across industries. Most firms generally planned to hold headcount steady in coming months.
On balance, wage pressures changed little from those in the prior period. In banking and manufacturing, where hiring difficulties persisted, contacts continued to raise pay to attract and retain workers. However, several contacts were holding wages steady because hiring had become less difficult, while others mentioned that wage increases were no longer sustainable. One manufacturer was considering a one-time bonus rather than a pay increase to keep workers "happy and loyal" without embedding long-term labor-cost increases.
Prices
Nonlabor input cost pressures changed little in recent weeks. Manufacturers and retailers reported relief from increasing input costs, in particular for fuel, freight, and some raw materials. By contrast, contacts highlighted higher costs for steel and utilities and for electronics and electrical equipment that have been in short supply. Multiple contacts said that costs for business services continued to increase, and some posited these increases were linked to higher labor costs. On balance, contacts expected similar nonlabor input cost pressures to persist in coming months.
On balance, selling-price pressures were relatively unchanged, as well. Some contacts raised prices modestly to account for higher input costs, while others raised prices simply because strong demand allowed for it. One nonresidential builder said, "We're working to be as opportunistic as we can be." However, some manufacturers and restaurateurs reported that increased price sensitivity from customers limited their ability to raise prices. Multiple freight haulers reported a drop in rates because of weakened demand.
Consumer Spending
Consumer spending was mostly unchanged from that of the previous reporting period, though activity varied by sector. The arrival of spring boosted sales for tourist attractions and restaurants, with some restauranteurs describing better activity year over year. However, non-auto retailers generally experienced weaker sales. One department store contact reported a sharp sales decline in his stores that he said had "worsened throughout March and April." Another contact suggested that some retailers had begun "reducing future orders and current inventory levels" in response to slowing sales. Reports from auto dealers indicated continued pressure on sales because of higher interest rates, historically high vehicle prices, and an ongoing lack of manufacturer incentives. Industry contacts generally expected consumer spending to remain soft in the coming months.
Manufacturing
Overall demand for manufactured goods was relatively stable. Demand remained strong for aerospace-related products and heavy trucks and trailers, and some manufacturers reported benefitting from an increase in international orders. Multiple contacts reported that slower end-market demand had resulted in fewer orders for their products as their customers sought to rein in inventories. One manufacturer indicating weaker demand said that customers were still "working off excess inventory stockpiled during pandemic." On balance, however, manufacturers expected demand to remain stable in the months ahead.
Real Estate and Construction
Demand for residential construction and real estate stabilized, and contacts attributed this stabilization to the arrival of spring and to flattening interest rates. One homebuilder indicated that potential homebuyers had been afraid that rates would continue to rise before they could close on a home, but the recent stabilization of rates had helped to increase activity. A couple of homebuilders reported an increase in speculative construction projects because many individuals want to purchase and move into homes immediately, in part to avoid further rises in interest rates.
Nonresidential construction and real estate activity softened on balance. One general contractor noted that clients have started to "put the brakes" on projects because of high interest rates and general economic uncertainty. Several commercial real estate brokers also noted that elevated interest rates were negatively impacting leasing activity. However, a contact who specializes in industrial space indicated there had been an increase in construction activity from manufacturing clients in recent weeks that he attributed to an uptick in reshoring projects.
Financial Services
Overall, loan demand continued to decline this reporting period. Bankers posited that increased interest rates along with economic uncertainty contributed to a slowdown in borrowing from households and businesses. One lender suggested that small businesses were beginning to use available cash in lieu of borrowing because of high rates. Delinquency rates remained low; however, one banker indicated that he expected delinquencies to increase in coming months. Core deposits continued to decline for a variety of reasons, most notably because of deposit-rate competition. Looking forward, bankers expected loan demand to weaken further in the coming months.
Nonfinancial Services
Freight activity remained relatively weak this reporting period. One logistics company contact said that the persistent weakness was because many "customers have 'paused' projects and inventory builds." Moreover, haulers anticipated that demand would remain soft in the months ahead. Overall, professional and business services contacts reported slower growth. A management consultant mentioned that clients were pulling back on spending as economic uncertainty grows. Looking forward, contacts anticipated that demand would decline in the coming months.
Community Conditions
Nonprofit contacts indicated that housing affordability remained a challenge and had recently worsened for low- and moderate-income households. Contacts cited rising housing costs, low inventory, and purchases by institutional investors as factors contributing to the affordability issue. A community stakeholder reported that two outside investors purchased more than 500 units of affordable housing in one community, and the residents, all of whom were low-income tenants, were asked to vacate the property with minimal notice. Another contact reported that all-cash transactions limited access to first-time homebuyers, particularly those looking to purchase homes in lower-priced markets. To help counter these trends, one public agency acquired more than 190 properties from a private investment company and was recently working with renters to keep the units as affordable housing.
For more information about District economic conditions visit: https://www.clevelandfed.org/en/region/regional-analysis