Federal Reserve Bank of Cleveland
Summary of Economic Activity
Business activity in the Fourth District declined slightly in recent weeks. Although contacts generally expected activity to increase slightly in the months ahead, reports varied by sector. Demand for manufactured goods softened further, and some contacts noted that shipments had not returned to normal levels after expected summer slowdowns. Consumer spending declined moderately, and retailers generally anticipated flat demand in the coming months. Residential construction and real estate activity declined, a circumstance which contacts attributed to elevated construction costs and mortgage rates deterring prospective homebuyers. Nonresidential construction contacts reported a slight decrease in demand and fewer projects available for bid than in recent years. By contrast, demand for professional and business services grew moderately and was expected to increase further in the near term. On balance, employment levels were stable to slightly up, wages and nonlabor input costs increased modestly, and selling prices grew slightly.
Labor Markets
Overall, employment levels were stable to slightly up in recent weeks. Most firms reported keeping their staffing levels unchanged over the recent reporting period, often citing steady demand and a desire not to over-hire for current business conditions. For firms that are adding to their workforce, some reported hiring to accommodate business growth. By contrast, several contacts reported adjusting to weaker demand by leaving open positions unfilled. On balance, firms expected to increase employment levels slightly over the coming months.
Wages grew at a modest pace in the recent reporting period, with the smallest net proportion of contacts in more than three years indicating wage increases. Firms reported "no longer need[ing] to offer above-market wages" to hire new staff or retain existing employees. However, some business professionals and others with specialized skills, such as vehicle technicians, remained in short supply. Contacts reported that requests for cost-of-living wage increases had become less frequent as inflation had eased.
Prices
On balance, nonlabor input costs increased modestly in recent weeks, though the bulk of contacts reported no change, and the net proportion of firms that reported an increase reached its lowest point in over four years. Construction and manufacturing contacts mentioned that most input costs were stable, though some raw material and freight costs rose. Several contacts mentioned that insurance costs continued to increase. Restaurateurs indicated that food costs had stabilized, and one contact noted that commodity prices had become more predictable. Transportation contacts reported that costs continued to increase despite falling fuel prices, with several haulers mentioning increases in the costs of tires, parts, and servicing.
Upward pressure on selling prices appeared to diminish in the current cycle, with the smallest net proportion of contacts in four years reporting price increases. Moreover, as with recent reports, roughly 60 percent of contacts reported keeping their prices unchanged. Some manufacturers indicated that falling steel and copper prices caused their firms to lower selling prices because of price variation clauses in contracts. Retailers reported that they were holding prices steady to maintain sales. One restaurateur mentioned trying to keep overall prices stable while broadening the price range of menu items to attract more customers. By contrast, transportation contacts reported increased selling prices for the first time in several months.
Consumer Spending
Consumer spending declined moderately in recent weeks, and contacts anticipated flat demand in the coming months. One large general merchandiser reported slowing sales since mid-June, both in its stores and online, while other contacts reported continued price consciousness among lower-income customers. By contrast, a lower-cost retailer reported positive sales growth through the first half of the year. Restaurant contacts reported stable sales in recent weeks. Auto dealers reported that affordability concerns continued to hamper sales, and reports varied on the availability and generosity of manufacturers' incentives on new vehicle purchases.
Manufacturing
Demand for manufactured goods declined moderately after a modest decrease in the prior period. Reports indicated fewer orders and shrinking backlogs because of still-soft demand for farm equipment, low construction activity, or slower commercial and consumer vehicle production. Demand for metal and metal products was particularly weak. One metal producer said shipments had not recovered after expected seasonal slowdowns, and another noted "historically low levels of demand." On balance, manufacturers expected demand to decline slightly in the coming months.
Real Estate and Construction
Residential construction and real estate activity declined in recent weeks. Contacts noted that elevated construction costs and mortgage rates remained a deterrent for many prospective homebuyers. Contacts also saw broader economic trends that were affecting the sector, pointing, for instance, to lower consumer confidence as a contributor to slower sales. On balance, contacts expected demand to remain flat over the months ahead.
Nonresidential construction contacts reported a slight decrease in demand over the last two months. Fewer projects were available for bid after an increase in activity over the last several years. Contacts anticipated that the slight decline in activity would continue in the coming months. Regarding demand for existing space, commercial real estate contacts expressed differing views: Some reported an increase in offers of rent concessions and discounts, reflecting reduced demand, while one contact reported increased activity in recent weeks despite the typical pattern of seasonal slowness.
Financial Services
On balance, bankers reported that loan demand from both businesses and households remained relatively flat. However, one banker mentioned that mortgage activity increased slightly as rates had "marginally declined." Another banker reported that some loan demand was related to firms that could "no longer wait for the rate environment to change" before making necessary capital improvements. Bankers anticipated that loan demand would remain relatively flat in the near term. Bankers reported that delinquency rates remained stable and at low levels. Finally, a slight majority of bankers reported that their deposit levels remained essentially unchanged from the prior reporting period.
Nonfinancial Services
Demand for professional and business services grew moderately in recent weeks, and contacts expected demand to rise further in the coming months. A law firm anticipated an increase in refinancings and other real estate-related transactions if interest rates fall. Freight contacts reported slight demand growth in recent weeks and anticipated modest growth in the coming months. However, one contact indicated that the industry was still working through the additional capacity that arose to address pandemic-era supply chain challenges.
Community Conditions
Overall, community college contacts reported increased enrollment for the upcoming academic year, particularly in part-time and certificate programs. Some reported that enrollment increased among individuals who left during the pandemic. Demand for support services such as food, transportation, and mental health services remained elevated, and one contact said it was "at an all-time high."
Contacts cited the need to adapt their programs to the changing demands of employers in areas such as IT, manufacturing, and healthcare and to the needs of a shrinking traditional student population. Despite concerns about long-term enrollment declines, one contact noted that "it is our moment" to show community colleges' return on investment.
For more information about District economic conditions visit: https://www.clevelandfed.org/en/region/regional-analysis.