Federal Reserve Bank of Cleveland
Summary of Economic Activity
Business activity in the Fourth District was stable after declining slightly during the prior reporting period. Reports on retail sales were mixed. While some contacts reported softer sales, lower-cost retailers benefited amid heightened consumer price consciousness. Residential builders and realtors noted increased activity as lower mortgage rates drew more prospective buyers into the market. However, commercial construction and real estate activity was mostly unchanged. Manufacturing activity again declined moderately, and contacts expected demand to remain soft in the coming months. Overall employment levels were stable, though there were isolated reports of layoffs. Wages rose at a modest pace, typical of increases prior to the pandemic. Although nonlabor costs grew moderately and selling prices increased slightly on balance, most contacts reported no change in either. Except for manufacturers, contacts expected activity to increase moderately in the months ahead.
Labor Markets
On balance, contacts reported flat employment levels in recent weeks, with most firms making no changes to their headcounts. Many firms kept their employment levels steady in accordance with flat demand. Trends differed by sector: professional and business services firms grew their employment levels moderately, whereas freight and manufacturing contacts reported modest reductions in employment levels, leaving newly vacated positions unfilled and occasionally laying off staff in response to weaker demand. Overall, contacts expected employment to increase slightly over the next two months.
Wages increased at a modest pace in the most recent reporting period, with greater gains in the service sector. Several firms continued to report challenges hiring skilled employees and accompanying wage pressures. Overall, however, the pace of wage increases was largely similar to that from before the pandemic. A few firms said decreased revenues prevented them from raising wages further, while one contact pointed to cooling labor markets and slower inflation as additional reasons for easing wage pressures.
Prices
Nonlabor input costs increased moderately on balance, though reports varied by sector, and more than half of contacts continued to report that input costs had not changed since the last reporting period. Restaurateurs reported that their egg costs had increased significantly in recent weeks, likely because of a rise in avian influenza cases. A number of contacts across sectors also reported that their costs had increased for services such as insurance and software. In contrast, most manufacturing and construction contacts reported that their raw materials costs were flat.
Upward pressure on selling prices remained relatively weak, with little change from the previous reporting period. Across sectors, most contacts reported making no adjustments to their selling prices in recent weeks, and contacts continued to report customers’ unwillingness to accept additional price increases. Several contacts in the transportation and manufacturing sectors reported that they were lowering prices in order to shore up demand, while most professional and businesses services and construction contacts held prices steady. Conversely, food retailers and restaurateurs increased prices slightly to offset cost increases in eggs and dairy products.
Consumer Spending
Consumer spending declined moderately overall in recent weeks. However, lower-cost retailers and restaurants reported slight sales growth, suggesting increased price consciousness among consumers. Several automotive dealers reported ongoing affordability challenges for many consumers, with no noticeable change in sales even as auto financing rates began to decline. Contacts generally expected moderate consumer spending growth in the coming months, particularly after November’s presidential election.
Manufacturing
Demand for manufactured goods again declined moderately, though the share of contacts who reported steady demand increased from the prior period. Some contacts reported fewer orders from other producers because of lower consumer and commercial vehicle production, while several also noted that some producers were holding off on orders because of uncertainty related to the coming presidential election. Shipments of metals and metal products remained weak, a circumstance which contacts attributed to low vehicle and agricultural equipment production and soft residential and commercial construction. On balance, manufacturers expected demand to decline modestly in the coming months.
Real Estate and Construction
Residential construction contacts reported strong growth in demand for homes in recent weeks. New home construction activity increased, with several builders describing “buyers coming off the sidelines” as interest rates have trended down. Declines in mortgage rates in recent months have also affected the market for existing homes, though real estate contacts were mixed on the outcome; one realtor saw more buyers come into the market, while another contact suggested that some potential buyers were continuing to wait for further declines in interest rates. On balance, contacts expected activity to grow at a moderate pace over the months ahead.
Nonresidential construction activity was flat over the last two months. Two commercial builders reported that many companies were planning to wait until after the general election to undertake construction projects. Public construction firms also reported fewer projects in their pipelines. Still, commercial real estate agents reported increased demand for office space as some firms returned to in-person work and others renewed leases after previously postponing such decisions. Collectively, contacts anticipated a moderate increase in demand in the coming months.
Financial Services
Overall, bankers reported that loan demand increased modestly, with some contacts noting that recent reductions in some interest rates had encouraged borrowing by both households and businesses. Looking ahead, bankers anticipated continued modest increases in loan demand. Most bankers reported slight increases in delinquencies in recent months driven mostly by consumer lending products, a circumstance which one banker attributed to an increase in “economic stress.” Overall, core deposits slightly increased. One banker reported that the issuance of one-year certificates of deposit had increased as clients sought to “lock in” rates in anticipation of further cuts.
Nonfinancial Services
Professional and business services firms reported robust demand in recent weeks and expected robust demand to continue in the coming months. One e-commerce contact attributed this growth to a continued shift to online purchases. Another contact cited increased optimism about a soft landing and potential further decreases in interest rates. Freight contacts reported no change in demand over the most recent reporting period but expected modest growth in the coming months. One transportation contact reported seasonal increases in shipments of consumer products but decreases in shipments of industrial products.
Community Conditions
Nonprofit contacts reported deterioration in the financial well-being of low- and moderate-income households and in the availability of affordable housing over the past six months, according to a semiannual survey. One contact observed that higher costs for basic needs had driven more households to borrow money from family or friends or to rely on credit or short-term loans to make ends meet. Several contacts noted that rising rents limited affordable housing options for low- and moderate-income households, while some contacts expressed concern about the impact of short-term rentals on housing supply, particularly in areas around tourist sites. One contact also noted that construction of new affordable housing units had lagged because of the higher costs of building materials and financing.
For more information about District economic conditions visit: https://www.clevelandfed.org/en/region/regional-analysis.