Federal Reserve Bank of Cleveland
Summary of Economic Activity
On balance, business activity in the Fourth District grew modestly in recent weeks, and contacts expected activity to increase further in the months ahead. Demand for business services remained robust, a circumstance which some contacts attributed to additional work related to possible federal policy changes. Moreover, nonresidential construction and real estate activity grew as firms committed to projects that were previously on hold. Still, consumer spending was flat, with retailers offering additional promotions to stimulate sales. Demand for manufactured goods also remained soft. Employment levels grew slightly in recent weeks. While many business services firms hired for growth, the majority of manufacturing and construction contacts held staffing levels steady. On balance, wages, nonlabor input costs, and prices increased modestly.
Labor Markets
On balance, contacts reported slight growth in employment levels in recent weeks; however, the majority of firms continued to report no change to staffing levels. Among manufacturing and construction firms reporting steady headcounts, several indicated that they were focusing on getting more work done with their existing staff by increasing hours, cross-training, or investing in automation. Other manufacturers said that margin compression prompted them to reduce headcounts by eliminating shifts or not replacing employees who left. By contrast, business services contacts indicated that they were hiring for growth, and auto dealers added mechanics to meet increased demand for vehicle repair work. Overall, contacts expected modest employment growth in the months ahead.
Wages continued to increase at a modest pace in recent weeks, though almost three-quarters of firms reported holding wages steady. Many firms reported improved labor availability, a circumstance which limited upward pressure on wages. Indeed, some contacts reported reverting back to only annual wage adjustments, as was typical prior to the pandemic. Nevertheless, other contacts reported needing to raise hourly wages to attract entry-level workers, and one restaurateur said, "[we're] still experiencing a lot of wage pressure [and] raising hourly rates to recruit good cooking staff."
Prices
Nonlabor input costs increased modestly on balance, though the majority of contacts continued to report that input costs were unchanged since the last reporting period. Some construction and manufacturing contacts said that costs were generally stabilizing for raw materials and commodities such as steel, fuel, and resin. By contrast, reports from contacts across sectors indicated that health care, technology, and services costs continued to increase. Overall, contacts expect costs to grow moderately in the month ahead.
Selling prices also grew modestly in recent weeks, although the majority of contacts continued to hold prices steady. Some retailers and consumer-facing goods manufacturers who indicated that they had not raised prices said they had offered promotions because of weaker demand and increased consumer price sensitivity. For instance, one manufacturer said, "[I'm] not sure [the] US consumer can handle more pricing at this point." Still, multiple firms across sectors indicated that they were raising prices to improve profit margins. One law firm contact noted that clients had not pushed back on increases in rates or fees. Some construction and manufacturing firms also noted passing along higher raw materials costs and wages.
Consumer Spending
Consumer spending was flat on balance after declining for several reporting periods, and contacts expected moderate growth in the coming months. Several restaurateurs reported higher sales, which one attributed to workers' return to the office. By contrast, several retailers continued to report flat or declining sales, a circumstance which they attributed to election-related anxiety and financial stress on lower- and middle-income consumers. One retailer reported an uptick in sales only after adding deeper discounts. Auto dealers continued to report weak sales as some customers continued to be challenged by high vehicle prices. However, one auto dealer expected high demand for parts and repairs to continue as consumers hold onto vehicles for longer.
Manufacturing
Demand for manufactured goods declined modestly in recent weeks. Contacts continued to report fewer orders from other producers because of lower consumer and commercial vehicle production and still-soft demand for agricultural equipment, the latter of which led one manufacturer to revise down its production forecast for the coming year. In addition, multiple contacts reported softer orders related to new home construction. Although most contacts expected stable demand in the coming months, multiple reports indicated uncertainty about how future changes to economic and trade policy might impact demand for their products.
Real Estate and Construction
Demand for homes increased in recent weeks, with both builders and realtors reporting an increase in inquiries. That said, some builders, including a large national builder, reported flat sales. One of these builders attributed the flat sales to mortgage rate volatility and uncertainty about inflation, while another attributed them to affordability issues. On balance, housing contacts expected moderate growth in the coming months.
Nonresidential construction and real estate activity increased modestly in the most recent reporting period. Several contacts observed that firms were committing to projects that had previously been on hold. Looking ahead, multiple contacts expected firms to move forward with capital projects following recent rate reductions and the resolution of election-related uncertainty. Consequently, contacts predicted strong growth in demand in the coming months.
Financial Services
Overall, bankers reported that loan demand remained relatively flat for both businesses and households. Looking ahead, bankers expected loan demand to improve as a result of expectations for further interest rate reductions. On balance, bankers reported that delinquencies remained relatively low since the last reporting period. Core deposits grew modestly, and one banker mentioned that balances grew despite falling deposit rates.
Nonfinancial Services
Professional services firms reported strong demand growth, a circumstance which they expected to continue in the coming months. One accounting firm reported that demand for their services increased because of tax policy uncertainty, while a law firm attributed their increase in demand to lower interest rates and an improved macroeconomic environment. Freight demand grew slowly in recent weeks, but contacts expected demand to grow moderately in the coming months. A logistics contact indicated that several customers expanded and sought more warehouse space.
Community Conditions
Several workforce development contacts reported that demand for labor, particularly skilled labor, remained elevated. One contact said that more employers were working with workforce intermediaries to resolve employee attendance issues through measures such as providing transportation for new hires. Others indicated that employers were more open to apprenticeship programs. Workforce challenges persisted in the childcare sector. One childcare provider indicated that finding and retaining quality workers was difficult. In addition, because of declining enrollment, the provider's childcare center was expected to increase its fees in January by 20 to 40 percent above the current level, as operating costs will be shared among fewer customers. Another contact explained that fewer childcare providers in rural communities contributed to lower workforce participation for women.
For more information about District economic conditions visit: https://www.clevelandfed.org/en/region/regional-analysis.