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Fourth District Beige Book

The Beige Book—officially known as the Summary of Commentary on Current Economic Conditions by Federal Reserve District—is produced eight times each year prior to Federal Open Market Committee (FOMC) meetings. The information in the Beige Book is gathered primarily through interviews with business people in each District, as well as from Federal Reserve Bank and Branch directors. The publication’s original purpose was to supplement official statistics with more current anecdotal accounts of the economic environment in order to assist policymakers during FOMC deliberations.


Summary of Economic Activity

The District’s economy regained momentum after it had slowed in the previous reporting period. Customer demand in the current period proved to be better than what contacts had expected, reflecting declining numbers of coronavirus infections and various fiscal relief measures. That said, activity remains below prepandemic levels for most firms. In addition, many firms, particularly those in construction, retail, and manufacturing, reported that delayed deliveries from suppliers and coronavirus-related employee outages constrained their output. Hiring activity was modest, even though customer demand improved, and wage pressures increased moderately. Nonlabor costs rose strongly as supply chain disruptions coincided with stronger demand for inputs. Selling prices rose moderately as firms attempted to keep up with mounting input costs. Looking ahead, contacts expected moderate improvement in customer demand over the next couple of months, and they expected stronger gains in the second half of the year as coronavirus vaccines are more widely distributed.

Employment and Wages

Staff levels increased modestly, on balance, and hiring activity cooled somewhat despite the pickup in business activity. Labor demand varied across sectors. In the freight sector, labor demand was especially strong, and many firms noted they would like to hire more drivers but experienced shortages. By contrast, labor demand was weakest in financial services, wherein several firms reported they were cutting costs and reducing their physical footprints. Consistent with activity in the last several reporting periods, a number of firms in manufacturing, retail, and construction noted that they wanted to add staff but found it difficult to fill open positions. Aside from typical staffing challenges, one in four firms reported that coronavirus-related staff outages impeded their ability to meet customer demand. Such reports were more common among manufacturers and construction firms where close to one third of firms expressed these difficulties.

Overall, upward pressure on wages was moderate, and more firms reported increasing wages than at any point in the pandemic. Pay raises were often between 2 percent and 3 percent, although several retailers and manufacturers commented that there were pockets of more sizeable increases for lower-wage workers and some skilled tradespeople such as machinists.

Prices

Reports suggest that upward pressure on costs and selling prices increased since the last report. Nonlabor costs rose strongly during this period, a change from the last several periods when costs were reported to have risen moderately. Manufacturers and construction firms indicated that steel and lumber costs continue to increase significantly. Other input costs also rose, including for aluminum, copper, resins, and some concrete products. Many firms attributed these price increases to supply chain disruptions occurring at the same time as demand was improving. Finally, firms in a range of sectors reported that transportation costs were up significantly because of capacity constraints among shippers and higher fuel costs.

Selling prices rose moderately, on balance, and a greater share of firms reported they increased their prices as compared with the share in the previous report. Price hikes were most prevalent among freight haulers, who, faced with very strong demand and tight capacity in the industry, were able to command higher prices with ease. Many construction and manufacturing firms raised their prices to keep up with escalating input costs, although several of them were concerned that doing so would not be adequate to preserve their margins. Price changes for consumer goods and services were less pronounced than for goods producers and transportation firms. Auto dealers commented that low inventories of vehicles continue to push up prices for new and used cars. Department stores and apparel retailers said they reduced their sales promotions. By contrast, most restaurants and hotels held their prices. Professional services firms broadly held their prices, as they have done for several reporting periods.

Consumer Spending

Reports suggest that consumer spending improved following weaker activity in the previous reporting period. The lifting of government-mandated restrictions on operating hours improved business activity somewhat for restauranteurs. Sales for general merchandisers and apparel retailers were slightly better recently, although some noted that in-store sales remained soft. Auto dealers said that low inventories were limiting sales, while hoteliers indicated that the lack of business travel continued to delay the sector’s recovery. Contacts were cautiously optimistic that consumer spending will continue to recover in the coming months thanks to additional fiscal stimulus and the apparent drop in coronavirus infections.

Manufacturing

Manufacturing orders increased moderately, on balance, although demand varied by industry segment. Contacts noted that demand for home goods, shipping materials, construction equipment, and logistics equipment was particularly strong. By contrast, demand for products related to commercial aerospace and to oil and gas production remained depressed. Many manufacturers experienced delayed deliveries of inputs, which impeded their ability to meet demand. Most manufacturers expected that demand will improve over the coming months, although many were concerned about rising input costs and turnover of entry-level employees.

Real Estate and Construction

Housing demand remained strong, thanks partly to low interest rates. Homebuilders also indicated that low inventories of existing homes motivated consumers to move forward with new-home construction. One contact commented that demand for suburban homes had increased. Despite the strong level of activity, a significant share of homebuilders experienced delayed deliveries from suppliers that resulted in extended lead times. Contacts anticipated sales would remain strong through the spring as pent-up demand is released. However, there was some concern that rising prices would eventually price some buyers out of the market.

Nonresidential construction and real estate activity edged higher, on balance, as demand for industrial and distribution space increased. By contrast, activity in the office and retail segments remained weak. Contacts anticipated that nonresidential construction and leasing activity would improve modestly in the next few months.

Financial Services

Banking activity increased moderately. Contacts noted that low interest rates continued to support demand for mortgages. Also, the current round of the Paycheck Protection Program (PPP) boosted lending to businesses, although some bankers commented that demand for the program was not as strong this round as it was in the first round. Aside from the PPP, demand for business loans was reportedly flat. Lenders indicated that delinquency rates for commercial and consumer loans were still low because of forbearance agreements and various fiscal relief measures, although some noted that delinquency rates were slightly up from those of two months ago. Multiple contacts reported that core deposits increased as customers deferred spending and investment. Looking ahead, bankers were optimistic that loan demand would pick up in the near term and even more so later in the year as more coronavirus vaccines are distributed.

Professional and Business Services

Demand for professional and business services continued to increase, albeit at a slower pace than in the last reporting period. Authentication and cloud services and human resources and payroll software providers all continued to benefit from the shift toward more remote work and online purchases. One contact noted that demand for the firm’s cloud offerings increased significantly because many firms have begun to outsource certain functions to software vendors rather than investing in their own IT resources or equipment. Contacts anticipated further increases in activity in the coming months as the economy continues to recover and more firms shift to remote channels of commerce and communication.

Freight

Demand for freight services increased strongly, and contacts expect the high level of activity to persist in the near term. Contacts commented that activity was driven by stronger import volumes, continued demand from home construction suppliers, and customers’ replenishing their inventories. On the downside, several firms said their deliveries to customers were delayed because they struggled to find qualified drivers.