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
Economic activity grew solidly, albeit at a somewhat slower pace than in the previous reporting period. Customer demand was solid for firms across a broad range of industries. That said, supply constraints limited many firms’ ability to keep up with growing demand. This challenge was particularly acute for homebuilders, manufacturers, and auto dealers, many of which reported shortages and delays in receiving key items. Staff levels increased modestly, despite reports of strong customer demand. Labor shortages remained intense, and many firms raised wages for new hires and current employees. Reports of rising nonlabor costs and prices were widespread. Firms generally attributed the higher prices to the persistence of supply chain disruptions and worker shortages. Firms were generally upbeat that customer demand will remain strong during the rest of the year, but they were less optimistic that labor shortages and supply chain disruptions would abate enough to alleviate some of the upward pressure on wages and input costs.
Employment and Wages
Staff levels increased modestly, and many firms commented that it was difficult to fill open positions for a wide range of occupations and skill levels. Contacts generally indicated that the flow of job applicants had not improved in recent months, despite some District states’ early ending of supplemental unemployment benefits. Businesses also struggled to keep up with the high pace of employee turnover and retirements. One metalworking firm remarked that one-fourth of its staff had been with the firm for three months or less because of high turnover of new employees. Many contacts were pessimistic about their ability to fully staff up in coming months. One producer of industrial robots expected it would take four to five months to hire 20 semi-skilled manufacturing techs, a timeline which would be far longer than typical.
Reports of wage increases remained widespread. About two-thirds of survey respondents increased wages during the past two months, the highest share since we began keeping records in 2016. More so than in recent surveys, contacts commented that pay increases were needed, not just to attract new hires, but also to retain current employees and to prevent poaching. Several contacts indicated that they were raising wages across pay grades. Also, several contacts said they were giving more frequent raises than usual. One trucking company said it had already given five pay raises this year.
Reports of rising nonlabor costs were widespread, and many firms expected sizeable cost increases in the coming months. Just over 80 percent of contacts reported that their nonlabor costs had increased in the last two months, a slightly higher share than in the previous survey. Contacts highlighted higher costs for a wide range of inputs, including meat, steel, packaging, electronics, office supplies, and freight services. Cost increases were often attributed to ongoing supply disruptions, which in some cases had worsened. A dairy farmer said that his food service distributors were now routinely out of a dozen or more items. These disruptions caused him to seek alternative suppliers at greater cost.
Reports of firms' raising their selling prices were also widespread. About two-thirds of respondents raised prices, a similar share to that of the previous reporting period. Many contacts indicated they were passing through higher labor costs to customers, not just higher costs for materials and freight services as in recent surveys. Some firms noted they were increasingly using surcharges to cover higher costs. Contacts are expecting larger increases in their prices during the next year than they previously anticipated because of rapid changes to costs and the longer-than-expected persistence of supply constraints. One freight hauler was told by a truck producer that all 2022 orders were being canceled and repriced because costs were changing so quickly.
Consumer spending increased moderately. The spread of the delta variant had mixed impacts on high-contact services. While contacts observed cancelations of group events and weaker demand for air travel, hospitality firms that cater to regional leisure customers reported continued improvement in activity and stronger demand for local getaways. Demand for goods remained strong. General merchandisers and apparel retailers said that in-store traffic picked up in recent weeks. One department store noted that early back-to-school sales were stronger than in 2020 and were in line with 2019 sales as most schools announced a return to in-person instruction. Auto dealers noted that demand remained elevated but that sales dipped as tight inventories and higher prices deterred some buyers. Contacts were optimistic that consumer spending would continue to improve in the coming months, although the spread of the delta variant clouded their outlooks for high-contact services.
Manufacturing orders increased strongly across a range of end-user markets. Many producers said they were unable to meet demand because of worker shortages and delayed deliveries of inputs. A sizeable minority of firms noted that capacity utilization was below desired levels because of such challenges, and some moved out their own delivery schedules. Contacts noted some customers were accelerating their orders in anticipation of future delays and shortages. Capital expenditures increased modestly, with firms directing additional spending towards automation. On balance, manufacturers expected demand to continue to rise in the coming months.
Real Estate and Construction
Housing demand remained robust. However, the limited supply of homes continued to put upward pressure on home prices, and homebuilders were concerned that persistent supply chain disruptions were inhibiting new home construction. Contacts anticipated that activity would level off because the intensely competitive buyer’s market and rapidly rising prices have led some potential homebuyers to postpone purchasing a home. One real estate agent predicted that “instead of super-hot, it will be a warm market where things will start to balance out.”
Nonresidential construction and real estate activity increased moderately, although there was variation across segments. Demand for industrial space remained robust, while demand for retail space and office space was dampened somewhat by the increase in coronavirus infections and rapidly changing workplace requirements. Contacts were optimistic that activity would continue to improve, although some were concerned that frequent cost increases and shortages of materials could hinder activity.
Banking activity increased moderately, although it cooled somewhat from that of recent reporting periods. Contacts noted that demand for auto loans and mortgages remained somewhat elevated even though limited inventories in both markets dampened activity. A few lenders reported stronger demand for commercial real estate loans. That aside, business lending was relatively soft, and some bankers said loan payoffs and cash balances were high. Contacts reported that delinquency rates for consumer and commercial loans were still low and that the number of active forbearance agreements continued to drop. Looking ahead, bankers expected loan demand to remain stable in the near term but noted that the spread of the delta variant tempered their prior optimism.
Professional and Business Services
Professional and business services firms continued to report robust demand. Technology firms experienced increased activity as clients resumed software investments that had previously been put on hold. Firms also noted that the labor market’s ongoing recovery led to heightened demand for human resources- and payroll-related software. Contacts were optimistic that activity would remain strong as the economy continues to grow, although some firms were concerned that the recent increase in coronavirus infections may begin to dampen overall economic activity and ultimately demand for their services.
Demand for freight services grew modestly from already high levels. One contact attributed the increased activity to customers’ adding to their supply stockpiles and some firms’ storing their products offsite when customers further down the supply chain were behind schedule. Several freight haulers reported that shortages of drivers or equipment led them to turn away some orders. Looking forward, contacts expected demand for freight services to remain elevated.