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 Fourth District economy continued to expand at a solid pace in recent weeks, although supply side constraints limited many firms’ ability to keep up with growing demand. Overall, household spending increased as progress in the fight against COVID-19 led many consumers to pursue activities they had foregone for more than a year, such as dining out and traveling. However, auto dealers and residential real estate agents suggested that while demand remained solid, sales were limited because depleted inventories left potential buyers with fewer buying options. Manufacturers and construction contacts reported that materials shortages, delivery delays, and staffing shortfalls made it difficult to keep up with increasing orders, let alone work down growing backlogs. Contacts in professional and business services and financial services reported strong, steadily increasing activity. More generally, firms remained very optimistic that demand would continue to increase in coming months but were less optimistic that labor and other supply constraints would abate enough to alleviate some of the upward pressure on wages, nonlabor input costs, and selling prices.
Employment and Wages
Labor demand remained solid in recent weeks, but firms continued to report difficulty in filling open positions. Nearly half of contacts indicated they increased staffing during the prior two months, with a nearly equal share reporting that staffing levels were unchanged. However, many of the firms that did not increase staffing commented that they simply could not find workers to fill new or open positions. Looking forward, more than half of contacts expected to increase staffing levels in coming months, with another 45 percent planning to hold staffing steady. Here again, many of those in the latter group suggested they would like to add workers but won’t be able to because of a dearth of available labor.
With the number of open positions seemingly exceeding available workers, wage increases became more commonplace, especially within lower-wage occupations. In addition to higher wages, more contacts reported paying signing bonuses to keep up with competitors. However, one contact indicated that she was putting off decisions on further wage hikes and bonuses until she sees if labor availability increases as states end supplemental unemployment benefits.
Nonlabor input costs increased further. Nearly 80 percent of contacts indicated that nonlabor input costs rose over the prior two months, a share that is roughly twice the share reporting increases at the turn of the year. Manufacturers noted rising costs for steel, aluminum, electronic components, freight, chemicals, plastics, and resins. Construction contacts cited widespread materials cost increases, as well, although a few homebuilders noted some relief in the cost of lumber. There were scattered reports that higher wages were spilling over to other input costs, including some business services. On balance, firms expect nonlabor input costs to continue increasing in coming months as supply constraints persist.
Selling prices increased moderately, on balance. Nearly 65 percent of contacts said they increased prices in the prior two months. When asked the same question in January, 34 percent indicated they had raised prices. In most cases, recent price hikes were attributed to firms’ trying to maintain margins amid higher costs. As one contact put it, “We're trying to pass along our increased costs to our customers just like everyone else.” But in many other cases, firms acknowledged that solid demand and limited supply provided them with opportunities to boost profit margins.
Reports suggest that consumer spending increased moderately during the reporting period. General merchandisers and apparel retailers said that demand remained strong, and one department store contact noted that sales during Mother’s Day and Father’s Day were stronger than 2019 and 2020 sales on the same days. Hoteliers and restaurateurs reported significant improvement in activity as pandemic fears waned, and a contact at a large airport said that leisure travelers drove a strong rebound in air travel that exceeded her expectations. Auto dealers said that demand remained elevated, but sales dipped as the semiconductor chip shortage continued to limit the supply of new vehicles. Overall, contacts were optimistic that consumer spending would continue to increase in coming months thanks to unused stimulus funds and progress in the fight against the pandemic, while auto dealers commented that sales will pick up once inventory levels recover.
Demand for manufactured goods grew strongly across a wider range of end-user markets, including some (such as aerospace equipment) that have been lagging during the recovery. Supply chains continued to be disrupted both domestically and abroad, adding to longer lead times and raising transportation costs. Many contacts noted that a severe shortage of hourly wage workers restricted output growth. One contact was unable to fulfill 10 percent of his orders because the firm failed to reach its staffing goals. On balance, most respondents expected conditions to improve in coming months, although rising attrition rates and materials shortages tempered expectations for continued growth.
Real Estate and Construction
Homebuilders and residential real estate agents commented that although housing demand remains strong because of low mortgage rates, construction activity softened because of high materials prices. One homebuilder noted that input costs were “out of control,” with steel and lumber being two of the main drivers of price increases. Another homebuilder indicated that higher home prices had led some potential customers to walk away from projects. Existing home sales also slowed because the supply of available housing remained limited. One real estate agent suggested that sales for her firm were below 2019 levels entirely because of the shortage of inventory. Contacts were hopeful that homebuyers would reenter the market when prices stabilize.
Demand for nonresidential construction and real estate continued to strengthen across many segments. Activity within the industrial sector remained strong, and demand for office spaces experienced notable increases in activity. Even so, one commercial real estate agent noted that many new developments and renovations had been put on hold because of increased materials costs and labor constraints among subcontractors. Looking forward, contacts were optimistic that demand would remain strong as more consumers and businesses return to their prepandemic lives.
Banking activity increased modestly in recent weeks. Contacts continued to report growth in business lending, especially for commercial real estate loans, as more of the economy reopened and fiscal support to businesses waned. Contacts also noted that demand for mortgages and auto loans remained strong, but the recent uptick in interest rates and limited inventories in both markets limited loan demand. Lenders said 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 were optimistic that loan demand, especially business lending, would continue to pick up as COVID-19 restrictions ease.
Professional and Business Services
Demand for professional and business services increased further as more businesses resumed in-person activities. Increased optimism also led many firms to restart projects that had previously been put on hold. A small management consulting firm reported that firms had begun to move forward with projects that were in the pipeline from 2019 and 2020. Overall, contacts were optimistic that demand would remain strong as general economic conditions improve further.
Demand for freight services grew modestly from an already high level. The rise in activity stemmed from customers’ needing to replenish low inventories and from continued increases in overall economic activity While demand for new routes grew, a shortage of truck drivers limited capacity. Looking forward, contacts expected demand to increase further in coming months, but expectations were tempered by concerns about difficulty finding driversand uncertainty around the new administration’s regulatory priorities.