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 in the Fourth District grew at a modest pace since our last report. Professional and business services saw moderate demand growth. Home sales increased slightly because of a drop in mortgage rates. Retailers noted a slight softening in demand after the holiday season, while banking conditions improved modestly after seasonal slowness. Seasonal factors weighed on growth in nonresidential construction and transportation. Manufacturers gave mixed reports, as some saw a pickup in demand, while others reported slowness and uncertainty in the global economy weighed on growth. Employment in the District increased modestly, with much of the growth coming from nonfinancial services and from manufacturing. Wages rose moderately across many sectors and occupations. District companies increased their selling prices moderately. Construction companies passed on strong input cost increases. By contrast, manufacturers’ prices remained more stable as the input cost pressures they had been facing in prior periods abated. Transportation companies raised prices, but retailers did not raise prices to cover transportation cost increases.
Employment and Wages
District contacts reported modest increases in staffing levels. Construction companies added some office staff but, because of the winter weather, did not hire field workers. They expect to resume increasing field staff in the spring. Manufacturers added both salaried and hourly staff, with one contact stating that her company had been hiring more of its temporary staff into full-time employment. Staffing companies reported increased placements and noted that nursing, information technology, and manufacturing staff are particularly in demand. Professional and business services firms, especially information technology firms, accelerated hiring to meet strong demand and expected to continue to add to their payrolls in the next few months. Trucking companies continued to add drivers when possible, but railroad companies downsized their staff. Railroad companies expected further staff reductions in the next few months. Retailers indicated that staff turnover was higher than usual in the beginning of the year and that they were hiring to maintain staff levels. Still, nondurable goods retailers continued to increase wages in line with inflation. Retailers planned to hold staff levels steady in the next few months.
Wages in the District rose at a moderate pace that was similar to that of the previous survey round. Wage growth was broad-based, as wages rose for a wide range of industries and occupations. Bankers raised wages both for low-wage and for high-wage positions, citing competitive labor markets. A couple of construction companies granted large retention-focused merit increases to office staff, but other companies mentioned that they tended to grant raises during busier seasons. Manufacturers re-evaluated wage rates for blue-collar laborers, and many manufacturers increased pay beyond the rate of inflation. Auto dealers also noted that pay for qualified technicians rose. Trucking companies continued to compete on wages, noting that demand for drivers exceeded supply. Some retailers felt pressure from local minimum wage increases. Staffing firms also noted upward wage pressures. One firm stated that new hires have been pressuring the firm to increase its starting wages; another stated that it now offers raises every 6 months instead of every 18 months, as it did previously. The rate of hiring by professional and business services firms accelerated somewhat. Nevertheless, wage increases in the industry decelerated, with a number of firms stating that wages were already high.
Selling prices rose moderately, with many businesses reporting that they were keeping up with input cost inflation. Upward cost pressures were strong for construction firms, which reported higher concrete prices. Nonresidential builders, and to a lesser extent homebuilders, raised their selling prices to maintain their margins. Upward cost pressures in manufacturing eased, as a number of producers reported stable or even lower steel prices after the tariff-driven steel price escalation in 2018. Because manufacturers did not see the same cost pressures as construction firms, they did not raise their prices to the same extent. Some producers actually cut their prices because of the lower steel prices. Retailers cited tariffs and higher transportation prices as elevating their costs. Yet, the majority of retailers held their prices steady, while auto dealers and producers gave fewer new-vehicle incentives. Transportation contacts reported elevated input costs as higher maintenance, repair, and other services costs outweighed savings from stable or lower fuel prices. However, pricing power was strong for transportation firms. The majority of freight contacts were able to raise their fees thanks to continued strong demand for their services.
Retailers reported slightly softer demand following the strong holiday season. By contrast, contacts had indicated in the prior survey round that they had expected solid growth through the first quarter of 2019. One auto retailer noted that sales of new vehicles had decreased slightly because of higher prices, while the demand for used vehicles increased. Retailers expect demand growth going into the second quarter of 2019 to be the same or better than in 2018.
Manufacturers in the District gave mixed reports. Many contacts reported that activity picked up during the last two months as a result of the usual seasonal build up and that they expect growth to continue. However, others expressed concerns about a number of factors that dragged down demand and weighed on the outlook for future growth. These include 1) supply chain constraints that have affected the availability of intermediate goods and components, 2) slower global growth--particularly in Europe and China--that contributed to a slowing in orders, 3) continued uncertainty about the future of tariffs on steel and aluminum and ongoing US-China trade negotiations, and 4) decreased consumer confidence. In addition to the ongoing trade negotiations between China and the United States, one manufacturer noted that if Chinese policymakers choose to stimulate heavy industry in their country, the outlook for his organization would be better than it would be absent intervention in the Chinese market.
Real Estate and Construction
Demand for residential real estate and construction improved slightly, as lower mortgage rates spurred home sales. Homebuilders and real estate agents expressed optimism that conditions will improve in the next few months, though they attributed this expectation primarily to warmer weather. Real estate agents reported that homeownership, relative to renting, rose in the region.
Nonresidential construction remained steady, as negative seasonal effects countered underlying demand growth. Nonresidential builders noted that they believed normal seasonal variation caused the pause in demand growth, and they expected growth to resume once winter ends. Nonresidential builders’ backlogs increased, as the stable and strong demand outpaced their ability to work through it during the winter. Builders acquired more public projects than private work.
Banking conditions recovered after a seasonal slowdown. Though some seasonal softness remained on the consumer side, this was offset by strength in commercial and industrial lending. Consumer demand for credit declined as consumers used the first quarter to pay off credit card balances following the holiday season. Reports about mortgage and auto lending were mixed. Some bankers indicated they felt the housing market was slowing, while others expected a seasonal upswing in mortgage demand. Commercial demand was concentrated among large and middle-market firms for mergers and acquisitions and some CRE projects, though one banker noted that “precautionary demand for cash and liquidity” had increased from commercial customers.
Professional and business services firms reported moderate demand and growth. A contact at a design firm noted that previously postponed projects were coming to fruition because consumer confidence improved. These firms expected sales and growth to be strong over the next few months. Freight contacts reported demand was flat because of extreme weather in the Midwest and Northeast. These contacts expect shipping volumes to be stable in the coming months. The majority of nonfinancial services firms expected to modestly increase their prices charged over the course of 2019.