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
Fourth District economic activity increased at moderate pace since the last Beige Book report. The share of business contacts reporting an increase in customer demand was unchanged over the period; however, far fewer firms noted a decrease in demand. The general improvement was evident across broad industry breakouts, but there was considerable variation within them. For example, spending on interest rate-sensitive goods (such as homes and light vehicles) was particularly robust, while spending in high-contact services segments (such as accommodation and food services) remained weak. The modest increase in customer demand was accompanied by an uptick in staffing levels. However, contacts suggested that hiring was difficult because of limited labor availability, which also exerted more upward pressure on wages. Supply chain constraints and higher costs of freight and some materials pushed up input prices, and a greater share of contacts were able to increase selling prices. While most firms expect demand to increase further in coming months, capital spending remained soft as firms continue to hold on to cash amid persistent uncertainty surrounding the pandemic.
Employment and Wages
Staffing levels increased slightly since the last report, although employment remained well below pre-pandemic levels. More firms across a wide array of industries reportedly wanted to hire (or rehire) additional workers to meet improving demand. However, many indicated that they had a hard time adding workers. Contacts said that three primary factors contributed to their inability to hire: health concerns, difficulty arranging dependent care, and generous unemployment insurance benefits. Contacts were specifically asked if labor availability increased after the generous supplemental unemployment insurance payments lapsed, and most said that it had not. There were a few exceptions noted by manufacturers, transportation firms, and restaurants. Nevertheless, the increase in labor availability was insufficient to meet these employers' needs. Staffing services firms continued to report unusually large numbers of unfilled orders because of these shortages. Moreover, they and other business contacts suggested that some wage rates were rising as a consequence, particularly in lower-wage positions.
On balance, selling prices rose moderately during the latest Beige Book period. However, pricing power varied by sector. In consumer-facing segments, auto dealers, furniture retailers, and apparel stores were among those reporting that customers were paying higher prices. Freight haulers said that strong demand, especially for last-mile delivery, was pushing up both spot and contract rates. By contrast, firms in professional and business services indicated that prices to customers were flat to down, with one noting that customers were "fragile" and had little appetite for higher prices.
Nonlabor input costs also rose for many firms. Construction and manufacturing firms reported rising freight rates and materials prices, along with supply chain interruptions, that contributed to higher input costs. Many of those firms were able to push such cost increases though to their customers. Contacts in a variety of sectors suggested that adapting their operations to account for COVID-19 also added to their costs.
Reports from retailers suggest that consumer spending increased modestly during the last two months. Auto dealers said that sales remained strong in August and September, and many suggested that sales would have been even stronger if not for unusually low inventories. General merchandisers and apparel retailers said that sales flattened out in recent months even though customers seemed more willing to shop in brick-and-mortar stores. Hoteliers noted some improvement in occupancy rates relative to those of a few months ago, although they remained low. Looking ahead, contacts noted cautious optimism that consumer spending will continue to recover but expressed some concern about this given uncertainty regarding the path of the virus and the future of fiscal stimulus.
Manufacturing orders increased moderately. Several contacts attributed stronger orders to customers' replenishing inventories that were depleted earlier in the year. Others said that increased auto production as well as growing foreign demand, especially from China, contributed to their partial recovery. However, several contacts emphasized that activity remained below pre-pandemic levels. Looking forward, almost two-thirds of manufacturing contacts believed demand will increase over the next quarter, although uncertainty about the path of the virus and the upcoming presidential election persisted.
Real Estate and Construction
Residential construction and real estate activity remained strong since our last report. Many contacts said that favorable interest rates and low inventories have persuaded many consumers to go forward with home purchases. One real estate agent noted that sales did not decline after Labor Day as they usually do, and contacts noted that while they anticipate that demand will soften in the coming months, they think demand will be stronger than is typical for fall. One builder reported that some potential homebuyers were pushed out of the market by higher home prices, a situation which resulted from low inventories and higher materials costs, particularly for lumber.
Demand for nonresidential construction was mixed. While public work remained weak, there was a slight uptick in private-sector projects. One general contractor reported that previously delayed projects began to move forward and that bidding activity had increased. For the most part, commercial realtors remained downbeat, citing a lack of interest in commercial space and financial hardship among small businesses and restaurants. By contrast, demand for industrial space remains strong. Looking forward, firms expected nonresidential construction and leasing activity to experience a typical seasonal deceleration as the winter months approach, but persistent uncertainty may further slow construction decisions.
Overall, banking activity increased after going through a soft patch during the last reporting period. Contacts noted that demand for mortgages and auto loans remained strong as low interest rates persisted, but demand for business loans was flat on balance. Lenders said that delinquency rates for commercial and consumer loans were still relatively low because of forbearance agreements and various fiscal relief measures. However, a number of contacts reported slight increases in delinquencies of commercial loans as the economy remained weak and some deferral programs ended. Looking ahead, bankers expected loan demand to remain unchanged throughout the current quarter but noted that uncertainty regarding the path of the virus clouded their outlook. Moreover, while bankers expressed surprise that they had not yet seen bigger increases in metrics reflecting financial duress, many expected them to rise in 2021.
Professional and Business Services
Customer demand for professional and business services remained strong, and no contacts reported a decrease in business activity. One contact indicated that his firm's demand was picking up along with the broader economy, but his firm was also benefitting from some pent-up demand that built during the slower months earlier in the pandemic. The transition to remote work and online transactions has accelerated the need for new software solutions and increased cybersecurity measures. In spite of the recent strength in demand for professional and business services, a couple of contacts expressed concern that firms may begin to delay purchases as a result of continued heightened uncertainty.
Demand for freight services increased over the reporting period, driven by an increase in e-commerce and ongoing (and broadening) resumption in economic activity. Eighty percent of contacts reported demand had increased in the last two months, and 70 percent expected demand to continue to increase during the fourth quarter, particularly because more consumers will be holiday shopping from home. Many firms have been unable to adequately respond to increased demand because hiring drivers is difficult, and freight prices have increased as a result.