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 increased slightly since our previous report, with firms across industries reporting mostly stable demand. District firms continued hiring at a moderate but slightly softer pace than in recent months. Contacts noted continuing wage pressures to attract and retain workers. Reported wage increases were moderate and in line with recent trends. Upward costs pressures, especially for raw materials, remained elevated. Contacts also noted higher transportation costs. Builders and manufacturers reported being able to pass through cost increases to their customers. Demand was stable or increased in retail, construction, and nonfinancial services but softened slightly in manufacturing and banking, a situation which contacts largely attributed to seasonal factors.
Employment and Wages
District firms added workers at a pace that was moderate but slightly softer than in the previous survey period. Most firms that reported increased hiring also noted improved customer demand, while firms that reported decreased hiring noted seasonal business declines as reasons behind their staffing decisions. Across various industries, several firms reported hiring for new positions because of business expansions. Contacts also reported hiring to replace departed workers. A steel producer noted difficulty finding hourly workers. Driver turnover remained a problem in the freight industry; however, one trucking contact reported some success hiring drivers. Reports of wage pressures were similar to those of the previous period, and firms across many industries offered increased incentives to retain workers and attract new talent. In addition to annual cost-of-living and merit increases, some construction contacts raised incentives for retention, and manufacturers increased base pay to attract skilled new hires.
Upward pressures on input costs and selling prices remained elevated and were similar to those reported in the previous survey period. Contacts reported strong pressure on input costs, especially for raw materials, including steel, concrete, and wood products. Various manufacturing firms continued to attribute cost increases to the effect of tariffs. Freight contacts reported recent decreases in diesel costs but noted that other costs have continued to increase, including truck parts and repairs. Retail contacts in turn noted continuing upward pressure on freight costs. Construction and manufacturing firms raised their prices to pass through higher costs of raw materials to consumers. The ability to pass through cost increases was similar to that reported in prior survey periods. A slightly lower proportion of freight contacts raised their rates compared with those who did so during the prior survey period. Retail contacts reported seasonal price promotions, while some professional services firms noted that increased demand and improved market opportunities have allowed them to raise prices.
Nondurable goods retailers reported slightly improved demand, driven primary by seasonal factors. However, these retailers believe the momentum from the holidays will continue after the holiday shopping season, and they predict customer demand in the first quarter will remain strong. These retailers expect that growth in 2019 will outpace growth in 2018 overall. Nondurable goods retailers continued to see moderate wage and nonlabor cost inflation and raised prices modestly. Auto retailers reported steady to slightly increasing demand overall, driven by used and nonluxury vehicles and increased new-vehicle incentives. While overall demand is up, rising interest rates are holding back demand and shifting it towards less expensive vehicles. Auto retailers expect demand to remain steady in the next quarter but to decrease in 2019 overall.
Manufacturing conditions softened at the end of the fourth quarter, but many contacts reported that this was largely a result of the usual seasonal slowdown. Continued uncertainty about international trade policy and volatility in financial markets may dampen demand in 2019, and contacts signaled that customers' capital expenditures are slowing. They also acknowledged that some of the strength in 2018 was driven by orders being pulled-ahead amid concern about future price increases, which have now come to pass or will be implemented in early 2019. The outlook for conditions in 2019 remains fair.
Real Estate and Construction
Residential builders and realtors reported stable demand in the current period, a break from a trend of softening demand for housing in the recent survey periods. While decreasing home affordability weighed on customer demand over the past year, a slight drop in mortgage rates spurred some demand recently. The decrease in home affordability was driven by rising interest rates and also by rising selling prices as builders boosted prices to cover their increases in wages and nonlabor costs. Realtors noted decreased demand from first-time homebuyers. Housing inventory was stable. Residential builders expect worsening demand both in the first quarter and in 2019 overall.
Conditions in nonresidential construction continued to be strong and improved slightly during the period. Demand from the industrial and education sectors was noted to be especially strong. Backlogs remained elevated and were increasing. Commercial real estate developers reported stable conditions. Most nonresidential builders were optimistic about growth in the first quarter, and commercial real estate developers expect stable conditions. Nonresidential builders expect moderate growth in 2019 overall. Commercial real estate developers' outlooks for 2019 were mixed.
Banking conditions softened slightly, driven by seasonality in commercial real estate, mortgage, and auto lending. Business inquiries were steady, and large and middle-market firms continued to seek financing for plant equipment and mergers and acquisitions. Volatility in financial markets and political uncertainty have had a negative effect on consumer and business confidence and cloud the outlook for loan demand in the coming quarter. Some bankers indicated that rising interest rates may also dampen demand.
Activity in nonfinancial services increased at a modest pace. Professional and business services firms noted increased demand, especially in the information sector, in which firms reported regular year-end increases in purchases of software and digital technologies. Freight contacts noted that while demand remains high, capacity constraints continued to limit growth in the industry, and while most freight contacts reported stable demand during the period, some trucking contacts noted softer demand compared with that of the previous quarter because of the pull-ahead of imports from China. Several contacts anticipate continuing high levels of activity, but some reported cautious optimism about the near future.