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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

After declining sharply in March and April, the Fourth District economy expanded in recent weeks as some firms resumed business operations. Contacts across most industry segments reported a rebound in activity during the early phases of reopening, although many suggested that the pace of improvement slowed as the reopening progressed. Most were also careful to point out that demand remained well below pre-pandemic levels despite the recent gains. Looking forward, contacts generally expected activity to pick up further in coming months. However, some questioned the sustainability of the pace of recovery amid a spike in new COVID cases across the country along with weak new orders and declining backlogs in some key industries. That uncertainty likely contributed to softness in capital spending and hiring plans. More than 40 percent of contacts cut capital spending plans since the last report, while less than 10 percent planned to spend more. Contacts across a wide array of industries indicated they were bringing idled workers back only slowly, and are unlikely to rehire all of them in the near term. Wages, nonlabor costs, and selling prices were generally flat-to-down.

Employment and Wages

Labor demand remained soft across most industry segments even as more of the District's economy came back on line. Half of contacts reported that staffing levels had not changed over the past two months, while the share reporting staff reductions was slightly larger than the share that reporting staff additions. Firms indicated that weak demand for their goods and services was the primary factor constraining hiring, but contacts also suggested that hiring was inhibited by workers' persistent fears of contracting the virus, a lack of child care, and generous unemployment insurance benefits.

Wages remained mostly flat as nearly three-quarters of contacts reported no change in the past two months. Many firms instituted formal pay freezes at the onset of the pandemic, while others temporarily put off merit increases until they were more confident in the sustainability of the recovery. More firms reportedly cut worker pay since the last report (particularly for higher salaried employees) and asked workers to take unpaid leave. Where wage increases were noted, contacts indicated that they were due to increased overtime and bonuses or COVID-related "hazard" pay.

Prices

Nonlabor input costs were flat to down since the last report. Manufacturers reported that prices for important inputs such as steel and petroleum-related products were mostly flat to down in recent weeks amid weak global demand and excess inventories, while freight haulers indicated that lower fuel prices had offset higher insurance costs. Contacts generally expected nonlabor costs to move higher in coming months as the economic recovery proceeds. With weak demand and little upward pressure on wages and other input costs, selling prices were mostly flat-to-down as well. Contacts in retail, transportation, and professional and business services were more likely to report increases in selling prices than those in manufacturing and construction. Still, the price increases were not material and often reversed declines recorded in previous periods.

Consumer Spending

Retail spending increased for most contacts since the previous report, although it was still below the pre-pandemic level. Automotive and apparel contacts generally indicated that demand had increased more than expected early in the reopening, and one tourism contact noted that hotel room bookings edged up as youth sports activity resumed. Some restaurants found success by continuing to focus on carryout and delivery even as dine-in restrictions were eased. However, some retailers have experienced very little recovery since the initial shutdown, and rising COVID cases have forced restaurants in a few areas to curb operations again. Overall, contacts are cautiously optimistic that consumer spending will continue to recover in coming months.

Manufacturing

Manufacturing conditions improved modestly since the last report. Contacts indicated that manufacturing output reached its trough in mid-April and has been increasing since then. Firms that experienced an uptick in demand attributed this increase to more of their customers resuming operations, particularly in the District's auto industry. Despite the general improvement, demand remained below pre-pandemic levels overall and was particularly weak in the District's aerospace sector. Moreover, several contacts indicated that new orders were uneven and failed to keep pace with shipments, leading to shrinking backlogs. Nearly two-thirds of contacts expected demand to increase in the coming months, yet more than half suggested that they had decreased planned capital expenditures in order to preserve cash.

Real Estate and Construction

Overall construction activity stabilized since our last report. However, conditions varied widely under the surface and contacts expressed concerns about the sustainability of the industry's recovery. Homebuilders reported stronger-than-expected new-home sales in May and June as buyers returned to the market as social distancing restrictions were eased. In addition, low mortgage interest rates encouraged undecided buyers to "get off the fence." Residential realtors suggested that demand for existing properties was robust as well, but a shortage of listings constrained sales. Both builders and realtors expected demand for single-family properties to remain firm in the near term, but several worried that conditions could change in the fall if high unemployment persists.

Nonresidential construction rebounded as delayed projects in some areas were restarted. However, several nonresidential builders indicated that there were few new projects entering the pipeline and that backlogs were being worked down, raising concerns that activity may weaken in the fall. Meanwhile, nonresidential real estate activity remained weak. Commercial realtors reported that overall demand for space was flat to down as softness in office and retail more than offset some strength in light industrial. Landlords continued to express concerns about cash flow as more of their tenants, particularly small businesses, come under financial strain.

Financial Services

Bankers reported that overall activity was slowly returning to normal in recent weeks. Contacts suggested that demand for business loans, particularly Paycheck Protection Program (PPP) loans, slowed substantially after large increases in March and April. One large regional bank reported that customers who had drawn down existing credit lines and revolving loans had begun to pay those loans back more quickly than anticipated. Deposit levels remained elevated as clients held on to cash from preemptive line-of-credit drawdowns, disbursements of PPP loans, and government stimulus checks. Most contacts reported that delinquency rates remained relatively low, but several expressed concern that delinquencies may increase when PPP funds run out and government-provided assistance diminishes. Demand for purchase mortgages increased as stay-at-home orders were eased, and mortgage refinancing activity remained high.

Professional and Business Services

Activity in professional and business services increased at a modest pace since the previous report, although it remained muted compared to a year earlier. As businesses continued to reopen, demand for payroll and other administrative services was returning, as was demand for marketing services. Technology companies that focus on work from home solutions have also seen an increase in demand as businesses prepare for possible future disruptions. Optimism increased significantly among contacts in the technology industry, as businesses will likely require many third party services in order to thrive in the "new normal" work environment.

Freight

The vast majority of transportation contacts reported an increase in freight demand in recent weeks. This pickup coincides with a resumption of manufacturing activity in the District as well as continued gains in shipments from grocers. One contact said that demand from grocers was 40 percent higher than prior to the pandemic, which offset weaker demand from some other sectors. By contrast, a few haulers were forced to accept below-cost shipments to maintain cash flow. Looking forward, two-thirds of transportation contacts expected demand to increase in coming months. At the same time, many were concerned about the potential for a second wave of COVID-related shutdowns which may disrupt shipments later in the summer and into the fall.