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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

Economic activity increased moderately and at a similar pace to the previous reporting period. Activity increased at a brisk pace for professional services, freight haulers, and firms whose sales benefitted from low interest rates (such as homebuilders and durable goods producers). Firms in industries that were most impacted by the pandemic (such as hospitality, aerospace, and energy) saw little improvement in demand. Staff levels increased slightly as customer demand improved. However, most firms were still below pre-pandemic staff levels. Although labor availability had improved recently, many firms report ongoing difficulty finding workers. Idiosyncratic disruptions to production as well as shipping delays pushed up transportation rates and costs for certain construction and manufacturing inputs. Selling prices rose moderately as a result. Looking ahead, contacts expected modest improvement in customer demand, although expectations have been tempered since the previous reporting period because of the uncertainty of the coronavirus's path. Consequently, outlooks for hiring in the year ahead were also restrained.

Employment and Wages

District labor markets continue to heal steadily. Staff levels increased slightly in response to the broader improvement in business activity. Most firms that had temporarily laid off workers have rehired most of those workers. That said, staff levels remain below pre-pandemic levels for about two-thirds of our contacts. Also, despite high levels of unemployment, firms experienced mixed results in recruiting workers. Firms generally had no trouble finding workers for office-type jobs, but recruitment was still a challenge for many manufacturing, construction, retail, and transportation firms. Firms in these sectors indicated that, although labor availability has improved with the passage of time since supplemental unemployment benefits lapsed in July, their staffing challenges have persisted.

Overall, wage pressures were modest because of the slack in the labor market. The freight and logistics sector was an exception. Many of these firms reported pay increases of 10 percent or more for drivers and hourly workers to attract workers and to stem high employee turnover.

Regarding the outlook, hiring plans for the year ahead were generally modest. About a third of contacts expected they will still be below pre-pandemic staff levels 12 months from now. Uncertainty about the path of the virus and associated public health measures topped the reasons firms are reticent to add staff. Moreover, a sizable share of firms indicated they expected sales growth to be too low to justify stronger hiring.

Prices

Nonlabor costs rose moderately, on balance. However, cost increases were more prominent for builders, manufacturers, and retailers. Many firms in these sectors experienced delays in receiving inputs because either the producer or the shipper was short-staffed. This situation not only increased input costs and the cost of shipping these materials, but it also increased lead times. Steel and lumber were widely cited as examples of commodities for which prices are well above pre-pandemic levels.

Selling prices rose moderately, although increases were stronger for durable goods and freight than they were for professional services and nondurable goods. Very strong demand and tight capacity in the industry motivated almost all of our freight haulers to boost their rates for new contracts, and most received little pushback from customers. A number of manufacturers and builders were able to pass cost increases on to their customers if they were not held to a long-term contract. Auto dealers commented that low inventories of vehicles continue to push up prices for new and used cars. By contrast, a number of restaurants and hotels cut their prices to attract customers. Professional services firms broadly held their prices, as they have done for several reporting periods.

Consumer Spending

Reports suggest that consumer spending grew moderately, albeit at a slower pace than in the last reporting period. Sales of goods were generally stronger than for services. Auto dealers commented that sales remained strong, thanks largely to low interest rates, and while some reported improved inventory levels, a number of contacts indicated that sales were still being limited by low inventories. Sales for general merchandisers and apparel retailers were slightly better recently, and they were expecting a favorable holiday shopping season. However, hoteliers and restauranteurs noted that the recent rise in COVID-19 cases weakened dine-in sales and business travel further from its previous low level, and customers were cancelling planned weddings and holiday events. Contacts expected business activity to remain broadly unchanged in the next few months, although increases in COVID-19 infections and diminished assistance to households from federal programs were significant downside risks to the outlook for spending.

Manufacturing

Manufacturing orders increased modestly, although at a slower rate than in the previous period. Firms also reported slightly better capacity utilization, and plans for capital investment were stable. By end-market, the wide variation in activity that was seen in recent periods persisted. Firms that make consumer durables (such as autos) and goods related to homebuilding continue to experience strong demand. Also, the growth of online retailing boosted orders for producers of packaging and logistics equipment. Conversely, aerospace demand remained flat at low levels because of depressed air travel. Similarly, orders for oil and gas equipment remained weak because of low levels of oil and gas drilling. Looking forward, contacts expected demand to improve modestly.

Real Estate and Construction

Demand for homes remained strong, and contacts attributed this primarily to low mortgage rates. Although a seasonal slowdown is normally experienced around this time of the year, homebuilders and real estate agents noted that sales have yet to slow. Looking to the next two months, contacts were concerned that demand may soften as COVID-19 cases increase. One homebuilder indicated that traffic on the firm's website had declined, suggesting that new home sales may soon begin to soften.

Nonresidential construction and real estate activity remained relatively stable since our last report. Increases in COVID-19 infections and uncertainty about the elections led many firms to hold off on their investments. One general contractor stated that there have been fewer projects available for bidding and those that are available have been smaller in dollar value. He also noted that many projects have seen a significantly larger pool of bidders than usual.

Financial Services

Banking activity remained stable during the reporting period. Contacts noted that low interest rates continued to support demand for consumer loans, especially for mortgages and auto loans. However, demand for business loans was reportedly flat. Core deposits grew for most contacts, and lenders indicated that delinquency rates for commercial and consumer loans were still low because of forbearance agreements and CARES Act-related assistance. One banker noted that customers for whom forbearance agreements had ended were staying current with their payments. Looking ahead, bankers were optimistic that conditions will improve as the likelihood of an effective COVID-19 vaccine increases.

Professional and Business Services

Demand for professional and business services strengthened further from its previous high level. IT firms, in particular, experienced robust demand for digitization projects and support for online retailing operations. One marketing firm noted an uptick in advertising activities. Contacts expressed optimism for the coming months and expected demand to remain strong.

Freight

Demand for freight services strongly increased, and firms expect the momentum to continue into the next several months. Logistics firms indicated that strong online retail sales growth was keeping fulfillment centers busy. Cargo volumes picked up as manufacturers and retailers built up their inventories. Also, import volumes were reported to have increased ahead of the holiday shopping season. Many firms in the industry indicated that high staff turnover and difficulty finding workers made it difficult for them to keep up with demand.