Fourth District Beige Book
Summary of Economic Activity
The Fourth District economy contracted slightly in recent weeks amid persistent softness in household spending, particularly goods spending. Several retailers and restauranteurs reported a typical post-holiday sales slump, but some said that sales fell short of their expectations as inflation continued to weigh on discretionary spending. In addition, higher interest rates contributed to ongoing weakness in light vehicle and home sales. Freight and manufacturing firms suggested that softer household spending dampened demand in their own industries, while bankers noted that higher interest rates curbed overall loan demand. Contacts generally expected business activity to soften further in coming months. Employment rose slightly, and while reports of layoffs remained few, a larger share of contacts noted that they had paused hiring. Increased labor availability, particularly among lower-paid workers, was accompanied by some further relief in wage pressures. Nonlabor input cost pressures changed little in recent weeks, while selling price pressures edged higher.
District employment increased slightly, though a larger share of contacts indicated that they had held staffing steady. Firms that were hiring often cited ongoing turnover and persistently high job vacancies as the main drivers. For instance, one manufacturer stated, "We still need about 10 percent [more] staff … to reach pre-COVID levels." On balance, contacts’ hiring expectations suggest employment growth will slow further in coming weeks. Looking forward, several contacts suggested that they were less likely to lay off workers in the event of an economic downturn because they were focused on retaining enough staff to meet longer term production goals.
Wage pressures continued to ease, and the share of contacts reporting increased pay was one of the lowest in the past 12 months. However, the relief was spotty. Notably, food and hospitality firms reported declining wage pressures related to increased labor availability. Meanwhile, contacts in the financial services and nonresidential construction sectors reported that sustained competition for skilled workers was still leading to large pay increases. Similarly, manufacturing contacts often offered wage increases that exceeded prepandemic norms to help employees offset the effects of inflation.
On balance, nonlabor input cost pressures changed little in recent weeks but were down meaningfully from a year earlier. Moreover, an increased share of contacts reported that their costs had stabilized recently. In addition, even when costs were said to be rising, contacts reported that they were increasing at a slower pace. Looking forward, contacts expect nonlabor input cost pressures to ease slightly further in the months ahead.
The share of contacts reporting increased selling prices was up slightly from that in the previous cycle but still down considerably compared to a year ago. Many contacts raised prices to offset high input costs. However, some firms reported increased pressure to not raise prices even as their costs remained elevated. For example, one freight hauler noted, “We have lost some of our normal business because we were not willing to reduce rates as much as our customers demanded. Our costs are not decreasing, so our margins are getting squeezed."
On balance, contacts’ reports suggest consumer spending was down somewhat as households faced continued pressure from high prices and increased interest rates. One general merchandiser noted that slower than normal holiday sales had been followed by further declines to start the new year, while another reported that high prices had led to a “pretty dramatic bias toward food and consumables over discretionary purchases. If there’s money left over, customers will spend some on general merchandise.” Auto dealers continued to report that higher vehicle prices and increased interest rates had resulted in softer customer demand. One industry contact said that his returning lease customers were often “shocked by the increase in monthly payments.” On balance, contacts expected consumer spending to remain soft in coming months.
Overall demand for manufactured goods changed little from the prior reporting period. However, reports continued to vary by industry segment. Demand increased for firms in aerospace and in heavy trucks and trailers. By contrast, softer demand was reported by firms associated with interest rate-sensitive sectors, including residential real estate and light vehicles. Multiple contacts said that softer consumer spending had reduced demand for their customers’ products. Broadly, manufacturers expected demand for their products to remain steady or increase slightly in the coming months and they frequently cited improved supply chains and stabilizing inventories as contributing to their relatively optimistic expectations.
Real Estate and Construction
Residential construction and real estate contacts reported that elevated interest rates continued to constrain demand, though the pace of contraction slowed somewhat. In fact, one homebuilder noted that demand had increased in recent weeks, a situation which he attributed to stabilizing mortgage interest rates and slower increases in materials costs (and home prices) compared to the prior two years. Still, contacts anticipated demand overall would remain below typical levels into the near future.
Nonresidential construction contacts reported that demand softened further because of high interest rates for commercial projects. One general contractor noted that the projects that are moving forward have often been self-funded. Real estate developers also cited weaker demand as customers have become increasingly concerned about high interest rates and general economic uncertainty. Contacts said that these same factors would lead to further softening in demand in coming months.
Overall, loan demand continued to decline this reporting period. Bankers noted a slowdown in lending to both businesses and households, which they attributed to high interest rates. Some lenders also suggested that perceived economic uncertainty was causing borrowers to be more cautious. Overall, delinquency rates have remained low, though a few bankers noted a slight increase in credit card delinquencies. Core deposits continued to decrease slightly, and bankers suggested that deposit rate competition and a shift to higher-yield alternatives contributed to the decline. Looking ahead, lenders anticipated that loan demand would weaken further as borrowing costs are expected to remain elevated.
Freight activity remained weak, which contacts attributed to a variety of factors including weaker demand in construction and consumer goods, as well as an ongoing inventory correction cycle. Contacts expected freight demand to remain soft in the months ahead. Demand for professional and business services grew at a relatively steady pace this period. One firm that provides transaction authentication services indicated that the continued upward trend of internet shopping will ensure growth in demand for his services.
Workforce development contacts indicated that the number of individuals seeking their services remained below prepandemic levels, though a few reported an uptick in recent months. Contacts noted that individuals were more likely to seek their services for training opportunities than for job placement. One contact mentioned that every worker who recently completed a manufacturing training program had at least two job offers. The difficulty manufacturers are having attracting and retaining workers led some to explore apprenticeships to meet their staffing needs. According to multiple contacts, lower-wage workers have greater options for employment and have become more selective in their job choices, prioritizing flexible work schedules in addition to pay. An eastern Kentucky contact reported increased demand for skilled trade workers as the region continued to rebuild from the July 2022 floods.