Fourth District Beige Book

Summary of Economic Activity

Fourth District business activity slowed slightly in recent weeks. For the first time since the end of the downturn in 2020, a plurality of contacts said that demand for their goods and services had weakened over the prior two months. Demand growth slowed in sectors that had exhibited strength recently (such as manufacturing and professional services) while demand in previously weak sectors (such as retail, construction, and freight) remained so. Lenders captured the sentiment of many of their customers when suggesting that higher interest rates, persistent inflation, and increased economic uncertainty were weighing on household and business spending. Contacts expected demand to decrease modestly further in the coming few months, and their plans for capital spending were lower, as well. Labor shortages persisted, even as worker availability increased somewhat and turnover decreased slightly. While wage and nonlabor input cost pressures were largely unchanged, upward pressure on selling prices eased further.

Labor Markets

Employment growth in the District continued at a slight pace. Demand for labor remained solid, though there were more frequent reports of employers’ opting to take down open job postings or declining to fill recently vacated positions. Reports of outright layoffs were rare and mostly concentrated in construction and freight, where demand has been particularly weak. Labor supply constraints appeared to ease somewhat, and there were scattered reports of reduced turnover. Still, nearly half of contacts indicated that finding workers with the right skills was the primary impediment to hiring. Looking forward, firms generally planned to add more workers to their payrolls in coming months, but at a slower pace.

With labor demand still exceeding labor supply, wages continued to rise. Most firms indicated that competition for workers remained intense, forcing them to raise pay in order to attract and retain workers. One homebuilder said, “[even] while cutting staff. . . we will adjust all base compensation up by 5 percent next month. This effectively negates 50 percent of the savings [from recent layoffs].” While wage pressures remained elevated, there were scattered signs that they were easing. For example, the share of contacts reporting pay increases over the prior two months fell below 50 percent for the first time in more than a year and a half.

Prices

Increases in nonlabor input costs remained stubbornly broad based. Since the second quarter of 2021, the share of contacts reporting recent input cost increases has consistently exceeded 60 percent, while in the year preceding the pandemic, the share reporting higher input costs averaged 32 percent. That said, the magnitudes of cost increases appeared to be easing. Firms often reported that cost decreases on some inputs (such as lumber and steel) were offsetting price increases in others (such as transportation and petroleum-related products). In addition, several contacts noted that while costs were increasing, they were not rising as fast as previously. For example, one manufacturer reported, “[cost] increases have been tapering off and are becoming far less frequent.”

Reports of selling-price increases remained common, but noticeably less so than early in the year. In some cases, firms suggested they had paused price hikes following increases in prior periods. In others, reduced demand forced firms to cut prices. A manufacturer said that “expectations [for weaker demand] have purchasers negotiating much lower prices from suppliers,” and a homebuilder reported that “incentives are increasing to motivate buyers to move forward” as demand weakened across the housing market.

Consumer Spending

Retailers reported further softening in demand as consumers faced continued pressure from high food and gasoline prices and increased interest rates. One general merchandiser said sales from mid-October to early-November had declined noticeably from those of the previous year, and he was unsure if activity in his stores would rebound for the holiday shopping season. Reports from restauranteurs and tourism contacts were mostly positive, with many citing increased activity brought on by unusually warm weather and the upcoming holiday season. Still, others noted that price increases as a result of higher input costs had begun to slow customer demand. Auto dealers reported a decrease in sales, noting that customers remained wary of higher payments because of increased interest rates and higher vehicle prices.

Manufacturing

Demand for manufactured goods flattened in recent weeks following a notable increase during the prior reporting period. While some contacts attributed the softening to expected seasonal fluctuations, others cited slowing in end markets and an increase in order cancellations. Still, a plurality of contacts said demand was unchanged. Manufacturers generally expected demand to hold steady in the coming months, outside of typical seasonal slowdowns. Manufacturers suggested that supply chain disruptions continued to ease somewhat, though they remained far from normal.

Real Estate and Construction

Housing demand continued to decline from levels that were already down significantly from recent peaks. Contacts noted that many potential buyers have found it difficult to qualify for mortgages amid higher interest rates. One homebuilder indicated that his firm’s sales in the third quarter were worse than in three of the four quarters of 2008. Contacts did not expect demand would improve soon because interest rates are expected to remain high. One real estate agent stated that “the snowball will continue to roll down the hillside with nothing to stop it.”

Nonresidential construction and real estate activity also softened further. Contacts indicated that rapidly rising interest rates and growing economic uncertainty have led many businesses to hold off on new projects. One general contractor indicated that demand has slowed considerably because firms are unsure what business will look like over the next 12 months. The same contractor added that rising interest rates have made it very difficult to secure financing for the speculative construction projects on which the firm heavily relies. Furthermore, a real estate broker noted that many buyers, particularly real estate investment trusts, have left the market.

Financial Services

Overall lending declined during the reporting period. Bankers noted that commercial lending recently began to weaken, and they attributed the weakening to higher interest rates. Some lenders observed a decline in commercial real estate lending, a situation which one contact said was related to clients’ canceling planned projects because of higher interest rates. On the household side, bankers reported continued weakening in mortgage and auto lending. Lenders indicated that delinquency rates for commercial and consumer loans remained low. Contacts reported that the level of consumer deposits decreased slightly. Bankers anticipated overall loan demand would decline further in the near term.

Nonfinancial Services

Freight contacts reported that demand slowed further in recent weeks. One freight contact noted that most of his firm’s clients expect a soft fourth quarter and peak season. Another said that further declines in freight activity are likely because he expected goods purchases, housing demand, and factory output to fall in coming months. Professional and business services firms were also more downbeat relative to their views in prior periods amid growing economic uncertainty. One law firm noted that while clients have continued to move forward with projects, they have been exhibiting more caution. Additionally, a software company noted that customers had begun to pause spending on technology.

Community Conditions

Several nonprofit contacts reported that rising development costs increasingly constrained the supply of affordable housing for lower-income households and are likely to continue doing so. Both ongoing and new construction are affected. Contacts suggested that increases in building costs (materials and labor) are less likely to be passed on to lower-income homeowners, resulting in increased need for gap funding for projects. One Ohio contact summarized the situation well, stating that “colleagues in our industry are going to produce fewer units because they are unable to make deals work due to the increases in costs and the unpredictability of costs.”