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
Overall economic activity in the Fourth District increased modestly, an improvement after a couple periods of little growth. Professional and business services contacts continued to see strong and increasing activity. Manufacturers reported slight demand growth for the first time in several months, noting that while their international sales remained weak, domestic demand was stronger than they had predicted. Homebuilders indicated that low mortgage rates and rising wages boosted demand for new homes. Auto sales were bolstered by higher incentives, while reports from nonauto retailers were mixed. Bankers noted growing loan demand for homes and autos. Nonresidential contractors reported that demand ticked up. By contrast, the freight sector saw further weakening. Contacts in many sectors were optimistic about near-term growth prospects. Employment rose slightly on balance, largely on the strength of professional and business services hiring, while overall wage growth was modest. Output price inflation was modest on balance.
Employment and Wages
Aggregate employment increased slightly over the period. Professional and business services firms continued to staff up to meet demand growth, accounting for most of the net employment gains. Construction contractors indicated that typical winter layoffs had been delayed this year. Nonseasonal retail staffing levels were stable. Most bankers held employment levels steady, but one large bank implemented layoffs, saying interest rate reductions had put pressure on margins. Most manufacturers had stable staffing, but a couple steel manufacturers cut temporary workers and reduced hours for permanent employees. Long-haul trucking and rail companies reduced staffing levels because of softening demand.
Wages rose modestly overall. Manufacturers increased wages and offered retention bonuses to compete for talent. Retailers across subsectors raised pay rates, citing tighter labor markets. While professional and business services firms reported only slight wage pressure, other white-collar industries, including banking and real estate, saw stronger wage pressure. One community banker said he needed to raise wages 10 percent to attract qualified talent. Construction pay was mostly unchanged. Freight firms reported little pressure to raise wages.
Selling prices in the District rose modestly on balance. Much of the price inflation came from services firms; nonsteel manufacturers' prices were stable, and retail inflation was mixed. Some professional and business services firms negotiated modest price increases. A staffing contact remarked, "we have good pricing power due to [strong] demand with inadequate supply." Commercial real estate companies increased rates in response to rising labor costs. Local delivery and rail freight companies raised rates, while long-haul trucking rates were flat to down. Manufacturers' selling prices were stable, except in the case of steel producers, whose prices fell with the market. Though tariffs pushed up costs for some manufacturers, manufacturers' materials costs decreased on balance, especially for steel. On the consumer side, a clothing retailer reduced the use of price discounting to offset higher costs resulting from tariffs. By contrast, a food retailer said that while tariffs had increased costs, the company "cannot raise prices on a whim" because of fierce competition. Homebuilders reported rising costs; some increased prices to offset these costs, while others took hits to their margins to maintain market share.
Retailers reported slightly higher sales compared to those of the previous report. Light-vehicle sales were solid and increasing. One dealer noted that new-vehicle sales in October were bolstered by a 7 percent increase in manufacturer incentives relative to last year's. Contacts in hospitality and retail apparel reported mixed activity throughout the Fourth District. While overall sales were up only slightly this period, retailers were optimistic about sales in the coming months, looking forward to a boost from the holiday shopping season.
Manufacturers reported a slight increase in activity, although overall conditions remained relatively soft. Domestic demand held up better than manufacturers had anticipated. However, several contacts said international weakness still weighed on demand, especially softness in western and central Europe and the ongoing negative impacts from trade tensions with China. One steel producer noted that declines in steel prices pushed up demand as customers negotiated contracts for 2020 in an effort to lock in low prices, while another said that a falling price environment encouraged customers to hold lower inventory and buy on an as-needed basis. Aside from the usual holiday slowdown, manufacturers were relatively optimistic that conditions would continue to improve in the coming months, and several noted that they were working on plans for increased capital investment for 2020.
Real Estate and Construction
Construction contacts reported strengthening demand, while real estate firms indicated that demand was flat. Nonresidential contractors noted slight demand growth over the period because they acquired new projects from a wide range of industry segments. Nonresidential contractors were upbeat about the near future as well, believing there will be plenty of projects to bid on in 2020. However, commercial real estate contacts reported flat demand. A couple commercial real estate contacts said softening global markets and trade tensions weighed on demand.
On the residential side, homebuilders indicated that demand increased modestly, citing low mortgage rates and wage growth as contributing factors. One homebuilder also suggested that stronger demand for resale homes allowed potential buyers to trade up to new homes more easily. However, residential real estate agents characterized sales of existing homes as unchanged. Homebuilders expected continued demand growth, apart from the expected winter slowdown, while realtors expected home demand to remain unchanged.
On balance, demand for credit increased slightly. A large minority of bankers reported that demand for credit had increased, while the rest suggested that it was steady. In particular, contacts indicated that lower interest rates drove increases in home lending—particularly for mortgage refinancing—and vehicle loans. However, one contact indicated that demand from small businesses and large commercial clients weakened. Although bankers indicated that falling interest rates may erode core deposits going forward, deposit balances have remained relatively stable to date.
Professional and Business Services
Activity in the professional and business services sector has strengthened further since the previous report. Contacts from a variety of subsectors continued to report strong demand for business services and suggested that their clients were investing in growth through activities such as marketing and mergers and acquisitions. One business development contact reported a considerable increase in activity in recent weeks because of a number of businesses that are opening new locations in the area. Overall, the majority of contacts in professional and business services expect favorable conditions to continue into the near future.
Freight sector conditions have weakened further since the last report. The majority of contacts reported no change or lower demand for freight services, although one freight firm reported that September and October were its strongest months since January. Ongoing weakness in the manufacturing sector was a major factor contributing to recent softening; one contact noted demand weakness because manufacturing output from Mexico had fallen significantly. Another contact remarked that economic uncertainty caused businesses to hold off on investment purchases, resulting in lower shipping volumes. Finally, contacts pointed to excess capacity in trucking as exacerbating weaknesses. Overall, freight contacts have downgraded their near-term outlook since the previous report, from solid to mixed.