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 in the Fourth District increased modestly, albeit at a slightly slower pace than in the prior round. Manufacturing demand held steady, although some producers noted weaker demand because of the Boeing 737 Max production halt. Others expressed concern about supply-chain implications of factory shutdowns in parts of China caused by the outbreak of COVID-19. Retail demand was relatively strong thanks to mild weather, strong consumer confidence, and low interest rates. Professional and business services, a long-standing bright spot in the District, continued to report strong demand for legal, IT, and advisory services. Loan demand was stable, with some improvement in mortgage lending because of low interest rates. Freight haulers said that cargo volumes remained low. On balance, contacts expected that customer demand will improve slightly in the near term. Hiring and wage growth continued at about the same modest pace as in the previous survey period. Contacts indicated that labor was still in short supply, while often noting that they do not believe larger wage increases will attract more applicants. Both nonlabor input costs and selling prices rose modestly.
Employment and Wages
District employers increased staff levels slightly, and firms expect a similar pace of hiring in the near term. Employment gains were concentrated in services. The majority of professional services firms added workers to meet growing customer demand, as has been the case for a number of months. Banking employment edged up after several periods of losses thanks to a few pockets where loan demand had increased. Retail reports were mixed. Warmer weather led a few food and hospitality firms to increase staff levels. However, one large department store reduced employee numbers as part of a restructuring. Transportation firms continued to pare payrolls because of weak cargo volumes and increased operational efficiencies. Most manufacturers held staff levels steady, and the few that added workers added finance and sales analysts and engineers to design new products.
Wages rose modestly and in line with the trend during the past several periods. A greater share of professional and business services raised wages to attract and retain talent. Retail wages moved up in line with an increase in Ohio’s minimum wage. However, a number of freight haulers held wages flat and reduced hours and benefits. Wage growth did not change meaningfully in other sectors. Despite low unemployment, contacts cite modest inflation as a reason for not granting larger wage increases. Contacts often noted that they do not believe larger wage increases will attract more applicants. Many firms that were hiring workers with general skills were concerned they would not be able to pass through the higher costs to customers. Among firms that were hiring skilled or professional workers, many were enhancing other benefits in lieu of more substantial wage increases.
Inflation pressures remain modest. Upward pressure on manufacturers’ input costs softened somewhat, in part because of lower contract prices for steel. Also, a number of manufacturers reported that weaker demand from China weighed on commodity prices, with one global capital goods manufacturer pointing to the factory shutdowns caused by COVID-19 as a cause. Transportation firms reported lower diesel fuel prices. Clothing and department store retailers commented that a reduction in incremental tariffs on Chinese imports eased cost pressures.
District firms raised selling prices modestly. On balance, manufacturers nudged their prices higher, with producers raising prices modestly on select customers or select products or mixing increases on some products with decreases on others. On the consumer side, competition kept retail, food, and hospitality price increases minimal.
On balance, retailers reported relatively strong demand. Contacts highlighted mild weather relative to last year as keeping activity strong after the holiday shopping season. Auto dealers reported strong sales thanks to elevated consumer confidence and low interest rates, although used-vehicle sales were rising more quickly than new-vehicle sales. Apparel retailers reported steady customer demand. One discount food and drug store noted that competition from online retailers had led to lower sales. Retailers were upbeat that strong economic conditions would continue to buoy customer demand in the near term.
Conditions in the manufacturing sector remained stable. One steel producer noted that the bottoming of steel prices led to an increase in demand. Also, for some manufacturers, demand improved because of a usual seasonal pickup that follows a quiet holiday season. Aerospace parts manufacturers and those who serve them noted dampened demand as a result of the Boeing 737 MAX production halt. Many contacts commented on general sluggishness in the global economy and voiced concern about the outlook given the spread of COVID-19 and the resulting effective shutdown of many commercial centers in China. Just more than a quarter of respondents reported that capacity utilization was lower than normal, citing slower demand and excess capacity in the market as the reasons.
Real Estate and Construction
Construction and real estate contacts indicated that overall demand continued to increase at a modest and slightly slower pace in recent weeks. At least part of the slower growth was attributed to typical seasonal effects. On the residential side, contacts cited a generally strong economy, low mortgage interest rates, and confident customers as contributing to ongoing housing demand. Looking forward, residential realtors and builders suggested that these solid fundamentals would continue to bolster housing demand in the coming months.
Nonresidential building activity remained strong, and firms expected strong conditions to persist well into 2020. A few contacts said that investment capital continued to flow into commercial real estate and development, and one commercial builder indicated that he had seen more bid opportunities in recent weeks as developers began planning for the spring. That said, contacts expect the growth rate of commercial building may slow somewhat after a few years of exceptional growth.
Overall, loan demand was stable. On the consumer side, while some bankers reported that lower interest rates spurred growth in mortgage demand, others noted the usual first-quarter decline in consumer credit card balances. On the commercial side, loan demand was balanced. One banker noted that some new capital projects were initiated at the beginning of the year, while others reported slower demand for commercial credit as trade tensions and weakness in the manufacturing sector weighed on business activity. Some contacts noted a sense of caution among their commercial clients; a few mentioned that the typical first quarter decline in deposits was less severe than usual. Contacts speculated there is a possibility that businesses are holding more cash reserves because of uncertainty about the outlook.
Professional and Business Services
Activity in the professional and business services sector remained strong but has moderated somewhat from that of recent months. Contacts noted that favorable economic conditions were encouraging firms to spend on legal, advisory, and IT services. Contacts expect demand for their services to remain strong going into the second quarter.
Overall demand for freight services was stable after declining slightly in the previous period. One logistics firm reported that its customers were replenishing inventories after a successful holiday shopping season. However, some freight executives reported that excess truck capacity and weakness in manufacturing had negatively affected their markets. One contact remarked that new entrants with significant amounts of capital have been taking market share. Transportation firms expressed concern about the potential for supply-chain bottlenecks as a result of COVID-19. The virus aside, transportation firms expect conditions to improve slightly in the near future as rising consumer spending leads to increases of merchandise shipments.