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
The economic recovery gained strength in recent weeks, and contacts across an array of industries reported healthy gains in customer demand. Contacts often pointed to progress in the fight against the COVID-19 pandemic, the easing of government-mandated restrictions, and the release of pent-up demand as key drivers of the recent improvement in customer demand. For these same reasons, firms were decidedly upbeat that demand will continue to improve in the near term. That said, many contacts commented that supply chain bottlenecks were constraining growth by causing extended lead times, depleted inventories, and escalating materials and transportation costs. Hiring activity was reportedly modest despite the improvement in customer demand, and many firms indicated they were operating with fewer staff members than they would like because of a dearth of job applicants. Consequently, a greater share of firms boosted wages, particularly for hourly workers on the lower end of the pay scale. Price hikes became more widespread as firms attempted to keep up with rising costs for materials and labor.
Employment and Wages
Staff levels increased modestly, despite widespread reports that customer demand had strengthened. Many firms commented that their headcounts were below desired levels because there were too few applicants for open positions. The problem was acute for firms in consumer-facing industries. A few retailers and restaurants noted they operated with reduced hours or had closed locations because they were short-staffed. One convenience store chain tried to increase its staff level for the past month, but unsuccessfully. As a result, 10 of its stores operated for four fewer hours than desired each day. Many manufacturers also said they were short-staffed, and several noted they were using overtime to fill the staffing gap. Others indicated that they were automating processes to keep up with demand and to reduce labor needs. Contacts in several industries observed an increase in employee turnover, which they attributed to workers’ feeling more confident leaving their jobs for higher wages or for more suitable positions.
The dearth of available workers motivated a greater share of firms to raise wages. About 55 percent of our survey respondents increased wages over the past two months, up from about 40 percent in the prior period. Reports of wage increases were widespread and were especially common among manufacturing, retail, and freight contacts. One staffing company contact remarked that he turned away prospective clients that offered starting wages of less than $13 per hour because he will not be able to find anyone at that wage.
Reports of rising input costs have grown more widespread. About three-fourths of contacts reported that their nonlabor costs had increased in the last two months. This share is up from about two-thirds in the last report. Cost increases were broad across items and were especially sharp for resins, metals, lumber, packaging, and freight services. Rising input costs were partly attributed to supply chain challenges caused by suppliers who often did not have enough workers to meet demand. A few manufacturing and construction firms reported that suppliers were raising their prices more frequently. One real estate developer said that quotes from general contractors were now valid for only 10 days, whereas before the pandemic quotes would be valid for 30 days or even as many as 180 days. Looking to the second half of 2021, roughly 60 percent of contacts expect their nonlabor costs will increase by an amount comparable to or more than the increases they experienced in the first half of 2021.
Reports of firms’ raising their selling prices also became more widespread. Many of the firms that raised prices suggested they were able to pass through most of their cost increases to customers. Contacts now expect it to take longer than previously anticipated for these supply chain issues to be resolved. This expectation motivated some of them to be more aggressive with their pricing. Looking ahead, about half of contacts plan to raise their selling prices in the second half of the year, with most of those firms intending to do so to an extent that will at least preserve their margins.
Reports suggest that consumer spending grew significantly. General merchandisers and apparel retailers said that demand remained strong beyond the expected boost from stimulus funds in March. Several contacts believed there was a good deal of pent-up demand that was being released as government restrictions were being eased. Hoteliers reported improvements in leisure travel, and auto dealers commented that sales were strong despite limited inventory and higher selling prices. Contacts were optimistic that consumer spending would continue to improve in the coming months thanks to growing vaccination numbers and easing of government-mandated restrictions.
Demand for manufactured goods continued to increase strongly. Contacts cited strength in demand for products related to housing, autos, and other durable consumer goods. Aerospace-related production continued its modest recovery, although demand remained weak on balance. Many contacts noted that output growth was constrained by shortages of hourly-wage workers, extended lead times for inputs, and depleted inventories. Many contacts reported their capacity utilization was within its normal range, although a sizeable minority reported above-normal capacity utilization. Manufacturers generally expected demand to continue to rise in coming months.
Real Estate and Construction
Demand for residential construction and real estate remained elevated as homebuyers continued to take advantage of low mortgage interest rates. Even so, a few contacts remarked that escalating construction costs may have sapped some of the momentum in homebuilding. One homebuilder observed that elevated prices made some customers hesitant to move forward with projects. A realtor observed a slowdown in lot purchases as builders in her market waited for construction prices to settle. Expectations for demand were mixed. Some contacts believed that housing demand would remain strong, while others predicted that elevated prices would discourage potential homebuyers.
Nonresidential construction and real estate activity increased in nearly all sectors as workers began to return to their offices, more consumers resumed in-store shopping, and overall economic conditions continued to improve. Overall, nonresidential contacts were optimistic that demand would increase further as the economy continues to reopen and pent-up demand is released. However, one contractor suggested that rising prices and materials shortages may curtail construction.
Banking activity increased moderately. Contacts noted that demand for auto loans and mortgages remained strong, although the recent uptick in interest rates and limited inventories in both markets dampened activity. Multiple contacts reported improvements in business lending, especially for commercial real estate loans. However, overall loan demand remained relatively soft. Lenders said that delinquency rates for consumer and commercial loans were still low and that the number of active forbearance agreements continued to drop. Bankers were optimistic that loan demand would continue to pick up as social distancing restrictions ease, but they also noted that potentially higher interest rates clouded their outlooks. They were also concerned that supply challenges could curtail their clients’ sales and soften their demand for credit.
Professional and Business Services
Demand for professional and business services remained strong. Authentication services continued to benefit from the further expansion of ecommerce. Also, demand for consulting and technical services increased as more companies began to recover from the pandemic. Overall, contacts anticipated that demand would continue to grow as firms feel more comfortable moving forward with projects that had previously been put on hold.
Demand for freight services remained robust, and volumes increased as the broader economy continued to recover. Contacts commented that shortages of shipping containers and bottlenecks at ports continue to be problematic. Looking forward, contacts expected demand to improve further in coming months, although many anticipate that a persistent driver shortage will constrain growth.