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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 remained stable and solid since the prior reporting period. Professional and business services firms continued to report strong growth. Loan demand increased, driven by improved confidence and lower mortgage rates. Lower mortgage rates also motivated increased demand for residential real estate. However, growth in the aforementioned sectors was offset by declines in others. Manufacturing continued to weaken because of trade wars, high customer inventories, and slowing global growth. Freight haulers saw a modest decline in demand, despite summer's typically being the strong season, and they are concerned about the future. Construction demand was flat overall. Consumer spending was flat as well. Employment increased modestly over the period, almost entirely because of hiring in professional and business services. Wages grew modestly overall, with gains reported in most sectors. Overall, prices increased at a slower pace than earlier, primarily because of lower materials costs, especially for steel. Retail was the only sector with appreciable acceleration of price inflation over the period.

Employment and Wages

Employment in the District increased modestly over the period. Professional and business services firms drove the bulk of hiring. Staffing firms placed more permanent employees than in the prior period. A banker reported increased hiring to keep up with stronger demand for mortgages. Retailers kept nonseasonal employment levels stable and remarked that turnover was at average levels but hiring remained challenging. Manufacturers reported generally stable employment as well. With the exception of seasonal hiring, construction employment was unchanged. Trucking companies did not increase total driver levels, but persistent driver churn motivated continued hiring. Railroad firms downsized employment.

Wages rose modestly overall, with wage growth in most sectors. Retailers reported raising entry-level wages because of persistent labor market tightness. A banker also reported raising entry-level wages incrementally by bringing in each new cohort at a slightly higher level up to a target of $15 per hour at the end of the year. About half of construction and real estate firms reported raising wages recently for the purpose of employee retention. Fewer professional and business services firms raised wages in this period than had in the prior two periods, but some cited poaching of employees as motivating continued wage increases. Several manufacturers implemented cost-of-living increases, and a few also raised wages for retention. After a couple years of strong wage growth for truckers, no trucking contacts raised wages since the last report.

Prices

Price inflation continued to decelerate, with aggregate selling prices rising only slightly over the period. Falling steel prices exerted deflationary pressure on regional manufacturers. Slowing demand for trucking led to declines in spot rates, especially for long-haul. Trucking contract rates also saw slight deflationary pressure; one company commented that it lost a route to undercutting even when holding its own prices constant. The majority of the aggregate price inflation came from retailers, who explained that they were passing along rising wage, tariff, and shipping costs. An auto dealer remarked that invoice prices for new cars have risen. Nonresidential builders did not report any recent materials cost increases, but they padded margins somewhat because of consistently strong demand. Residential subcontractors increased their rates, and some homebuilders raised prices in turn. Professional and business services firms said that increased competition forced them to hold pricing steady.

Consumer Spending

Retail activity was relatively flat, as contacts reported mixed demand for seasonal products. Food retailers indicated that demand for seasonal goods increased over the period. However, apparel and sportswear retailers reported that cool and wet weather dampened demand for seasonal products, resulting in softer than expected sales. Auto retailers continued to see a shift from new car sales and leases to used car sales. Certified preowned vehicles were in particularly high demand, as higher interest rates and price increases on new vehicles have taken many customers out of the new vehicle market.

Manufacturing

Conditions in the manufacturing sector weakened further. While contacts continued to cite trade-related factors as causes for the slowdown, many reported that broader economic forces were also at work. A large ramp up in activity in 2017 and 2018 led many customers to overbuild inventories, leading to slower current demand. Meanwhile, slowing global growth, adverse weather—which has impacted construction activity—and other factors have also contributed to the weakening. Materials costs continued to fall, particularly for steel. There were fewer reports than in the prior period that falling prices have bolstered demand.

Real Estate and Construction

Nonresidential construction and real estate contacts reported strong and stable demand, and they expected this trend to continue in the near future. Backlogs remained solid, and a wide variety of new projects were coming online. Nonresidential builders have revised upward their expectations for demand in the second half of 2019. One builder stated that he has kept expecting that this strong, consistent demand will cause the market to become saturated but that saturation has not happened so far.

Homebuilders saw mixed conditions; some spoke of slowing momentum, while others said that lower interest rates spurred demand growth. One homebuilder was concerned that slower foot traffic in the current period could signal slower demand in the future. Homebuilders cited the possibility of increased interest rates as the most important risk to their outlook. Residential real estate agents noted improved demand in the summer selling season for both seasonal and nonseasonal reasons. Lower mortgage rates and buyer confidence motivated more first-time homebuyers to enter the market, while older customers downsized their homes. Real estate agents were optimistic about demand through the remainder of 2019.

Financial Services

Loan demand increased modestly since the last report. Home loan and refinancing activity increased as mortgage rates dropped. Most community banks reported loan growth driven by strong economic conditions and business and consumer confidence. Demand for commercial credit remained stable and strong. Core deposits grew modestly. Delinquency rates continued to be low. Bankers believed conditions will slightly improve through the quarter, but they were less optimistic about revenue growth in 2019 than they had been at the beginning of the year. Bankers cited the yield curve, the potential for lower interest rates, and international relations as the primary risks to the outlook.

Professional and Business Services

Professional and business services firms saw robust growth, as almost 70 percent of firms reported improving business conditions over the period. Improved interest in offerings, new partnerships, and larger pools of funding were cited as some of the primary drivers of growth in the sector, and firms expected these positive conditions to continue. However, political uncertainty, trade policy, and uncertainty regarding the risk of a downturn were cited by some contacts as notable risks to the sector.

Freight

Activity in the freight sector softened modestly over the period. Even a modest decline is noteworthy because freight shipments typically pick up substantially in the summer. While some firms reported increases in activity because of their reputation and their ability to attract new customers, the majority of firms reported softening demand, particularly for long-distance shipping. Flooding in the Midwest, low demand for fertilizer, and generally slower economic growth were among the causes of the softer demand contacts described. One contact reported that weaker year-over-year growth rates were causing concern among fleets. Freight firms generally expected demand to remain softer, or even decline further, in the coming months.