Beige Book Report: Cleveland
March 7, 2018
Summary of Economic Activity
Business activity in the Fourth District expanded at a moderate pace since our last report. Labor demand remains strong, but worker shortages are limiting firms' ability to hire. Competition for qualified workers has led employers to raise wages. Some firms reported that the Tax Cut and Jobs Act is enabling them to increase investment and raise worker pay. Upward pressure on input costs continued at the same pace as that seen during the past few reporting cycles. Firms generally were able to increase their selling prices. Retailers reported a continued boost in sales going into the first quarter, and they attributed this boost to stronger consumer confidence. Housing and commercial real estate markets remained buoyant. Manufacturing output trended higher.
Employment and Wages
Labor markets in the Fourth District tightened during the survey period as demand for talent exceeded the available supply. Hiring was strongest in manufacturing and construction. Retailers pared their workforces, citing the end of the holiday shopping season and a need to gain efficiencies. Transportation firms trimmed payrolls because of lower seasonal demand and driver shortages that prompted efforts to boost efficiency. Across industries, the majority of firms reported replacing staff or making seasonal adjustments, though a sizeable share said they had created positions. Overall, the market for talent remains challenging. Turnover and an aging workforce were commonly cited as key challenges. Retirements are limiting the potential pool of workers. One construction contact noted that he is expecting significant labor shortages this year. A steel producer observed that every time his firm gets close to having a full staff, someone quits. The tough competition for workers led employers to raise wages during the survey period, especially for lower-wage jobs. Contacts speculated that savings resulting from the Tax Cuts and Jobs Act (TCJA) will, in part, support pay increases over the short to medium terms. A few bankers expect to raise minimum pay to $15 per hour within the next year or two. However, few contacts expect the tax cuts to lead to more robust hiring. Rather, firms expect to maintain their recent hiring pace over the short term.
Non-labor input costs rose for a majority of contacts, at a pace similar to that of the previous survey period. A combination of stronger demand, supply constraints, and higher materials prices elevated non-labor costs, especially in the construction, manufacturing, and transportation industries. Steel producers reported raising selling prices because of a decline in market share for foreign steel and expectations about potential outcomes of pending trade cases. Manufacturers further down the supply chain reported sizeable increases in the price of steel that they purchased. Firms' ability to pass through price increases to their customers was little changed from the previous survey period, though there was considerable variation across industries. Transportation companies across the board were able to raise freight rates in response to higher fuel costs and capacity constraints. Similarly, construction firms were able to pass along their higher input costs without much pushback. Retailers, however, cited competition as a reason for their holding or lowering their selling prices.
Retailers reported improving sales during the survey period. Some retailers indicated that in early 2018 they were still benefiting from the holiday season. Others reported that rising consumer confidence could help explain stronger customer demand that began in November 2017. Most retailers were optimistic that sales would continue to increase during the remainder of the current quarter and into the next. Auto dealers experienced more challenges than their general retail counterparts at the beginning of the year. Unit sales of new motor vehicles declined about 7 percent in January compared to those of a year ago. Contacts indicated that this was due in part to poor weather conditions and higher interest rates. One dealer reported that new motor vehicle sales were beginning to slow after five to seven years of growth, increasing dealer inventories, especially for new cars. Pressure from OEMs to buy excess products also contributed to higher than normal inventory levels.
Demand for manufactured goods increased during the survey period and on a year-over-year basis for many of our contacts. Strong customer confidence and seasonal demand changes for industrial products contributed to new manufacturing orders. One producer of residential HVAC systems reported a large increase in output during January compared with that of a year ago thanks to stronger consumer confidence and rising liquidity. Manufacturers of material handling and construction equipment were optimistic in their outlook. Rising commodity prices are encouraging demand for products from extractive and metal recycling equipment producers. Fabricated metals producers cited particularly strong growth because of decreased competition from imports. Imports have reportedly fallen because of stronger global demand and concerns about potential outcomes of pending trade cases. Most contacts in the fabricated metals industry reported that the TCJA and business-friendly policies are encouraging capital expansions and increased investment. They expect strong demand growth to continue with increased infrastructure spending. Contacts in the plastics industry relayed a mixed picture, with some contacts reporting slowing demand along seasonal trends and oversupply within the industry.
Real Estate and Construction
For most homebuilders, demand was stable or had improved since December and on a year-over-year basis. One contact reported that an improving labor market was boosting demand. Almost all homebuilders increased their base prices during the survey period as demand rose and as materials and labor costs increased. Some contacts specifically cited the Canadian lumber tax as a source of increased materials costs. The average sales price of new and existing single family homes increased 5 percent during January compared to those of a year ago. Homebuilders continued to raise wages to decrease turnover rates and to attract the best talent. Some homebuilders struggled to fill positions for framers, bricklayers, and drywall hangers.
Nonresidential builders saw a boost in inquiries at the beginning of 2018. Rising demand was attributed to improving economic conditions and higher customer confidence. Builders increased their billing rates because of rising demand and materials costs, both of which are expected to trend higher into the next quarter. Contacts reported that some lenders remain cautious when considering project financing, especially for multifamily developments.
Demand increased for C&I loans and for commercial real estate lending during the survey period. Bankers speculated that they are beginning to see an impact from the TCJA, saying that at the beginning of the first quarter, credit demand grew significantly because of pent-up demand for capital and real estate. Business lending was stronger on a year-over-year basis, with contacts citing greater customer confidence, improving market conditions, and expanding footprints. On the consumer side, credit card usage was seasonally lower following the holiday boom, while direct and indirect auto lending increased. One banker noted that consumers have built up home equity and that drawdowns on HELOCs are expected to increase as the spring home improvement season begins. Delinquency rates were stable. One contact said that current lending standards are working efficiently and that delinquency rates are quite low.
Activity in the nonfinancial services sector grew at a moderate-to-strong pace. Rising freight volumes across product segments were attributed primarily to solid economic growth. Freight haulers were concerned about capacity constraints caused by labor shortages. This situation is forcing freight customers to transition from truck to rail carriers. Within the professional services sector, contacts from engineering, software development, and accounting firms reported the strongest demand growth, which they said was due to passage of the TCJA and confidence in the overall economy.