WASHINGTON (MaceNews) – The Federal Reserve’s Beige Book survey of economy conditions Wednesday reflected the usual “moderate” pace of expansion but this time included explicit concerns about trade tensions and their potential dampening effect on capital investment.
There were signs the residential real estate market is being forced into a better balance of supply and demand. There were “widespread” reports of labor shortages and some signs of “deceleration” in prices. The summary portion of the survey, prepared by the New York Fed, follows:
Economic Activity
Reports from the Federal Reserve Districts suggested that the economy expanded at a moderate pace through the end of August. Dallas reported relatively brisk growth, while Philadelphia, St. Louis, and Kansas City indicated somewhat below average growth. Consumer spending continued to grow at a modest pace since the last report, and tourism activity expanded, to varying degrees, across the nation. Manufacturing activity grew at a moderate rate in most Districts, though St. Louis described business as little changed and Richmond reported a decline in activity. Transportation activity expanded, with a few Districts characterizing growth as robust. Home construction activity was mixed but up modestly, on balance. However, home sales were somewhat softer, on balance–in some cases due to reduced demand, in others due more to low inventories. Commercial real estate construction was also mixed, while both sales and leasing activity expanded modestly. Lending activity grew throughout the nation. Some Districts noted weakness in agricultural conditions. Businesses generally remained optimistic about the near-term outlook, though most Districts noted concern and uncertainty about trade tensions–particularly though not only among manufacturers. A number of Districts noted that such concerns had prompted some businesses to scale back or postpone capital investment.
Employment and Wages
Labor markets continued to be characterized as tight throughout the country, with most Districts reporting widespread shortages. While construction workers, truck drivers, engineers, and other high-skill workers remained in short supply, a number of Districts also noted shortages of lower-skill workers at restaurants, retailers, and other types of firms. Employment grew modestly or moderately across most of the nation, though Dallas noted robust job growth, while three Districts reported little change that partly reflected a dearth of applicants. Six of the twelve Districts cited instances in which labor shortages were constraining sales or delaying projects. Wage growth was mostly characterized as modest or moderate, though a number of Districts cited steep wage hikes for construction workers. Some Districts indicated that businesses were increasingly using benefits–such as vacation time, flexible schedules, and bonuses–to attract and retain workers, as well as putting more resources into training.
Prices
Prices of final goods and services continued to rise at a modest to moderate pace in most Districts, though there were some signs of a deceleration. All Districts noted fairly widespread input price pressures, particularly for construction materials and freight transportation. Tariffs were reported to be contributing to rising input costs, mainly for manufacturers. Businesses’ input costs have generally been rising more rapidly than selling prices, though there have been increased efforts to pass along cost hikes to customers. A few Districts noted some increase in inflation expectations.
Highlights by Federal Reserve District
Boston
Firms reported continued expansion of business activity. Retailers, manufacturers, and staffing firms cited year-over-year increases in revenues and sales. Labor markets remained tight amid little net hiring. Contacts reported only modest increases in prices, if any. Outlooks continued to be positive.
New York
The regional economy expanded at a moderate pace, and labor markets have remained tight. Input price in-creases have remained widespread, while firms’ selling prices have decelerated somewhat. Housing markets have softened, on balance, while commercial real estate markets have firmed a bit.
Philadelphia
Economic activity continued to expand at a modest pace. With tight labor markets, wages grew moderately despite incremental job growth. On balance, contacts continued to observe modest price increases but expressed growing concern for future inflation. Notably, manufacturing slowed to a modest pace of growth, and nearly two-thirds of the manufacturers reported rising prices paid.
Cleveland
The District economy grew at a moderate pace. Labor markets tightened, and wage pressures were noted broadly. Cost pressures among manufacturers and construction firms continued, especially for metals, construction materials, and transportation. Stronger confidence in the economy boosted demand in nonfinancial services and the retail sector. Construction activity weakened.
Richmond
The regional economy grew moderately in recent weeks. Port and transportation activity remained robust. Business travel and tourism was also strong throughout the Fifth District. Meanwhile, manufacturers gave mixed accounts as some firms were unable to pass along higher input prices. Labor demand strengthened, and employers continued to report difficulties finding qualified workers. Prices grew moderately, overall.
Atlanta
The Sixth District economy expanded at a moderate pace. Labor markets remained tight, and wage pressures increased for some firms. Most nonlabor input costs were stable. Retail sales improved further. On balance, the pace of nonresidential construction was flat compared with year-earlier levels, while residential construction activity was up. Manufacturing activity continued to grow.
Chicago
Growth picked up to a moderate pace. Manufacturing production and employment grew moderately, consumer and business spending increased modestly, and construction and real estate activity was up slightly. Wages and prices rose modestly, and financial conditions improved slightly. Overall crop yields appeared set to forge a new record.
St. Louis
Economic conditions improved slightly. Labor market conditions remained tight, and wage growth was modest. Manufacturers facing higher input prices reported passing those costs along to their customers. Agriculture contacts estimated that the majority of the soybean crop has not yet been priced, leaving farmers exposed to current market conditions.
Minneapolis
Ninth District economic activity expanded moderately. Employment grew strongly, despite continued labor constraints. Hiring demand was robust, and wage growth was moderate to strong. Price pressures increased moderately overall. Manufacturing activity increased, but contacts in manufacturing and agriculture remained concerned about negative impacts from trade restrictions. Summer tourism grew moderately overall.
Kansas City
Economic activity expanded modestly in late July and August, including gains in consumer spending, manufacturing, wholesale trade, transportation, high-tech, and professional services. Manufacturing contacts noted that recent trade developments had led to higher input prices and lower capital spending plans for some firms. Prolonged weaknesses in the agricultural sector were increasingly impacting farm borrower finances.
Dallas
Economic activity expanded at a solid pace. Manufacturing and service sectors sustained a healthy pace of growth, while activity in the housing and energy sectors was flat to down. Retail spending accelerated, as did loan demand. Wages and other input costs rose, but firms’ ability to pass these increases on to customers was limited.
San Francisco
Economic activity in the Twelfth District continued to expand at a moderate pace. Conditions in the labor market tightened further, and price inflation increased moderately. Sales of retail goods picked up moderately, and activity in the consumer and business services sectors edged down slightly. Activity in the manufacturing sector expanded modestly. Activity in residential and commercial real estate markets was solid. Lending activity ticked up modestly.
Federal Reserve Bank of Boston
Summary of Economic Activity
Economic activity in the First District expanded at a moderate pace since the last report. Responding retailers, manufacturers, and staffing firms cited year-over-year increases in sales and revenues in recent weeks. In most reporting areas in the region, residential real estate markets saw increases in both closed sales and prices. Activity in commercial real estate markets was generally steady; contacts noted rising construction costs. Staffing firms as well as respondents in retail and manufacturing cited tight labor markets; wage pressures varied. Prices rose modestly if at all, despite increasing freight costs. Overall, the outlook continued to be positive.
Employment and Wages
Most contacts said labor markets were tight; net hiring remained modest to nil while wage increases were mixed. Retail hiring continued at a modest pace; contacts reported wage pressures varied across the region. The labor shortage for restaurant workers continued to be very troublesome, particularly on the Cape: contacts cited not enough U.S. workers and not enough visas for seasonal foreign workers. Most manufacturing contacts have not increased headcount. They reported that locating engineers and skilled machinists remained difficult, but assembly line and administrative workers were not hard to find. Staffing firms cited increasing labor demand and decreasing labor supply across the board, a combination that continued to present challenges, especially for recruiting skilled workers. Some staffing firms noted increases in bill and pay rates, ranging from low single digits to 10 percent.
Prices
Prices were reported to be unchanged or up slightly. Retail contacts indicated that selling prices remained steady, on average; one prominent retailer noted that food prices were up somewhat, but its overall retail price level was flat because of lower prices in other categories. However, higher fuel prices and a scarcity of truckers continued to drive up freight costs; manufacturers also noted increased trucking costs. Five of nine manufacturing contacts reported that their selling prices had gone up, but increases were small.
Retail and Tourism
Retailers contacted in this round said that year-over-year comparable-store sales ranged from low to mid-single digit increases from a year earlier. Two firms reported overall sales increases in the double digits due to business expansion. Apparel sales were particularly strong, as were sales of electronics and seasonal items. Contacts expressed concern and uncertainty regarding tariffs, particularly for inputs and goods sourced from China, such as cotton, electronics, and furniture. Absent the tariff issue, expectations for sales were positive through the end of 2018.
A contact in the Massachusetts restaurant industry reported that sales were up 4.6 percent in 2018 through June 30, based on meal tax receipts. Restaurant sales in July were up 7.1 percent year-over-year, a robust increase that was partly attributed to hot and humid weather and many rainy weekends; with this weather pattern continuing, sales through the end of August were expected to be strong as well. Menu prices were up about 2.6 percent year-over-year, driven by higher operating costs: wholesale food prices were up, as were costs associated with insurance, labor, and rent. The cost challenges confronting the restaurant industry were reportedly inducing caution about expansion.
Manufacturing and Related Services
All contacted manufacturers reported higher sales than in their last reports. Growth was consistent across geographies and industries. A semiconductor contact said that slowing smartphone expansion led the firm’s growth to slow slightly, although it remains positive. A maker of motion-control equipment said that tariffs on steel and aluminum had led those metal producers to increase capital spending and demand for capital goods. By contrast, First District contacts cited no major revisions to their capital spending plans; they indicated that tax reform made investment somewhat more attractive but did not change the basic calculations.
Most contacts noted the tariff issue but said that, so far, the effects have been small and they did not expect too much damage if they are expanded. A gun manufacturer said that they had locked in steel prices for two years prior to the tariffs. A contact in the motion-control industry said they expected to pass on any tariffs in the form of surcharges or price increases.
Manufacturing respondents’ outlooks remained positive. Most had not revised their outlook recently, but a capital equipment manufacturer said they had raised their investor guidance at the end of July versus February.
Staffing Services
New England staffing firms continued to grow over the summer; nearly all responding firms reported year-over-year revenue growth, ranging from the low single-digits to as much as about 20 percent. Some firms reported spending more to attract and retain talent, including the adoption of new technology and incentive programs. Demand for permanent workers is greater than for temporary workers, but supply issues are even more pronounced for temporary positions, making temp vacancies more difficult to fill. Some contacts stated that because the New England economy is faring better than the rest of the country, labor supply is even more challenging in New England than elsewhere.
While they all expressed concern about labor supply, staffing contacts expressed optimism about upcoming quarters; they expect to finish the year strong.
Commercial Real Estate
Commercial real estate activity held roughly steady on balance in recent months, although rising construction costs and shortages of construction labor were seen as growing constraints. Office and warehouse leasing demand remained strong in Boston and Portland amid low vacancy rates, resulting in positive but slow net absorption and further upward pressure on rents. The Hartford area continued to experience weaker leasing activity than Boston or Portland, although conditions were seen as mostly stable and distribution space enjoyed decent demand.
The financing environment remained favorable for commercial real estate construction and investment in the First District, and recent loan deals were seen as safe in the sense of involving relatively low amounts of leverage. Construction was stable but mixed across areas and sectors; multifamily housing and hospitality continued to lead. Commercial real estate contacts said that construction costs had increased moderately-to-steeply in recent months, and the increases were attributed in part to rising materials costs–stemming partly from tariffs on imported goods–and in part to rising wages for scarce construction labor. The tight construction labor market also contributed to delays in project completions. Contacts maintained a mostly favorable outlook.
Residential Real Estate
Residential real estate markets in Boston and four First District states with available data showed brisk sales activity in the month of July; current data were unavailable for Connecticut and Vermont. For single family homes, closed sales increased in all reporting areas but Rhode Island. For condos, closed sales increased in all reporting areas except Maine. Rhode Island saw some improvements in inventory and supply. The Rhode Island contact noted, “Last month marked the first time in nearly two years that the single-family home inventory climbed above 4,000. All indications are that the market may have reached the point at which supply and demand begin to become more balanced.”
Median sales prices increased in most reporting areas, but not Rhode Island. Contacts expressed concern that a seller’s market environment was distorting house prices. A Massachusetts contact said that some level of price correction would be healthy for the current market, to reduce buyer discouragement and seller concerns about finding a home to buy after they sell. A contact from New Hampshire also commented, “Housing-price-bubble chatter has increased this summer. It is too early to predict a change, but the common markers that caused the last housing cool-down are present.”