Federal Reserve Beige Book Highlights Softening Demand as Wages Growing but at Slower Pace

The Federal Reserve released its Biege Book Wednesday prepared at the Federal Reserve Bank of San Francisco based on information collected on or before August 29, 2022. The focus on softening demand and pricing was evident. The outlook for future economic growth remained generally weak with expectations for further softening of demand over the next 6 to 12 months. The banks noted wages grew across all districts, although reports of a slower pace of increases and moderating salary expectations were widespread.

This report was prepared at the Federal Reserve Bank of San Francisco based on information collected on or before August 29, 2022.

This document summarizes comments received from contacts outside the Federal Reserve System and is not a commentary on the views of Federal Reserve officials.

Highlights

  • Most Districts reported steady consumer spending as households continued to trade down and to shift spending away from discretionary goods and toward food and other essential items.
  • Auto sales remained muted across most Districts, reflecting limited inventories and elevated prices.
  • Hospitality and tourism contacts highlighted overall solid leisure travel activity with some reporting an uptick in business and group travel.
  • Manufacturing activity grew in several Districts, although there were some reports of declining output as supply chain disruptions and labor shortages continued to hamper production.
  • Employment rose at a modest to moderate pace in most Districts.
  • Overall labor market conditions remained tight, although nearly all Districts highlighted some improvement in labor availability, particularly among manufacturing, construction, and financial services contacts.
  • Price levels remained highly elevated, but nine Districts reported some degree of moderation in their rate of increase.
  • Substantial price increases were reported across all Districts, particularly for food, rent, utilities, and hospitality services.
  • manufacturing and construction input costs remained elevated, lower fuel prices and cooling overall demand alleviated cost pressures, especially freight shipping rates.
  • Several Districts reported some tapering in prices for steel, lumber, and copper. Most contacts expected price pressures to persist at least through the end of the year.
  • Economic activity was unchanged, on balance, since early July, with five Districts reporting slight to modest growth in activity and five others reporting slight to modest softening.
  • The outlook for future economic growth remained generally weak
  • expectations for further softening of demand over the next 6 to 12 months
  • employers noted improved worker retention on balance
  • wages grew across all districts, although reports of a slower pace of increases and moderating salary expectations were widespread
  • most contacts expected price pressures to persist at least through the end of the year

Overall Economic Activity

Economic activity was unchanged, on balance, since early July, with five Districts reporting slight to modest growth in activity and five others reporting slight to modest softening. Most Districts reported steady consumer spending as households continued to trade down and to shift spending away from discretionary goods and toward food and other essential items. Auto sales remained muted across most Districts, reflecting limited inventories and elevated prices. Hospitality and tourism contacts highlighted overall solid leisure travel activity with some reporting an uptick in business and group travel.

Manufacturing activity grew in several Districts, although there were some reports of declining output as supply chain disruptions and labor shortages continued to hamper production. Despite some reports of strong leasing activity, residential real estate conditions weakened noticeably as home sales fell in all twelve Districts and residential construction remained constrained by input shortages. Commercial real estate activity softened, particularly demand for office space. Loan demand was mixed; while financial institutions reported generally strong demand for credit cards and commercial and industrial loans, residential loan demand was weak amid elevated mortgage interest rates.

Nonfinancial services firms experienced stable to slightly higher demand. Demand for transportation services was mixed and reports on agriculture conditions across reporting Districts varied. While demand for energy products was robust, production remained constrained by supply chain bottlenecks for critical components. The outlook for future economic growth remained generally weak, with contacts noting expectations for further softening of demand over the next six to twelve months.

Labor Markets

Employment rose at a modest to moderate pace in most Districts. Overall labor market conditions remained tight, although nearly all Districts highlighted some improvement in labor availability, particularly among manufacturing, construction, and financial services contacts. Moreover, employers noted improved worker retention, on balance. Wages grew across all Districts, although reports of a slower pace of increase and moderating salary expectations were widespread. Employers in several Districts reported giving midyear and off-cycle raises to offset higher living costs, and many noted that offering bonuses, flexible work arrangements, and comprehensive benefits were deemed necessary to attract and retain workers. Looking ahead, employers planned to provide end-of-year pay raises to their workers, but expectations for the pace of wage growth varied across industries and Districts.

Prices

Price levels remained highly elevated, but nine Districts reported some degree of moderation in their rate of increase. Substantial price increases were reported across all Districts, particularly for food, rent, utilities, and hospitality services. While manufacturing and construction input costs remained elevated, lower fuel prices and cooling overall demand alleviated cost pressures, especially freight shipping rates. Several Districts reported some tapering in prices for steel, lumber, and copper. Most contacts expected price pressures to persist at least through the end of the year.

Highlights by Federal Reserve District

Boston
Business activity expanded at a modest pace. Labor markets remained very tight, and employment increased modestly despite above average wage growth. Output prices increased moderately, but contacts noticed a stabilization or easing of input prices. Although many contacts were optimistic, the real estate outlook worsened, and some contacts perceived an elevated risk of recession.

New York
Economic activity contracted modestly, with supply disruptions easing somewhat. Employment increased modestly despite ongoing worker shortages. Tourism remained strong, whereas consumer spending was flat and manufacturing activity fell significantly. Businesses continued to report widespread increases in selling prices, input prices, and wages, though to a slightly lesser extent than earlier in the year.

Philadelphia
Business activity held steady compared with the prior Beige Book period. Manufacturing, among other sectors, continued to decline. Employment grew slightly despite increased talk of a recession. Firms reported wage and price pressures subsided, but growth remained at a moderate and strong pace, respectively. Hiring, supply chains, and price growth remained key challenges for most firms. Firms’ expectations for future prices fell.

Cleveland
Business activity steadied in the District, after slowing slightly in the prior reporting period. Moreover, contacts appeared cautiously optimistic that demand would not soften much further in the next few months. Firms continued to add to their payrolls even though their hiring plans were not as aggressive as earlier in the year. Upward cost and price pressures let up somewhat with generally softer demand and some easing of supply disruptions.

Richmond
Economic activity slowed slightly in recent weeks. Manufacturers, ports and transportation companies, retailers, and hospitality firms reported slight to modest declines in sales and volumes. Real estate activity was flat to down moderately. Lending activity declined for most loan types. Meanwhile, nonfinancial services saw moderate growth, employment increased strongly, and price growth remained robust.

Atlanta
Economic activity grew slightly. Labor markets eased some, but wage pressures continued. Many nonlabor costs moderated. Retail sales softened. Leisure travel activity slowed while business travel grew. Housing demand weakened. Commercial real estate conditions were mixed. Manufacturing activity was strong. Demand for transportation services was mixed. Banking activity was steady.

Chicago
Economic activity decreased modestly. Employment increased moderately, business spending was little changed, consumer spending and construction and real estate declined modestly, and manufacturing orders were down moderately. Wages rose rapidly, as did most prices, while financial conditions improved modestly. Agriculture income expectations for 2022 were unchanged. Nonbusiness contacts reported little change in economic activity.

St. Louis
Economic conditions have declined slightly since our previous report. Slowing consumer demand and continued price increases have contributed to a weaker outlook. Residential housing activity slowed and rental demand rose. Manufacturing and agriculture firms saw significant input price increases.

Minneapolis
The Ninth District economy fell slightly since early July. Employment grew moderately and wage pressures remained strong. High prices persisted but showed signs of easing. Energy and manufacturing saw only slight growth. Consumer spending was flat; construction and real estate sectors were subdued. Farm conditions were healthy, save for drought in some areas. Reports from minority- and women-owned businesses were mixed.

Kansas City
The Tenth District economy expanded slightly, with much of the growth in business revenue driven by higher prices rather than greater volumes of activity. Worker turnover declined moderately, and labor demand remained strong. Prices grew rapidly, including housing rental rates. Consumer spending was mostly unchanged, but more households began to express difficulty in meeting regular expenses, such as utility payments.

Dallas
Economic growth in the district continued, though the modest pace experienced over the summer has been a downshift from stronger expansion experienced earlier in the year. Job growth was quite robust and wage growth remained highly elevated due to a tight labor market. Supply chain bottlenecks have begun easing and prices were not rising as fast. Outlooks were mixed as uncertainty remained elevated.

San Francisco
Economic activity expanded modestly over the reporting period. Hiring activity grew at a modest pace amid tight labor market conditions. Wages and price levels increased further, albeit at a slower pace. Retail sales were stable while demand for services strengthened. Conditions in the agriculture sector were mixed. Residential real estate activity eased, and lending activity was steady.

Source: Beige Book – September 7, 2022

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