Next week, the Federal Reserve will decide its next interest rate move. The Federal Reserve’s Open Market Committee will finish its two-day meeting on Wednesday, Nov. 2, and Fed Chairman Jerome Powell will come out at 2 p.m. and give us the bad news, probably. The expectation is another 75 basis point hike in the Fed’s target rate, in its continuing campaign to rein in inflation.
We are seeing discussion about whether the Fed may be less aggressive after Nov. 2. One problem is that every time this discussion starts up, the markets rally, like Friday, when the Dow jumped nearly 750 points. This isn’t helpful because then the Fed leadership may think the markets don’t really believe it has the moxie to go full Volcker with interest rates and crush inflation.
The big question the Fed is wrestling with is whether its five rate hikes since March have started slowing down the economy and inflation enough. The picture is mixed. We got a glimpse of some trends last week in the latest Beige Book, which came out Wednesday. The Fed’s economists and researchers put together a snapshot of each of the Fed’s 12 regional districts. It is anecdotal, but useful because the folks at each regional Fed bank talk to businesspeople throughout their districts. And unlike a lot of government data, which has a lag, the Beige Book information was being gathered as recently as Oct. 7. I went through our district’s part of the book to see what’s happening. Our district takes in North and South Carolina, Virginia, Maryland, Washington, D.C., and most of West Virginia. North Carolina is the largest state in the district, by population.
- Labor market: Companies worry that the lack of workers is “impacting their customer experience.” A quick-service restaurant “reported service interruptions in food deliveries, trash collection and landscaping.” One company put in productivity incentives to keep workers that could pay as much as $36,000 a year. High school and college students returning to school has been “especially impactful this year.” One business said it lost 40-50% of its workforce when high schools opened, further straining its ability to maintain consistent hours of operation.
- Prices: They continued to rise strongly, but “at a slightly slower pace of growth.” Manufacturers were getting “robust” year-over-year increases from customers, but price growth “eased somewhat” from the peak of a few months ago. Service providers said much the same. Input price growth was moderating. Several sources said freight and energy prices have come down somewhat in recent weeks.
- Manufacturing: Activity was unchanged. A lack of qualified workers remains a big issue. Employees are jumping back and forth depending on which company pays more. The supply chain improved. Manufacturers were clearing backlogs as new orders decreased. Manufacturers, especially in retail, were pessimistic about the economy as they expect consumers to reduce discretionary spending somewhat.
- Ports and Transportation: Ports said demand was strong because labor problems on the West Coast are diverting ships here. Imports outpace exports, with some improvement in loaded exports. Exports of commodities and rolling stock “trended lower.” Import volumes are led by heavy equipment and furniture. There are higher than normal dwell times for containers because of inland constraints. Spot shipping rates continue to decline as capacity frees up. Air freight volumes are low because of reduced capacity and rates declined slightly. Trucking companies said demand slowed and capacity “loosened up slightly.” Spot rates decreased moderately, but contract rates stayed the same or increased slightly. Trucking firms said they weren’t having trouble hiring or retaining drivers but getting parts to maintain their fleets was a problem and the cost of parts had “increased dramatically.” New equipment was delayed because of manufacturer supply chain disruptions.
- Retail, travel and tourism: Retailers saw “modest growth” in sales and revenue recently despite lower foot traffic. Some contacts said big ticket sales were down “slightly.” There were reports that consumers were pulling back on “nonessential goods” like artwork, home décor and higher-end beauty and wellness products. A small consumer appliance producer said sales were down slightly from previous months but were “still very strong” compared to pre-pandemic levels. Inventories overall were down “modestly.” Travel and tourism declined “slightly.” Leisure travel declined “modestly” but business travel picked up. A hotel in South Carolina said revenue remained strong because average room rates increased. Several food service contacts reported “mild sales declines” in recent weeks. One restaurant group said maintaining typical hours was difficult because of staffing problems.
- Real estate and construction: Interest rates have risen, and home sales are down. New and existing inventories are at “all-time lows.” Sales prices “decreased modestly.” But demand has stayed strong in some urban markets with strong job growth. More buyers are going for ARMs. Some builders are offering incentives, price reductions and free upgrades to sell inventory. Commercial real estate activity slowed, but industrial and apartment segments had strong leasing demand, low vacancy rates and increasing rental rates. Class A office, particularly in the suburbs, remains strong with rental rates unchanged. Retail vacancy rates “were good.” Sale prices declined due to increased capitalization rates. New commercial construction is hampered by supply chain disruptions for materials and difficulty finding skilled workers.
- Banking and Finance: Loan demand weakened “modestly” across commercial loan types. Rising rates are driving down home mortgage demand. Car loan demand is stable, with inventory shortages in the new car market. Some institutions say delinquency rates are rising, “although at a measured pace” and mainly in the consumer portfolio.
Nonfinancial services: Providers were starting to report flattening growth and demand. Rising costs and problems finding workers are major concerns. One business said they are dealing with this with more capital expenditures and investing in business processes. Non-traditional compensation schemes are being implemented.