The latest Beige Book, aka “Summary of Commentary on Current Economic Conditions,” came out last week from the Federal Reserve, and I read it closely because the economists at the Fed choose their words carefully. These are produced eight times a year, and when wording and tone change from one edition to the next, it is significant.
There are sections in the book for each of the 12 Federal Reserve districts. Our district, the Fifth, is headquartered in Richmond, and includes North and South Carolina, Maryland, Virginia, DC and most of West Virginia. Researchers interview business executives and store owners throughout the region in the weeks before publication, so it is some of the freshest information that Fed monetary policy makers will have when they meet next week. A year ago, I wrote a Digest explaining how the Beige Book comes together.
The story is still about supply chain and hiring difficulties. When you shut down large parts of the economy and then try to restart things, it isn’t like turning on a light switch.
Employees have moved on to other jobs. Suppliers that shut down or scaled back need time to ramp up. A lot of businesses have gone under. Shipping containers aren’t where they’re needed. Businesses can’t get parts.
It is going to take time to sort out. Here are some highlights and lowlights from our district’s section of the book. I have basically condensed from the report what I think is most interesting, trying to stick to the Richmond Fed staff’s wording, and added some commentary of my own:
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Employment and wages: The shortage of workers is limiting growth and some firms have reduced hours and services. The Delta surge is delaying bringing workers back to the office. Wages “rose moderately,” with one manufacturer not only increasing starting wages, but also offering guaranteed raises after three and six months. (The language in this report – “. . . contacts across industries reporting an acute shortage of labor” – seems more urgent than in the previous Beige Book, released July 14.)
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Prices: Manufacturing and service sector firms report a substantial rise in prices for “non-wage inputs,” particularly for materials that are in short supply due to global supply chain disruptions. Gas and freight prices are up from already high levels. “Many firms reported raising their prices in response to higher input costs for materials, energy, transportation and labor.” (This, too, seems to have a more urgent tone than the July report, when many firms across sectors noted they were “only passing a portion of those higher input costs on to customers.”)
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Manufacturing: Manufacturers saw moderate growth in shipments and new orders. Furniture, food and packaging manufacturers saw high demand that they are often unable to meet. Low and unpredictable supply of inputs and labor shortages “constrained production.” Firms are having trouble finding transportation, both domestically and internationally, which delays shipments of finished products and the arrival of materials. (Something new was this sentence: “Lead times continued to lengthen, and many manufacturers of perishables turned away business.”)
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Ports and transportation: Furniture imports were “especially strong, along with food, machinery and textiles.” Auto parts imports “showed some strengthening.” Rail delays, as well as chassis and trucker driver shortages, “left containers waiting at ports for an extended time before being shipped inland.” (This wasn’t part of the Fed report, but a labor dispute has idled most of the new $1 billion terminal in North Charleston, SC.) Trucking companies are turning away business “amid high demand” because of the lack of enough drivers. Many trucking companies are experiencing record margins despite high operating costs because of high rates. Passenger planes that had been used to carry freight earlier in the pandemic are now being used to handle increased passenger volumes, making them less available for cargo. (One consequence of supply chain problems: “Contacts also noted that a long backlog of parts is leaving trucks and trailers out of use for extended periods of time.”)
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Retail, travel and tourism: Retailers reported moderate sales growth, but shortages and increased lead times for merchandise, such as foreign-made goods. One vendor had to provide refunds to several bridal parties because imported dresses didn’t arrive in time for weddings. Many retailers were able to keep margins up despite increases in costs of products and shipping. Travel and tourism remained strong. Hotels and short-term rentals had “solid bookings and daily rates remained strong.” Hotels limited service because of staffing shortages, and some restaurants temporarily closed because of an inability to find workers. (I see a possible result of the Delta surge: There are “delays in bookings for conferences, business travel and group travel result from uncertainty surrounding COVID variants.”)
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Real estate and construction: Home sales remained strong, but decreased “modestly” since the last report. Sales prices keep rising, but the growth rate slowed. Days on market remained low, but increased in some areas. Listing of resales increased. But builders remained sold out of lots. New construction was strong, but there were delays and “rapidly rising costs” from supply chain disruptions in materials and appliances. Realtors say there are more investors looking for homes to remodel and resell. Commercial real estate leasing “grew moderately” in recent weeks, with demand for industrial space high. Spec and build-to-suit industrial construction were strong but “developers struggled to find space.” “Office vacancies remain high . . . despite increased incentives and concessions.” “. . . [E]specially high occupancy for restaurants as new restaurants replaced ones that had closed during the pandemic.” Multifamily occupancy and rents rose. (I found this interesting: New multifamily space increasingly included office space for one- and two-bedroom apartments. Another pandemic feature, I suppose, suggests a permanence to working from home for some portion of the workforce.)
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Banking and finance: “Overall, loan growth was moderate this period reflecting solid underlying economic conditions but was tempered by uncertainty related to COVID variants.” There was a “modest demand” for conventional commercial lending, but a slowdown in mortgage lending. (The report used the phrase “a cooling of the housing market,” which seems significant. Maybe the Fed won’t have to tap on the brakes too hard.) Some lenders are seeing fewer refinancing requests. Credit quality “continued to be excellent” and delinquencies remained at historically low levels.
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Nonfinancial services: Revenue growth was limited by low inventories, labor shortages and turnover. Some businesses in professional and legal services lost employees to competitors, which impacted their ability to meet demand.
