The Federal Reserve’s latest Beige Book came out last week, and, as usual, it had some interesting things about our regional economy as it is getting back on its feet. Mostly about shortages and bottlenecks.
The book comes out eight times a year, and is a snapshot compiled by Federal Reserve regional banks of economic conditions around the country. It is anecdotal and qualitative, but there’s nothing wrong with that. The anecdotes are often fresher than government data. And the Fed’s monetary committee combines it with quantitative readings to decide whether to move interest rates up or down, so it is an important document.
Our section of the book is written by economists in the Fed’s Richmond office, who talk to a couple hundred business executives and company owners in the weeks leading up to publication. We are in the Fifth District, which includes North and South Carolina, Virginia, D.C., Maryland and most of West Virginia. North Carolina is the most populous state in the district, with around a third of the region’s roughly 32.5 million residents, so, the trends discussed in our section are probably representative of what’s happening here. (We sometimes forget how many people live in North Carolina; twice as many as South Carolina, for example.)
Basically, according to the Beige Book, the economy is coming back and a lot of companies are struggling with shortages of materials and labor. Here’s the breakdown for our district:
Employment and wages: Companies are struggling to fill open positions. Demand is strong for entry-level workers, driving up wages, and raising wages for experienced staff. A contact in the hospitality sector said former employees were choosing to stay unemployed or were finding work in other industries. “Several contacts also noted increased turnover . . .”
Prices: Prices are up “sharply” because of “strong demand, rising input costs and supply constraints.” Companies are paying more for labor, energy, shipping and raw materials. Some are able to pass increases on to customers and some can’t.
The previous Beige Book – which came out in mid-April – said, overall, “prices rose at a moderate rate.” The Fed, which is in charge of keeping inflation under control, has to decide if surging prices are a temporary thing or not.
Manufacturing: Manufacturers are seeing strong growth in demand, particularly for materials, home goods and food. But they are having problems both getting inputs and getting goods to customers, in part because of trucking and shipping container shortages. Inventories of inputs have fallen and lead times have lengthened.
One interesting sentence: “Because of the delays in receiving and high costs of inputs, many manufacturers looked for substitutions for regular inputs and eliminated certain products.”
(Manufacturing is still around 10-11% of the state’s workforce. In 1970, it was more than 30%, before much of textiles and furniture production went overseas. Still, it’s a significant part of the economy, more than 18% of state output.)
Ports and Transportation: Port volumes in the district were breaking records, with “notable acceleration in the growth of exports.” (The April report said the growth of imports “far exceeded” the growth of exports.)
Imports were driven by retail goods – furniture, home goods and home improvement products. Agricultural exports volumes were high. Car imports and exports were “volatile” due to chip shortages.
(I got a statement from the NC Ports which supports what the Beige Book reports. “Like other ports in the region, the Port of Wilmington has seen record volumes, including record refrigerated reefer volumes and record rail volumes over the past couple months.”)
Trucking companies in the district are seeing moderate growth “from already high volumes.”
“Demand exceeded supply, as labor and equipment constraints caused truckers to turn business away.” Long lead times for new tractors and trailers mean companies are repairing and reusing older equipment.
Retail, travel tourism: Retailers are seeing “moderate growth in demand and revenues” but the supply chain isn’t keeping up because of shipping and production delays. “. . .[S]hoppers were generally serious about making purchases.” This sounded more positive than the April Beige Book, which said some clothing retailers reported that many shoppers were not making purchases.
The June Book said auto inventories “were especially low and continued to shrink” because of chip shortages and a jump in used-car demand, “which were also in short supply.”
Travel and tourism “increased moderately.” Visits to beaches and outdoor attractions are “especially strong.” Hotels are seeing high occupancy on weekends, from folks within driving distance. Business travel is soft but “inquiries for group travel increased.” Labor shortages are causing restaurants and hotels to cut services and restrict capacity.
Real estate and construction: Home prices continue to go up and average time to sell drops. Builders are seeing a decline in inventories and sell-outs in some communities. More resale homes are coming to market but are being bought too fast to build inventory. Realtors are increasingly seeing cash sales.
Commercial real estate leasing “expanded moderately.” Multifamily occupancy and rental rates were up. Retail vacancy rates fell, with stores and restaurants opening and expanding. The tone of June’s report on the office segment was more positive than April’s. The June report: “Office leasing improved as businesses returned to the workplace, and some agreed to longer-term leases than in the past year and took advantage of leasing concessions.”
Banking and finance: “Overall loan demand rose moderately this period due in part to the need for increased capital as businesses [are] continuing to emerge from the pandemic. Financial institutions indicated a moderate demand for conventional commercial lending driven by improving consumer and business sentiment as well as sustained low rates.” That sounds better than the April report, especially the language about emerging from the pandemic and improving sentiment.
Mortgage lending saw “continued slight growth,” the June report says, with a “slight decline” in refinancing requests. Stimulus payments kept deposit growth strong, which led to more competition among financial institutions to lend. Credit quality and delinquencies “remained good.”
Nonfinancial services: An increase in health services demand “was driven by non-COVID-related services and elective procedures.” A university president reported a “substantial spike in applications” but applications from lower-income students were down slightly. An ad agency reported “solid growth in new ad spending,” particularly from small businesses. There were reports of worker shortages limiting growth.