Economy

Trade Uncertainty and Labor Shortages Dominate Fed Beige Book

October 21, 2019

Economic activity expanded at a slight to moderate pace across most of the U.S. in September and early October. Reports from the Federal Reserve Districts in the South and West were generally more upbeat than the Midwest and Great Plains, according to the Fed’s latest Beige Book.

Manufacturing activity edged lower as firms cited persistent trade tension and slower global growth. Nonresidential construction increased at a slightly slower pace but maintained modest momentum. The agriculture sector reported deteriorating conditions due to trade disruption, lower prices and adverse weather. Auto sales remained strong with the early impact from the strike at General Motors negligible. Freight shipments stabilized after falling during the previous period.

Worker shortages were reported in several districts with firms increasing incentives, such as bonuses and benefits, to attract and retain workers. Higher pay was also on the table at many firms, resulting in moderate wage gains in most Districts. Smaller firms reported difficulty in matching pay offers by larger firms.

Manufacturers and retailers noted rising input costs, especially for items subject to tariffs. Retailers were more successful than manufacturers in passing higher costs to customers. Shipping rates were lower than earlier this year as excess capacity offset higher fuel costs.

Businesses are expecting further economic expansion, but many have cut their growth outlooks for the next six to 12 months. Concerns about the slowing economy and trade policy were widespread.

The Chicago District reported that the GM strike had created shortages for auto parts, extending wait times for auto repair. Manufacturers noted that a slight drop in orders had lowered steel demand. The decrease was confirmed by auto suppliers and specialty steel manufacturers who blamed the strike.

The St. Louis District noted a modest increase in price pressure. Construction firms attributed the increased costs partially to new tariffs despite recent declines in steel prices. Manufacturing production was down slightly in Missouri but relatively unchanged in Arkansas. Both states reported a decline in new orders.

In the New York District, manufacturers grew increasingly less optimistic about the near-term outlook while transportation firms expressed the opposite. Both expressed concern about tariffs and trade tensions. Office and industrial construction weakened in the region along with new multi-family construction in the NYC area.

Business activity in the Third District in the Philadelphia region grew modestly during the latest period. Manufacturing grew moderately and residential and nonresidential construction activity held steady. About half of the firms surveyed expect an increase in general activity over the next six months. More than half of the manufacturing firms expect rising prices for inputs and 45 percent expect to receive higher prices for their own goods.

In the Cleveland area, manufacturers noted that customers let inventories get too low and are now needing to restock. Others reported demand down, citing a global slowdown in industrial activity and trade uncertainty. About two-thirds of manufacturers said their capacity utilization was normal, but others complained of unused capacity due to a shortage of labor.

Ports in the Fifth District of Richmond, which includes North and South Carolina, are booming with healthy volumes of imports and exports. Demand for trucks increased modestly and rails noted strength in auto and construction-related shipments. Trade policy adversely affected foreign sales and raw material costs for some Fifth District firms and could lead to job losses for some.

In the Atlanta District, construction was generally robust. An increase in multifamily construction prompted worries about oversupply in some metro submarkets. Manufacturing reported a rebound in activity with increases in new orders and production. About one-third of firms surveyed expect higher levels of production over the next six months.

The Minnesota District reported a slight decrease in manufacturing activity. Custom manufacturing and metal fabrication reported a slowdown in new orders and anticipate an even slower fourth quarter. Producers of heavy equipment and building materials saw an uptick from the constructor sector.

Manufacturing activity in the Dallas region’s Eleventh District decelerated in September, led by machinery and fabricated metals manufacturing. Drilling activity continued to erode, but oil and gas production rose. Firms said they were not changing capital spending plans because of the attacks on Saudi oil facilities, however, the outlook for the remainder of the year was more pessimistic. Trade and tariffs were mentioned as drivers of higher costs.