October 2019 Federal Reserve Board's Beige Book

DISCLAIMER: Below are excerpts from the Federal Reserve Board's Beige Book published on October 16, 2019. It "... was prepared at the Federal Reserve Bank of Cleveland based on information collected on or before October 7, 2019. This document summarizes comments received from contacts outside the Federal Reserve System and is not a commentary on the views of Federal Reserve officials."

The excepts were chosen for their relevancy to the recruitment, staffing, employment services, and IT services sectors. The inclusion or exclusion of any sections or wording, the inclusion of each District's service areas (note that sections of some states are divided and end up in more than Fed District), as well as emphasizing certain sections with special typefaces (e.g. bold-faced) was done solely at the discretion of steinbergemploymentresearch.com. The full report can be found at the Federal Reserve Board.

First District  --  Boston (CT, MA, ME, NH, RI & VT)  return to District list

Business activity showed signs of slowing in the First District. Retail results were mixed, while restaurants and tourism contacts cited recent signs of softening. Few manufacturers provided positive reports. By contrast, software and information technology services firms said revenues were up, some strongly. ... Except for software and IT services, most responding firms had downgraded their outlooks since the last round.

Employment and Wages

Labor markets remained tight even as a couple of firms began layoffs. Retailers said the labor market was tight. Among manufacturers, however, no contact reported increasing headcount and two – which supply industrial customers – reported significant layoffs, about 5 percent of their staff. One also instituted furloughs and shortened workweeks; another respondent reported a marked increase in unsolicited resumes for skilled machinists. By contrast, two manufacturing contacts reported that they still have difficulty finding qualified employees. Software and IT services contacts indicated that while headcount and turnover were largely unchanged, most planned to hire more front-facing sales roles in addition to technical and R&D staff.

Manufacturing and Related Services

Reports from manufacturers were mostly negative. Four of the seven respondents reported lower sales versus the same period last year, two reported flat sales and only one firm, a defense contractor, reported higher sales. Several contacts attributed declines to trade issues; a manufacturer of filtration membranes said that chip manufacturers were delaying new plant construction due to uncertainty about trade policy. The farm-sector recession reduced demand for heavy equipment.

No contacts reported positive revisions to capital spending plans and two reported significant cuts. An industrial supplier planned to cut capital expenditures versus last year by as much as 25 percent versus a previously-planned 5 percent increase.

Five of seven contacts reported downward revisions to their 2020 outlook. Three of those remained positive but less positive than earlier. One industrial firm expected a recovery to start in the second half of 2020. Several compared now to 2015 when industrial demand slowed markedly but the economy as a whole did not.

Software and Information Technology Services

Growth in demand in the past quarter exceeded expectations for the majority of New England software and IT services sector respondents. All three contacts experienced positive demand growth. Two noted that market interest in subscription and cloud-based offerings had picked up month-to-month. Revenue growth remained positive and ranged from 2 percent to 24 percent year-over-year. For most firms, capital expenditures were unchanged, but one mentioned considering a switch from housing their own servers to migrating their operations onto the cloud, which would significantly change the structure of their capital expenses. All in all, contacts were upbeat in light of a third quarter that exceeded expectations, but many remained wary of political and macroeconomic uncertainty in the longer-term.

Second District  --  New York (CT, NJ & NY)  return to District list

Growth in the Second District economy was subdued in the latest reporting period. The labor market remained very tight, as employment levels were flat, and wage growth picked up slightly. ... Manufacturing activity was up marginally, and transportation business rebounded, while business was reported to be weaker in most service industries. Business contacts generally expressed considerably less optimism about the near-term outlook. ...

Employment and Wages

The labor market has remained stable and very tight across the District, but hiring has been subdued. Business contacts have continued to report trouble finding workers to fill a wide range of jobs such as construction contractors, truck drivers, auto mechanics, IT professionals, accountants, retail clerks, and nursing home attendants. A major New York City employment agency noted that almost all job candidates are merely jumping from other jobs. However, an upstate contact maintains that there has been a decrease in job-hopping.

Businesses overall continued to report little change in staffing levels. Contacts in real estate, education & health, and leisure & hospitality reported continued modest net hiring, while those in manufacturing, wholesale trade, transportation, and information reported modest declines in employment, on balance. Looking ahead to the next six months, businesses in manufacturing and most service sectors still plan on adding to staff; however, wholesale trade and information businesses anticipate modest declines in employment.

While businesses generally report that wage growth has remained moderate, there has been more widespread escalation in some lower-wage industries such as retail trade and leisure & hospitality. A large New York City employment agency notes that finance-sector firms are largely holding the line on salary increases, and there is a wide gap between salary offers and job-seekers' demands

Manufacturing and Distribution

Manufacturers reported steady to slightly rising business activity. On the distribution side, transportation contacts indicated a modest pickup in activity, while wholesalers noted a significant drop-off in business.

Looking ahead, manufacturers and wholesalers have grown less optimistic about the near-term outlook, while transportation firms have become somewhat more optimistic. Contacts in all these sectors have expressed ongoing concern about tariffs and trade tensions and the related uncertainty going forward.

Services

Businesses across almost all service industries reported some weakening in activity, on balance, since the last report. However, contacts in leisure & hospitality noted a leveling off in activity, following a substantial pickup in the last report. ...

Other service industries reported softening activity — particularly those engaged in information services. Finance and real estate firms reported notable weakening, while professional & business and education & health service firms reported flat to modestly declining activity. Service firms, in general, have grown somewhat less optimistic about the near-term outlook.

Third District  --  Philadelphia (DE, PA & NJ)  return to District list

Aggregate Third District business activity continued at a modest pace of growth during the current Beige Book period. Nonauto retail sales accelerated to a moderate pace of growth, and manufacturing continued to grow moderately. Nonmanufacturing and tourism continued at a modest pace of growth. ... The firms' outlook for growth over the next six months remained positive but softened, with less than half of all firms anticipating increases in general activity. Contacts frequently noted ongoing caution in the business plans of their clients and themselves, but most expected current business conditions to continue.

Employment growth continued at a modest pace during the current Beige Book period. About two-thirds of nonmanufacturing firms reported increases in staff – a bit higher than in the prior period – while the share of manufacturers reporting increases held steady at about one-fourth. Average work hours have edged down since the prior period.

Tight labor market conditions continued to be cited as a factor in slow hiring by nearly all firms. Staffing firm contacts described "acute pressure" in recent months, which has resulted in still fewer job applicants, more difficulty signing prospective job candidates and retaining current employees, and ongoing wage pressures.

Wage growth continued at a moderate pace, with contacts reporting wage increases ranging from above 3 percent to 6 percent on a year-over-year basis. Reports were further mixed, with some contacts noting that wage growth had steadied and others noting an acceleration. The share of nonmanufacturing contacts who reported increases in wage and benefit costs edged down further to 40 percent; only 4 percent reported decreases.

Manufacturing

On balance, manufacturers continued to report moderate growth in activity. Although nearly half of all the firms reported no change in shipments and in new orders, the percentage of firms noting increases significantly outstripped those noting decreases for each metric.

The makers of lumber products, paper products, chemicals, fabricated metal products, and industrial machinery tended to note gains in new orders and shipments. Electronics producers reported little change, and the makers of primary metal products reported mixed results. Overall, these trends are not substantially different compared with the same period one year ago.

Comments have been mixed. Several firms noted slowing activity, heightened uncertainty, and ongoing concerns over tariffs; a primary metals producer noted that "customers were hesitant." However, others noted product segments with strong demand and mixed effects from tariffs.

Manufacturers' expectations of activity over the next six months were mostly unchanged. Expectations of shipments and of new orders edged lower but remained above long-term nonrecession averages. Expectations of future employment and planned capital spending also remained above average but rose a bit.

Nonfinancial Services

On balance, activity at service-sector firms continued at a modest pace of growth. The percentage of firms reporting increases in current revenues and in new orders remained positive but edged lower. One large firm noted continued improvement in the already low delinquent accounts receivables of its consumer base. This improvement was observed throughout the Third District and the country. Nearly one-half of the firms – slightly less than in the prior period – expect growth over the next six months.

Fourth District  --  Cleveland (KY, OH, PA & WV)  return to District list

Overall economic activity in the District was stable on balance, though reports varied by sector. A still favorable economic environment continued to boost demand for professional and business services generally, but some firms indicated that heightened uncertainty also contributed to the increase as customers sought more consulting services. ... Employment was stable on balance, though reports by sector were mixed. Still, wages rose modestly because of persistently tight labor markets. Selling prices increased modestly on balance as firms sought to compensate for higher labor costs as well as increased pressure from rising nonlabor costs.

Employment and Wages

Employment was generally stable in the Fourth District, although there were scattered reports of softer demand for labor. Firms in the professional and business services sector continued to add staff in response to robust demand. Most apparel and general merchandise stores held headcounts steady, as did construction contractors. Some bankers curbed hiring to focus on operational efficiencies and to reduce expenses. By contrast, some firms reduced employment levels as a direct result of softer demand for goods and services. Specifically, some manufacturers froze hiring and reduced hours, and planned to keep payrolls and hours at lower levels until product demand picked up again. Freight haulers (both trucking and rail) reduced headcounts to "align [human] resources to reduced volume levels."

Wages grew modestly on the whole in the Fourth District. Manufacturers continued to increase wages and enhance benefits offerings amid persistently tight labor markets. Higher wages were also reported by general merchandise and auto retailers. Retailers cited difficulty finding qualified workers and heightened competition for labor from distribution centers as contributing factors. Some professional and business services firms increased skill requirements for new hires and therefore raised starting pay relative to wages of existing staff. Many real estate firms increased wages, citing a "war for talent." By contrast, most construction contractors did not raise wages in this period, nor did most freight haulers.

Manufacturing

Overall manufacturing conditions appeared to stabilize following a few periods of slowing, although reports from contacts varied. A few manufacturers suggested that their customers let inventories run too low in anticipation of a more significant manufacturing slowdown than has materialized. As a result of the need to restock, demand for these manufacturers' products picked up in recent months. Other manufacturers reported that demand continued to soften, citing a global slowdown in industrial activity and persistent trade-related uncertainties. Two-thirds of contacts reported that capacity utilization was within a normal range, although several noted that labor shortages persist. Some manufacturers had existing capacity that was going unused for lack of workers, a situation which damped plans for further capital spending.

Professional and Business Services

Activity in professional and business services strengthened. Contacts reported an increase in demand for a variety of products and services, pointing to strong business conditions for their customers. Firms in consulting services suggested that global issues such as international security concerns and worries of future economic volatility have increased demand for their services. The majority of professional and business services contacts anticipate that favorable economic conditions will carry into the first quarter of next year, although a few expect growth to slow.

Fifth District  --  Richmond (MD, NC, SC, VA & WV)  return to District list

On balance, the Fifth District economy grew modestly in recent weeks. Manufacturers saw a modest decline in shipments and new orders, overall, as trade policies continued to reduce sales and raise raw materials costs. ... Meanwhile, shortages of labor and buildable lots restrained new home construction. ... Labor markets remained tight and wages increased at a moderate rate. ...

Employment and Wages

Fifth District manufacturers reported a modest decline in shipment and new orders. Several firms indicated that trade policy was reducing their foreign sales and raising raw materials costs. An electrical equipment manufacturer reported raising prices to cover tariff-related cost increases, while another firm looked to cut costs in other areas of the supply chain. A Virginia furniture manufacturer said that trade issues could lead to jobs losses if not resolved. Meanwhile, a food manufacturer cited the rapidly rising price of chicken as a concern, and a Virginia manufacturer reported looking for new suppliers over concerns about the possible effects of Brexit.

On balance, demand for nonfinancial services picked up slightly in recent weeks. Many service providers continued to report difficulties finding workers and rising labor costs, particularly for health insurance. In some cases, those firms faced profit margin compression since they were not able to pass along cost increases to customers. Overall, businesses remained cautiously optimistic about growth prospects over the next several months. There were several remarks about investing in software and technology. A few firms, on the other hand, were holding back on capital spending due to uncertainties around labor constraints and trade.

Reports from Sixth District business contacts indicated that economic activity expanded modestly from mid-August through September, and most contacts expect a similar pace to continue for the remainder of the year. The labor market remained tight, and a growing number of contacts shared reports of wage pressures increasing among lower-skilled positions. Some firms noted rising nonlabor costs and several contacts impacted by tariffs reported the ability to pass along price increases. ... Manufacturing activity improved with purchasing managers noting increased new orders and production since the previous report. ...

Employment and Wages

Most firms reported that staffing levels were in line with expectations for flat to slightly higher growth in payrolls compared with the prior year. Exceptions emerged in industry sectors directly related to export logistics and freight, where some labor force reductions were noted. Overall, however, business contacts continued to observe tightening in several labor market segments, sharing that many positions remained unfilled for long periods of time, encouraging some employers to lower hiring standards. Labor availability challenges were broadly viewed as firms' biggest constraint to growth. As a result, firms continued to explore recruiting and retention options.

Annual wage increases, on average, remained in the 3-4 percent range; however, wage growth continued to accelerate for lower-skill positions. Across industry sectors, there was growing dialog about increasing minimum hourly wages to $15 per hour.

District manufacturing contacts reported a moderate rebound in overall business activity since the last reporting period. New orders and production levels increased notably and purchasing managers indicated that supply delivery times were slightly longer. Finished inventory levels were reported to have increased somewhat, while optimism for future production was unchanged, with close to one-third of contacts expecting higher levels of production over the next six months.

Seventh District  --  Chicago (IA, IL, IN, MI & WI)  return to District list

Economic activity in the Seventh District increased slightly overall in late August and September, and contacts expected growth to continue at a similar pace over the next 12 months. Employment, consumer spending, business spending, and construction and real estate all increased slightly. Manufacturing production declined a bit. Wages and prices rose slightly and financial conditions improved modestly. ...

Employment increased slightly over the reporting period and contacts expected a similar-sized increase over the next 12 months. Hiring continued to be focused on professional and technical, sales, and production workers. As they have for some time, contacts indicated that the labor market was tight and that it was difficult to fill positions at all skill levels. One auto supplier facing a decline in sales due to the GM strike planned to cut workers' hours rather than making layoffs because he felt that in the tight labor market, it would be too difficult to find new workers after the strike ended. A staffing firm reported little change in billable hours. Wages increased slightly overall. Contacts were most likely to report wage increases for professional and technical, administrative, and production workers. Many firms reported rising benefits costs.

Manufacturing production decreased slightly in late August and September. Demand in the automotive industry decreased some, but remained at a solid level. Contacts noted that the halt in production at GM plants due to the strike was starting to affect auto suppliers' order books. ...

Reports from contacts suggest economic conditions have improved slightly since our previous report. Contacts from multiple industries noted a heightened sense of economic uncertainty. Labor market conditions remained tight, although there were indications of declines in manufacturing employment. Contacts noted a strengthening of price pressures, but remained mixed as to their ability to pass higher costs on to their customers. Consumer spending activity increased slightly. ...

Employment and Wages

Employment conditions have been mixed since the previous report. The number of posted job vacancies for nonfinancial services occupations increased from July to August. Contacts continued to report labor market tightness and difficulty hiring and retaining qualified employees; one St. Louis area hospitality firm reported that some candidates were not even showing up for scheduled interviews. Several firms reported taking additional steps to compete for workers, such as increasing benefits, relaxing hiring standards, and increasing outreach. Other firms described creative attempts to adapt their business practices to a worker shortage, such as retraining existing employees to work other positions. Conversely, survey-based measures of employment showed declines in some sectors, particularly manufacturing. An Arkansas grocer reported that the state's increase in the minimum wage has forced them to rethink the number of employees they can deploy per store.

Wages have grown moderately since the previous report, in part due to continued upward pressure from the tight labor market. Wage growth at smaller firms has been more modest. Several local contacts at such companies reported struggling to match wage increases offered by larger firms.

Manufacturing

Overall manufacturing activity has declined slightly since our previous report. Survey-based indexes suggested that manufacturing activity decreased slightly in both Arkansas and Missouri from August to September. Production levels were down slightly in Missouri but relatively unchanged in Arkansas. New orders fell in both states. Several companies announced new capital expenditures and hiring plans, but others announced operation reductions or facility closures.

Nonfinancial Services
... Logistics firms announced plans to expand operations and increase their workforce within the District.

Ninth District  --  Minneapolis (MI, MN, MT, ND, SD & WI)  return to District list

The Ninth District economy grew at a slight pace since the last report. Employment was flat, while wage pressures were moderate overall and price pressures remained modest. ... Manufacturing decreased slightly, while agricultural conditions remained weak.

Economic activity in the Tenth District rose slightly in late August and September, with gains in consumer spending, professional and high-tech services, transportation and wholesale trade driving overall growth. ... Manufacturing activity edged down, driven by continued declines in durable goods plants, but was expected to expand slightly in the coming months. ... Employment levels rose in most services sectors, but contacts in the energy and manufacturing sectors noted a decline. District manufacturing and services firms expected employment to increase by 3 percent on average in 2020. Wages grew modestly, and the pace of gains was anticipated to accelerate in the months ahead. ...

Employment and Wages

District employment rose since the last survey as a majority of services sector contacts noted increasing employment levels, while contacts in the manufacturing and energy sectors reported a slight decline. Employment levels were above year-ago levels in both the services and manufacturing sectors, but slightly below in the energy sector. Expectations for employment growth were positive across most sectors, and survey respondents in the manufacturing and services sectors expected employment in their firms to rise by 3 percent on average in 2020.

A majority of contacts continued to report labor shortages across all skill levels. Specifically, contacts noted shortages for truck drivers, hourly retail and food-services positions, auto-technicians, pilots, IT personnel, nurses, and skilled construction workers. Wages were modestly higher than the previous survey period, and wage gains were expected to accelerate at a faster pace moving forward.

Manufacturing and Other Business Activity

Manufacturing activity edged lower compared to the previous survey and year-ago levels, driven by continued declines at durable goods plants. Manufacturers expected activity to expand slightly in the months ahead. New orders and the backlog of orders declined, while factory production and shipments increased slightly. Factory production, shipments, and volume of new orders were expected to increase moving forward. Capital spending remained modestly above year-ago levels, but contacts anticipated much slower growth in the months ahead. One contact attributed delayed capital spending to high tariffs that could not be passed along to customers.

Outside of manufacturing, firms in the transportation sector experienced moderately higher sales, while sales increased strongly in both the wholesale trade sector and professional and high-tech services sector. Expectations for all three sectors were for strong growth moving forward.

Eleventh District  --  Dallas (LA, NM & TX)  return to District list

Moderate expansion continued in the Eleventh District economy. Growth continued in manufacturing and nonfinancial services and resumed in retail after flat sales in the previous period.... Employment growth was solid while wage pressures continued. ... Outlooks improved in manufacturing and nonfinancial services, were unchanged in retail and financial services, and softened in energy. Uncertainty generally remained elevated, driven by trade tensions, the political climate, recession concerns, and weaker global growth.

Employment and Wages

Employment continued to expand at a solid pace. Hiring picked up in manufacturing, while headcounts fell in the oil and gas sector. A staffing services firm noted that direct hires have been increasing while demand for contract workers has abated. A majority of firms trying to hire reported they were having difficulty finding qualified workers. Labor shortages continued to span most industries, skill levels, and regions. Contacts in retail, leisure and hospitality, and professional and business services cited difficultly hiring and retaining workers as a leading issue. A manufacturing contact expressed plans to invest more in capital equipment to reduce their dependence on labor in expanding their business.

Nonfinancial Services

Nonfinancial services activity expanded moderately over the reporting period. Growth in professional and technical services continued to lead the expansion, while administrative and support services also picked up pace. Staffing services contacts reported high demand in all markets, with particular strength in IT, accounting, banking, and healthcare. Activity in the transportation and warehousing sector remained mixed, with strong airline passenger demand and rising sea cargo volumes but some weakness in air and rail cargo volumes....

Service-sector outlooks were slightly positive. Contacts cited uncertainty as a serious issue hampering future demand and business expansion plans. Tariffs, the presidential election, and national or global recession fears were among the drivers of increased uncertainty.

Economic activity in the Twelfth District expanded at a modest pace during the reporting period of mid-August through September. The labor market remained tight, employment growth was modest, and wages grew moderately. ...

Employment and Wages

The labor market remained tight, and employment levels grew modestly on balance. Some contacts explicitly pointed to growing customer demand as the impetus for adding employees. In general, labor demand continued to outpace supply in sectors such as construction, finance, and hospitality. However, some businesses observed that they were able to add workers because labor shortages abated somewhat over the reporting period. In Washington, large e-commerce companies continued hiring to staff new distribution centers. A community bank in Oregon added positions in response to swifter lending activity. A restaurateur in Southern California reported that a shortage of qualified workers resulted in some restaurants reducing operating hours. A contact in Oregon reported that retail job growth was slightly negative year-on-year and that some manufacturers were unable to fill positions due to skills gaps.

Wages continued to rise moderately across sectors. Labor shortages in construction boosted wages in that sector and resulted in longer lead times for projects. Contacts reported rising salaries for skilled information technology and software development personnel. A business services provider reported that wage growth has decelerated since last year, but is still very high by historical standards. Several contacts emphasized that rapid employee turnover continued to be a key challenge and was a driver of more generous retention-focused benefit packages and higher wage offers. In California, newly enacted legislation about the designation of independent contractors as employees is expected to increase labor costs for impacted companies significantly in the new year.

Manufacturing

Activity in the manufacturing sector was little changed. A metals manufacturer in the Pacific Northwest reported steady activity across various product lines, while a contact in the semiconductor industry in California reported that sales and inventory levels were normal. The slowing trend in both housing and global growth along with the stronger dollar generally constrained sales at domestic wood product manufacturers, though some noted that a recent tick up in the housing market stabilized demand somewhat.

© 2019, Bruce Steinberg.  All rights reserved.

last updated October 16, 2019