Today’s Beige Book indicated that economic activity across all twelve Federal Reserve Districts increased at a modest to moderate pace between October and mid-November. The outlook improved slightly from the previous report that highlighted hurricane-related setbacks.
Retailers reported optimistic views on holiday spending, with pre-holiday consumption reports largely being mixed as consumers held off on purchases in many cases in anticipation of Black Friday promotions. Retailers expect holiday spending to bolster revenue in the fourth quarter, with auto dealers also expecting a boost. Some retailers have implemented technology upgrades in order to entice shoppers back into stores, providing a streamlined shopping experience between the digital and brick-and-mortar worlds.
Price pressures intensified relative to the previous report, with moderate increases in non-labor input costs being passed onto selling prices. Building material price increases were magnified by strong demand as hurricane rebuilding efforts progressed. Moreover, input costs increased in the transportation and manufacturing sectors, with the inflation largely passed through to consumers.
Residential real estate inventories remained tight, leading to consistent growth in prices with the low inventories resulting in multiple-offer scenarios that have magnified affordability concerns. Some contacts reported increased interest in remodeling services, as homeowners hold on to their properties longer due to tight market conditions. At the same time, a scarcity of labor also limited construction activity. These effects will be amplified by rebuilding following hurricanes Harvey and Irma in the coming quarters. Additionally, builders are concerned about passing through the quickly rising input costs, including land, building materials, as well as labor, to consumers, potentially preventing first-time homebuyers from purchasing property. Non-residential construction increased slightly, extending trends reported last month. Industrial and warehouse space is in high demand, while retail space development remains weak amid a continuing shift to online shopping.
Employment growth picked up relative to the prior report, with hiring progressing at a modest to moderate pace, resulting in universally tight labor markets. Employers continue to report difficulty in recruiting and retaining workers of various skill levels, with this issue posing a threat to expansion. Wage increases were modest or moderate, emulating last month’s report, with the most substantial increases being reported for professional, technical and production positions where workers are in especially short supply. Increasingly, firms are using sign-on and mid-year bonuses, over-time, and other non-wage efforts in order to retain and attract workers.
Manufacturers remain optimistic and expect a pickup going forward, with business having expanded moderately during the reporting period. The expansion in shipments kept the transportation industry busy, which was reported to have expanded in all Districts with the exception of New York. Additionally, the recent California wildfires prevented some shipments, as reported by the San Francisco Federal Reserve Bank staff.
Key Implications
This Beige Book confirms that economic activity continues to advance in the fourth quarter, with hurricane-related setbacks having quickly faded. Business optimism will continue to support investment over the remainder of the year, with the largest constraint on growth currently related to widespread labor shortages. However, firms are counteracting this by investing more heavily in equipment to support expansion, boding well for productivity. Additionally, producers remain upbeat, and expect global economic strength to support continued expansion going forward. These growth prospects should strengthen further as the GOP tax reform plans come closer to materializing, with a slashing of the corporate tax rate potentially lifting investment previously held back by policy uncertainty.
Labor markets are extremely tight and will continue to bolster household incomes and solidify the consumer as an important driver as growth in the fourth quarter. The residential property market will likely remain undersupplied as rising input costs, related to land and labor shortages, hold back new construction, leading prices of new homes higher and holding back purchases.
The report suggested that businesses are increasingly passing on increases in their own input costs to consumers, with these moves likely to show up in inflation in the near future. These dynamics, alongside strong economic growth, will continue to support the case for a December rate hike, something we see happening with near-certainty at this point.
