Today’s Beige Book indicated that economic activity across all twelve Federal Reserve Districts expanded at a modest to moderate pace in March and April, unchanged from the previous month’s characterization. While on aggregate outlook remained positive, contacts in manufacturing, agriculture, and transportation industries expressed concern about newly imposed or proposed tariffs, with tariffs mentioned 36 times in this publication.
Weather-related disruptions also stood out in the report, particularly in districts located in the Northeast, where it impacted retail and tourism activity as well as construction.
In tandem with the March retail sales report, consumer spending rose in most regions in March and early April, with gains in non-auto sales and tourism. Auto sales were reported to be mixed, which is somewhat contrary to the national vehicle sales report that showed auto sales jumping to 17.4 million (annualized) in March from 17.0 million in February.
Prices increased at a moderate pace on aggregate, however there were widespread reports about rising steel prices in the aftermath of the tariff announcement. Prices for building materials, such as lumber, drywall, and concrete, also continued to rise briskly. Transportation costs, meanwhile, rose on the back of higher fuel prices and rising labor costs due to shortages of truck drivers. There were some scattered reports of companies successfully passing through price increase to consumers. The frequency of these incidents is likely to increase in the future if input costs continue to climb as businesses are anticipating.
Extending last year’s trend, residential real estate inventories remained thin, restraining sales activity in several districts and buoying home prices. Rising labor and material costs as well as lack of available land continues to limit construction of homes. This is in contrast to the commercial real estate segment, where demand and construction activity both improved since the last report.
Widespread job growth continued, with modest to moderate gains across districts. Labor markets remained tight across the nation, weighing on job growth in some regions. Labor shortages were reported across a wide range of industries and skills, but were most apparent in high-skill positions, such as engineering, healthcare, IT as well as in construction and transportation. Companies were responding to tight labor supply in a variety of ways, such as raising compensation, investing in training and automation and increased use of overtime. While wage pressures continued to build, most districts reported wage growth as only modest.
Key Implications
Building inflationary pressures stood front and center in this Beige Book report. Businesses are increasingly facing rising input costs for both labor and raw materials. With declining unemployment, strong economic growth and the risk of further trade tariffs, this trend looks set to continue. For now, many businesses are finding creative ways to absorb rising costs, but some are starting to pass them onto consumers. As a result, we expect that core inflation will continue to rise enabling the Fed to raise rates another two times this year.
Rising input costs will strain housing construction, limiting the already-tight inventory of houses available for sale and boosting home prices, which continue to outpace income gains. Limited inventory and falling affordability, as well as tax changes, will weigh on home sales even as incomes and employment continue to rise. It will also likely sway consumers and builders toward cheaper and smaller units. Recent housing starts data suggests that multifamily construction is making a comeback. While it may be too soon to declare it a trend, particularly amid weather-related disruptions in some parts of the country, it is worth keeping an eye on.
