Fed’s Beige Book Freaks Out Over Unprecedented Nationwide Shortages Of Everything

With the economy overheating, it will hardly come as a surprise that the latest Fed Beige Book – which found that the economy expanded at a “moderate” pace from early April to late May, a “somewhat faster” rate than the prior reporting period – one of the biggest concerns were soaring costs, but nothing spooked the various Fed districts quite as much as what appears to be a shortage of everything, with district after district complaining about broken supply chains, lacking workers, and critical commodities that just can’t be procured.

Reading the report, we learn that several Districts cited “the positive effects on the economy of increased vaccination rates and relaxed social distancing measures, while they also noted the adverse impacts of supply chain disruptions. The effects of expanded vaccination rates were perhaps most notable in consumer spending in which increases in leisure travel and restaurant spending augmented ongoing strength in other spending categories.”

Commenting on the overall state of economic activity, the Fed found that:

• Light vehicle sales remained solid but were often constrained by tight inventories.
• Factory output increased further even as significant supply chain challenges continued to disrupt production.
• Manufacturers reported that widespread shortages – there’s that word again – of materials and labor along with delivery delays made it difficult to get products to customers.
• Similar challenges persisted in construction.
• Homebuilders often noted that strong demand, buoyed by low mortgage interest rates, outpaced their capacity to build, leading some to limit sales. Nonresidential construction increased at a moderate pace, on balance, even as contacts in several Districts said that supply chain disruptions pushed costs higher and, in some cases, delayed projects.
• Demand for professional and business services increased moderately, while demand for transportation services (including at ports) was exceptionally strong.
• Lending volumes increased modestly, with gains in both household and business loans. Overall, expectations changed little, with contacts optimistic that economic growth will remain solid.

Employment and Wages

• Staffing levels increased at a relatively steady pace, with two-thirds of Districts reporting modest employment growth over the
• reporting period and the remainder indicating employment gains were moderate.
• As the spread of COVID-19 continued to slow, employment growth was strongest in food services, hospitality, and retail.
• Manufacturers also added workers in several Districts. It remained difficult for many firms to hire new workers, especially low-wage hourly workers, truck drivers, and skilled tradespeople.
• The lack of job candidates prevented some firms from increasing output and, less commonly, led some businesses to reduce their hours of operation.
• Overall, wage growth was moderate, and a growing number of firms offered signing bonuses and increased starting wages to attract and retain workers.
• Contacts expected that labor demand will remain strong, but supply constrained, in the months ahead.

Prices

• Not surprising, the Fed found that overall price pressures increased further since the last report, something the record surge in the latest CPI print confirmed.
• Selling prices increased moderately, while input costs rose more briskly. Input costs have continued to increase across the board, with many contacts noting sharp increases in construction and manufacturing raw materials prices.
• Increases were also noted in freight, packaging, and petrochemicals prices.
• Contacts reported that continuing supply chain disruptions intensified cost pressures.
• Strengthening demand, however, allowed some businesses, particularly manufacturers, builders, and transportation companies, to pass through much of the cost increases to their customers.
• Looking forward, contacts anticipate facing cost increases and charging higher prices in coming months.

And some more detail at the regional Fed level:

Boston

• Business activity in the First District expanded at a moderate pace. Restaurant sales were up sharply, and restaurant openings buoyed retail property leasing. Labor demand strengthened but hiring was held back by labor shortages. Recruiting efforts intensified, with varying degrees of wage increases. Prices held mostly steady despite growing cost pressures.

New York

• The regional economy continued to grow at a strong pace, with growth broad-based across industries. Hiring picked up and wages continued to grow moderately, with availability of workers cited as a top concern. Consumer spending and tourism picked up noticeably. Input price pressures have intensified further, and more businesses are raising their selling prices.

Philadelphia

• Business activity continued at a moderate pace of growth during the current Beige Book period – still below levels attained prior to the pandemic. Supply constraints continued to limit growth but may also be contributing to overstated perceptions of strong demand for labor and parts. Employment continued to grow modestly as did wage growth, while prices grew moderately.

Cleveland

• The pace of business activity quickened, and contacts expect that demand will remain strong in the near term. However, supply chain bottlenecks constrained growth and caused materials costs to escalate. Price hikes became more widespread as firms attempted to keep up with rising costs. Hiring activity was reportedly modest because of a dearth of job applicants. A greater share of firms boosted wages, especially for hourly workers.

Richmond

• The regional economy expanded moderately in recent weeks. Manufacturers and service providers reported increased activity but also faced higher labor and input costs as well as shortages of materials. Employment rose moderately but was constrained by challenges filling open positions. Prices rose briskly in recent weeks as some increased costs of business were passed along to customers.

Atlanta

• Economic activity expanded at a moderate pace. Labor markets improved and wage pressures picked up for some positions. Some nonlabor costs remained elevated. Retail sales increased. Leisure, hospitality, and tourism activity strengthened. Residential real estate demand remained strong. Commercial real estate conditions were mixed. Manufacturing activity improved. Banking conditions were steady.

Chicago

• Economic activity increased moderately. Employment, consumer spending, business spending, and manufacturing production all increased moderately, while construction and real estate was flat. Wages and prices rose moderately and financial conditions improved slightly. Prospects for agriculture income in 2021 improved.

St. Louis

• Contacts reported that economic conditions have moderately improved since our previous report. Many contacts described a situation in which growth in demand for their products or services is outpacing their growth in capacity.

Minneapolis

• The District economy saw robust demand, tempered by inventory shortages and rising prices. Job openings increased, but wage growth was not well aligned with firms ’ broader concerns over labor availability, and workforce contacts cited low wages as a barrier to job seekers taking available jobs. Manufacturing and construction activity continued to grow despite strong input cost pressures. Agricultural incomes grew sharply.

Kansas City

• Economic activity rose moderately since the last survey. Consumer spending increased moderately, and sales were above pre-pandemic levels for the majority of retail, restaurant, and auto contacts. Most other sectors expanded as well, including commercial real estate, which increased for the first time since the pandemic started. However, about two-thirds of firms reported a negative impact from rising material prices and lack of availability.

Dallas

• The District economy expanded at a solid rate, bolstered by continued strong growth in housing, manufacturing, and nonfinancial services. Drilling activity rose further. Price pressures intensified. Reports of labor shortages were more widespread across sectors and skill levels than the last report. Outlooks stayed positive.

San Francisco

• Economic activity in the District expanded significantly, and labor market conditions continued to improve modestly. Wages and inflation picked up further. Retail sales increased, and activity in the services sector strengthened moderately. Conditions in the manufacturing and agriculture sectors continued to improve. Residential construction remained strong, while lending activity grew somewhat.