Fed Beige Book: Supply-Chain and Labor Shortages Limit Growth

Written by David Schollaert

The U.S. economy expanded at a modest rate from late October to early November, the Federal Reserve said in its latest Beige Book report. Overall growth was again constrained by supply-chain disruptions and labor shortages.

FedResConsumer spending increased modestly. But low inventories held back sales of some items, notably light vehicles. Leisure and hospitality activity picked up in most Fed districts as the spread of the Delta variant largely ebbed. Yet while construction and manufacturing activity generally increased, the sector was held back by scarce materials and labor. The outlook for overall activity remained positive in most districts, but some noted uncertainty about when supply chain and labor supply challenges would ease.

Employment growth ranged from modest to strong across Fed districts. Robust demand for labor was reported, but persistent difficulty in hiring and retaining employees continued. Nearly all Fed districts reported robust wage growth. Hiring struggles and elevated turnover rates led businesses to raise wages and offer other incentives, such as bonuses and more flexible working arrangements.

Elevated prices remained a concern across districts. Prices rose at a moderate to robust pace, with price hikes widespread across all sectors of the economy. Higher prices were fueled by strong demand for raw materials, logistical challenges, and labor market tightness.

District Highlights from the December 2021 Beige Book:

Boston – Business activity in the First District expanded at a modest pace on balance. But results were mixed. Sales of single-family homes softened relative to their frenzied recent pace. Labor demand was robust, but hiring was modest in light of labor scarcity. Price increases were moderate. The outlook was mostly positive but marked by uncertainty.

New York – The regional economy continued to grow at a modest pace but was restrained by intensifying supply disruptions and labor shortages. Employment and wages increased, and businesses noted ongoing widespread escalation in both input costs and selling prices. Nevertheless, contacts continued to express optimism about future business prospects.

Philadelphia – Business activity grew moderately during the current Beige Book period – faster than the prior period – but remained below pre-pandemic levels. Vaccination rates rose slightly, but COVID-19 cases also resumed rising – and vaccine mandates hit a wall with some workers. Overall, employment growth picked up to a moderate pace. Wage and price growth picked up even more sharply.

Cleveland – Expansion picked up a bit after slowing during the summer and early fall. Contacts reported that supply challenges continued to limit sales and output growth. Labor availability changed little, leaving many firms with open positions and unable to meet some demand. Ongoing shortages of inputs and labor put further upward pressure on costs, and more firms reported raising output prices over the past two months.

Richmond – The economy continued to expand at a modest rate. Growth continues to be constrained by labor shortages and supply chain issues. Firms faced challenges filling open positions as well as increased turnover, leading to wage increases for new and existing workers. Price growth further intensified from an already elevated rate.

Atlanta – Economic activity expanded at a moderate pace. Labor markets remained tight and wage pressures grew. Nonlabor costs rose. Retail sales strengthened. Domestic leisure travel remained solid. Residential real estate demand was strong. Commercial real estate conditions improved. Manufacturing activity was robust. Banking conditions were stable.

Chicago – Economic activity increased moderately. Employment and business spending grew moderately, consumer spending and manufacturing were up modestly, and construction and real estate were flat. Wages and prices increased sharply, and financial conditions improved slightly. A larger than expected corn and soybean harvest pushed up anticipated 2021 farm income.

St. Louis – Economic conditions have shown modest improvement since the prior report. Contacts reported continued difficulties hiring to meet increased consumer demand. Wage increases and supply chain shortages have led to price increases across several sectors. The overall outlook is optimistic due to anticipated strong demand.

Minneapolis – The economy saw moderate growth despite continued challenges related to labor, higher prices, and supply chains. Prices rose as firms passed higher input costs to consumers. Employment grew moderately, but tight labor precluded even stronger gains. Consumer demand grew, but the spread of the Delta variant slowed some activity. Ag conditions improved, but drought remained problematic. Minority- and women-owned business enterprises saw mixed activity.

Kansas City – Economic activity continued to grow at a moderate pace. High expectations for future growth were supported by significant increases in orders for goods and services in the future. Several contacts noted that their business is booked out further than ever. Most contacts attributed the backlogs in their businesses to both elevated demand and ongoing supply factors. Amid supply disruptions, desired inventory levels rose.

Dallas – The economy expanded at a solid pace, though supply-chain bottlenecks and staffing challenges remained headwinds. Employment gains were robust, and wage and price growth continued to be highly elevated. Housing and industrial demand remained solid, and office leasing ticked up. Outlooks were optimistic. But uncertainty crept higher due to worsening supply-side constraints.

San Francisco – Economic activity strengthened moderately over the reporting period. Employment rose at a moderate pace, while overall conditions in the labor market remained tight. Wages and price levels rose significantly. Retail sales expanded markedly, while conditions in the agriculture and manufacturing sectors strengthened further. Lending activity increased modestly, and residential construction expanded at a brisk pace.

David Schollaert

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