Federal Reserve Bank of Cleveland
Summary of Economic Activity
On balance, contacts reported that business activity in the Fourth District increased slightly in recent weeks, with expectations for continued slight growth in the months ahead. Manufacturing and construction contacts reported improved demand compared to prior periods, with multiple contacts noting increased confidence as businesses were more willing to make decisions despite lingering uncertainty. Meanwhile, consumer spending declined modestly and demand for freight fell moderately. Overall, contacts said their employment levels were flat and wage pressures grew modestly. Nonlabor cost pressures remained robust, and selling prices continued to grow moderately.
Labor Markets
Reports indicated that employment levels were flat on net in recent weeks. Some construction and professional and business services firms added staff driven by new projects and robust backlogs, while some manufacturing and retail firms reduced head counts because of decreased demand and cost-reduction initiatives. Accounts from multiple industries reflected increased caution in hiring through measures such as requiring backfill approvals, relying on subcontractors for flexibility, and strategically using technology to limit hiring. Still, some firms leveraged increased labor availability to hire for previously hard-to-fill roles such as engineers, accountants, and architects. Contacts generally expected employment levels to increase slightly in the coming months.
On balance, wage pressures grew modestly in recent weeks. Contacts from financial and professional and business services reported that competition for skilled labor drove wage increases, with one banker noting that potential hires were less willing to leave current jobs. Some freight and manufacturing contacts implemented targeted wage increases for high-demand positions or those requiring specialized skills while maintaining stable wages for other positions. Several retail and staffing contacts said the cooling job market and stable workforce reduced wage pressures. Some contacts across industries reported holding wages steady, cutting contracted hours, or reducing overtime to contain overall costs.
Prices
Overall, nonlabor input cost pressures were robust for the fifth consecutive reporting period. Tariff-related cost increases continued to affect the manufacturing and retail sectors, with contacts specifically citing impacts on general merchandise, metals (particularly aluminum), and equipment. One manufacturer said that firms that had previously absorbed tariff-related increases were now gradually raising prices to cover these costs. Still, some manufacturers reported that tariff impacts had stabilized or even attenuated as they were able to negotiate down related costs and/or find domestic vendors. Many contacts continued to report rising utilities and insurance costs. On net, nonlabor costs were expected to grow at a strong pace in the coming months.
Overall, contacts reported that selling price pressures were moderate in recent weeks. Tariffs continued to drive price increases across multiple sectors. Some retailers reported continued upward pressure on food, vehicle, and general merchandise pricing, and several professional and business services firms increased rates to cover higher labor and insurance costs. Several manufacturing and construction contacts reported reduced pricing power amid weak demand, leading some manufacturers to decrease prices and some real estate brokers to offer discounts or incentives. Some freight contacts were recently able to raise prices slightly as capacity tightened because of company closures and regulatory restrictions for non-citizen drivers.
Consumer Spending
Consumer spending declined modestly across industries in recent weeks. Some retailers reported a disruption in normal sales because of the dramatic increase in goods prices and the impacts of the government shutdown, particularly the temporary pause in SNAP benefits. Auto dealers said vehicle affordability issues and still-high interest rates dampened demand. Similarly, many food and hospitality contacts reported that weak consumer sentiment hampered spending. On balance, contacts expected consumer spending to be flat in the coming months. Some retailers suggested that consumer spending would vary depending on the impacts of political and economic uncertainty. For instance, one restaurateur anticipated a decline in dining out if Affordable Care Act subsidies are discontinued.
Manufacturing
Contacts' reports suggested a modest increase in demand for manufactured goods following several periods of flat or declining activity. Some producers continued to cite data center buildouts as a primary driver of demand. Multiple manufacturers noted stronger orders related to manufacturing of light vehicles and agricultural equipment than in recent reporting periods. One manufacturer of agricultural equipment attributed this increase to the recent announcement of government payments to farmers and to the prospect of a temporary trade deal with China. A smaller share of producers reported flat or softer orders related to slow sales of existing homes or low home-improvement activity. Manufacturers generally expected demand to increase modestly in the coming months.
Real Estate and Construction
Demand for homes increased in recent weeks. One real estate contact said that stable mortgage rates and reduced uncertainty regarding brokerage fees gave some homebuyers confidence to engage in the market, while another noted that some homeowners remained hesitant to sell and lose the lower rates on their existing loans. Homebuilders reported steady activity as they worked through projects from earlier in 2025. Contacts anticipated weaker demand in the coming months.
Nonresidential construction and real estate activity increased modestly in recent weeks. Two contacts pointed to data centers and manufacturers as drivers of construction demand. Two multifamily housing developers saw an increase in senior and affordable housing construction projects, while one developer saw softer demand for market-rate apartments and food and hospitality industry space. Contacts expected continued modest growth in the coming months, and one developer suggested that excess industrial demand would bolster activity in 2026.
Financial Services
Overall, bankers reported moderate growth in loan demand in recent weeks. One banker noted increased demand for commercial real estate loans and more inquiries for commercial and industrial loans. Another reported stable growth in consumer loan products, with upticks in their credit card accounts and balances. Bankers expected loan demand to increase slightly in the coming months, which some bankers attributed to anticipated declines in interest rates. One banker expected small businesses to be particularly motivated by declining rates. Core deposits increased slightly, though one banker indicated that deposit competition remained intense. Delinquency rates for both consumer and commercial loans were flat.
Nonfinancial Services
Demand for professional and business services continued to grow moderately in recent weeks. A consulting firm reported that demand shifted away from sustainable building certifications and toward energy audits and engineering assessments. On net, contacts expected robust demand growth in the coming months. One contact noted that the recent reduction in interest rates would lead to favorable financing and help projects move forward. Meanwhile, demand for freight fell moderately in recent weeks, and contacts expected flat demand in the coming months. Several transportation contacts indicated that tariffs decreased import and export volumes and that the government shutdown impacted passenger volumes.
Community Conditions
In a recent survey of low-income workers, respondents reported experiencing notable economic pressures. Almost 7 out of 10 indicated that their expenses had increased, while half stated that their income did not cover their costs. Still, many expressed optimism regarding the current job market. Forty-five percent said they were planning to seek new employment in the coming months, primarily in the healthcare, technology, and business sectors, and nearly all were confident that they would find a new or better position. These jobseekers identified several potential barriers to their search for positions including the need for additional skills and experience.
For more information about District economic conditions visit: https://www.clevelandfed.org/en/region/regional-analysis.