Federal Reserve Bank of Cleveland
Summary of Economic Activity
On balance, contacts reported that business activity in the Fourth District increased modestly in recent weeks, with continued modest growth expected in the months ahead. Manufacturing and commercial construction contacts reported increased demand, with multiple contacts noting that the majority of activity came from data center buildouts. Freight contacts reported that demand for their services grew modestly; however, they attributed this to reduced capacity rather than increased freight volumes. Meanwhile, consumer spending was flat. Overall, contacts said that their employment levels remained flat and that wage pressures grew moderately. Nonlabor cost pressures remained robust, and selling prices continued to grow moderately.
Labor Markets
Reports indicated that employment levels remained flat on net in recent weeks. While some construction, financial services, and professional and business services firms added staff to support growth, others across sectors reduced head counts because of soft demand, cost pressures, and weak outlooks. Labor reductions varied from targeted cuts by manufacturers and reductions in temporary retail workers' hours to closures of underperforming business locations. Several contacts noted increased availability of qualified candidates as larger firms slowed hiring. Multiple contacts reported leveraging automation and artificial intelligence solutions to gain efficiencies in back-office functions, a situation which one banker anticipated could further reduce head count needs.
On balance, wage pressures continued to grow moderately, with many contacts implementing standard annual increases. Several professional and business services contacts reported selectively raising wages to attract and retain talent, with one noting "scarcity of accounting graduates and talent." In freight, while most contacts reported stable wages, a couple regularly raised drivers' wages, citing persistent difficulties finding qualified candidates, particularly with new CDL requirements. Manufacturers and bankers reported awarding typical merit increases, while retailers approached wage increases more cautiously, with a couple holding steady because of elevated cost pressures.
Prices
Overall, nonlabor input cost pressures remained robust for the sixth consecutive reporting period. Contacts reported higher costs for insurance, professional services, utilities, and materials (especially metals and food). Freight costs surged, with one contact describing spot market rates as "exploding." Many manufacturers cited tariffs as driving materials-cost increases, while some large retailers noted that tariff impacts were stabilizing. To offset these pressures, multiple contacts evaluated new vendors and sought efficiencies to counter increases in non-negotiable areas like utilities. On balance, contacts expected nonlabor costs to grow moderately in the coming months.
Overall, contacts reported moderate selling price pressures in recent weeks. Many passed along higher input costs, though some firms absorbed these increases to maintain market share amid competitive pressures and softer demand. Several manufacturers implemented additional price increases to cover tariff impacts; one noted raising prices by 4.25 percent instead of the planned 3 percent to offset additional steel tariffs. Freight contacts reported robust rate increases despite customer pushback and softer demand. Two carriers noted a similarity to pandemic-era pricing conditions without the corresponding demand surge, and another suggested that capacity constraints might explain the price firmness.
Consumer Spending
Contacts reported flat-to-down consumer spending, with many attributing slow sales to the unseasonably cold temperatures and winter storms. Several automotive dealers expressed concern over vehicle affordability as sales declined, with one noting that low-income consumers were priced out of new car purchases. Retailers and food and hospitality contacts reported reduced discretionary spending due to the high cost of living. Overall, contacts expect a slight increase in consumer spending over the coming months. Most automotive dealers anticipated services and parts demand to increase because of the rising average age of vehicles but expected flat-to-declining vehicle sales as affordability issues persisted.
Manufacturing
Demand for manufactured goods rose slightly, and contacts generally expected demand to increase modestly in the coming months. Data center buildouts and operation remained a key demand driver for producers of metal products and electrical components, though for some this was the only area of growth amid otherwise soft demand. Other sources of strength included light vehicle manufacturing and aerospace. In reports collected prior to the recent Supreme Court ruling on tariffs, multiple contacts were optimistic that more clarity surrounding trade policy would improve overall economic conditions. Conversely, a small number of manufacturers continued to report flat or softer orders related to home-improvement activity, as existing home sales remained stable at a low level.
Real Estate and Construction
Demand for homes decreased slightly in recent weeks. Two homebuilders and several real estate brokers reported that harsh winter weather discouraged potential buyers from entering the market. Contacts' views on the impact of mortgage rates were mixed. A homebuilder said that current rates contributed to greater demand for new homes, while a real estate broker suggested that rates would need to decrease further to encourage existing homeowners to move. Contacts anticipated strong growth in the coming months, with some expecting pent-up demand and lower mortgage rates to contribute to an active spring selling season.
Commercial construction and real estate demand increased modestly over the last two months. Builders noted continued demand for infrastructure and data centers, offsetting the impact of delayed manufacturing projects. Senior and multifamily housing developers saw steady demand, while retail rental activity softened. Demand for office real estate improved as more firms sought in-person workspaces, though one commercial real estate consultant noted that tenants in the sector remained cautious. On balance, contacts expected continued modest growth in the coming months.
Financial Services
On balance, bankers reported that overall loan demand grew modestly in recent weeks. A couple of bankers said that merger-and-acquisition activity increased, with some commercial clients increasingly focused on succession planning. On the consumer side, one banker noted that mortgage demand had remained "relatively good" despite typical seasonal stagnation in winter months. Credit demand was generally up, though bankers attributed the growth to varying sources. Some reported that growth came primarily from existing accounts, including slower paydowns and increased utilization of existing credit lines, while a couple cited new account originations. In the months ahead, bankers expected loan demand to increase moderately.
Nonfinancial Services
Professional and business services firms reported moderate demand and expected robust demand in the coming months. An accountant reported that tax policy changes drove demand for their services, and one consultant attributed demand growth to a rebound in corporate investments. Likewise, a law-and-consulting firm noted that merger-and-acquisition activity increased for large public companies but slowed for middle-market firms. Freight contacts reported modest demand growth and expected moderate growth in the coming months. However, they attributed the recent growth to a reduction in available drivers due to the updated CDL eligibility requirements rather than an increase in freight volumes.
Community Conditions
Nonprofits reported that clients' financial stress worsened over the past three months because of elevated food, utility, and housing costs coupled with reduced social support services. In response, contacts said some clients stopped paying bills, skipped meals, or delayed medical care. One contact noted seeing more employed individuals requesting food, rent, and utility assistance, and another noticed more seniors seeking employment to make ends meet. To address their clients' increased financial stress, nonprofits provided hotel stays when homeless shelters were full, worked with local grocers to secure more food donations, and furnished funds to cover delinquent rent and utility bills.
For more information about District economic conditions visit: https://www.clevelandfed.org/en/region/regional-analysis.