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. Manufacturers reported increased demand; however, many worried that a prolonged conflict in the Middle East would result in higher input costs and softer demand. Following a harsh winter, new construction and sales of existing homes picked up. Retailers reported modest demand declines as customers reduced purchases amid higher fuel prices. Overall, contacts said that their employment levels grew slightly and that wage pressures grew moderately. Nonlabor cost pressures remained robust, and selling prices grew moderately.
Labor Markets
Employment levels increased slightly on net in recent weeks. Many professional and business services firms added staff to support growth. Multiple manufacturers reported that improved demand warranted additional hiring, while some higher education contacts added staff to support rising enrollment. Many firms reported using AI to increase productivity, though contacts did not indicate significant impacts on staffing levels. Reported staff reductions occurred mainly in transportation, manufacturing, and retail, driven largely by cost-saving initiatives. One restaurateur reduced staff to control costs despite increased sales.
On balance, wage pressures remained moderate. Many contacts implemented standard annual increases, while transportation and financial services contacts noted that tight labor markets pushed up their wages. A few manufacturing and wholesale contacts implemented an additional wage increase to offset rising prices faced by their employees. However, several contacts faced challenging wage-setting decisions given higher inflation, slow growth, and economic uncertainty, described by one contact as "an incredible mixed bag." One construction contact who reduced staff amid a slowdown said they offered remaining employees higher pay for taking on additional responsibilities, while one manufacturer froze wages because of market uncertainty.
Prices
Overall, nonlabor input cost pressures were robust for the seventh consecutive reporting period, intensifying further and continuing an upward trend that started in September 2024. Contacts across sectors highlighted escalating energy costs related to the conflict in the Middle East, with some describing fuel costs as "skyrocketing" and others noting that this would further exacerbate already-high freight costs. Materials costs continued to rise, particularly for metals like copper, steel, and aluminum, with manufacturers citing tariffs as drivers. Two agricultural contacts reported fertilizer cost spikes, and one attributed this to the Strait of Hormuz closure. Multiple professional and business services contacts noted increasing software costs, including for previously free AI tools. In the coming months, contacts generally expected robust nonlabor cost growth, with many anticipating that an extended conflict in the Middle East would further raise their input costs.
Reports indicated that selling prices largely mirrored nonlabor input costs, remaining on an upward trajectory that began in September 2024 and rising moderately in recent weeks. Multiple manufacturers and retailers increased prices to cover rising input costs and previously absorbed tariff-related costs. Some manufacturers implemented surcharges on oil-related inputs affected by the conflict in the Middle East. Commercial construction contacts noted less pricing power amid softening demand, while residential construction contacts raised prices in response to strong demand and low inventory. Some freight contacts increased rates to cover surging fuel costs, though a few reported customer pushback against these increases.
Consumer Spending
Consumer spending declined modestly in recent weeks, driven by extreme weather events and high fuel prices. Grocery store and automotive contacts noted that higher fuel prices strained customers' wallets, and one higher-end grocer reported customers making fewer trips and purchases. Contacts expected flat consumer spending in the coming months, with many noting that the evolving conflict in the Middle East and associated increase in fuel costs could hurt their demand. One national retailer expected consumers to remain resilient, while another saw the potential for sustained higher gas prices to offset the expected boost from higher tax refunds.
Manufacturing
Demand for manufactured goods rose modestly, and contacts generally expected activity to increase moderately in the coming months. Data center development remained the primary demand driver in many industry segments, and several producers continued to report stable or higher orders related to aerospace and light vehicle production. While two producers with defense contracts reported stronger activity related to the conflict in the Middle East, many manufacturers worried that a prolonged conflict would increase input costs and soften demand. A few producers continued to report flat or softer demand as customers strategically reduced existing inventories.
Real Estate and Construction
Demand for homes increased modestly in recent weeks. Both new home construction and existing home sales activity picked up after an especially cold winter, with inventories remaining low in some areas. One real estate broker said that lower mortgage interest rates had improved demand, but a few worried that now-rising rates amid the conflict in the Middle East could keep potential buyers on the sidelines. Still, contacts anticipated strong demand growth in the coming months.
Commercial construction and real estate demand increased moderately in recent weeks. Several contacts noted increased bidding opportunities and project inquiries, with particular strength in data center builds. By contrast, two others observed firms being more cautious with their real estate investments as they waited for broader uncertainty to ease or potential rate cuts later this year. Retail and industrial leasing activity increased, while reports on office activity remained mixed. On balance, contacts expected strong demand growth in the coming months.
Financial Services
Overall, loan demand grew moderately in recent weeks. Bankers mentioned that commercial loan demand was strong, highlighting increases in capital expenditure, real estate, and merger-and-acquisition activity. Reports were mixed for consumer credit. One banker mentioned that credit card usage increased, while another said that demand for auto loans was slower than expected. Looking ahead, bankers expected loan demand to be flat on net in the coming months. Bankers said that increased oil prices related to the conflict in the Middle East were a major source of economic uncertainty for clients. Others mentioned that the continued partial government shutdown and ongoing tariff adjustments were contributing to this uncertainty.
Nonfinancial Services
Demand for nonfinancial services increased robustly in recent weeks, and contacts expected the robust demand to continue over the coming months. Among professional and business services contacts, one law firm noted that regulatory uncertainty can increase demand for consultations. Among freight contacts, two firms partially attributed the increase in their volumes to the declining supply of drivers among other carriers, following increased regulations on nondomiciled drivers and "chameleon carriers." Several transportation contacts expected the conflict in the Middle East to hurt their demand through slower economic growth and surcharges associated with rising fuel costs.
Community Conditions
In a semiannual survey of nonprofit organizations, most respondents reported a decline in their clients' financial well-being over the past six months due to elevated prices. One respondent said more people sought foreclosure prevention services amid rising property taxes and insurance, while a homeless shelter operator observed longer stays due to the lack of affordable housing. Some respondents who assist jobseekers noticed fewer entry-level positions available. By contrast, others noted more openings for low-paying jobs—manual labor, part-time or temporary jobs, and gig work—that typically lack health-care benefits or a reliable income.
For more information about District economic conditions visit: https://www.clevelandfed.org/en/region/regional-analysis.