Federal Reserve Bank of Cleveland
Summary of Economic Activity
On balance, contacts reported that business activity in the Fourth District increased moderately in recent weeks, with continued moderate growth expected in the months ahead. Demand for manufactured goods rose at a robust pace, largely driven by data center development. Higher fuel costs continued to dampen demand for retailers, who noted increased price sensitivity among consumers. Home sales continued to pick up, and data center buildouts drove commercial building demand. Overall, contacts said that their employment levels grew modestly and that wage pressures remained moderate. Nonlabor cost pressures remained robust, and selling prices grew robustly.
Labor Markets
Employment levels increased modestly on net in recent weeks. Construction contacts reported robust growth in staffing, with some adding employees to support new projects or continue data center work. Across industries, many contacts described making measured hiring decisions focused on increased productivity and strategic growth rather than broad expansion. For instance, one manufacturer noted "widespread hesitancy in hiring, even for expansion opportunities." Several manufacturing and professional and business services contacts reported creating new positions requiring AI expertise, though one accounting firm noted that AI implementation had reduced their hiring needs. Retailers generally maintained flat employment levels, citing ongoing cost-containment efforts. Overall, contacts anticipated modest employment growth in the coming months.
On balance, wage pressures remained moderate. Cost-of-living adjustments and annual merit increases continued to be the primary drivers of wage growth. Several businesses implemented additional wage increases to help employees manage higher living costs. Some financial and professional and business services firms reported that competition for specialized talent continued to push up wages. Meanwhile, across sectors, multiple contacts noted easing wage pressures amid cooling labor demand. One construction contact noted that employees were "nervous and stressed" and believed employees were reluctant to "risk" leaving for higher-paying opportunities.
Prices
Nonlabor input cost pressures remained robust for the eighth consecutive reporting period, with the highest share of contacts reporting cost increases since the summer of 2022. The primary drivers of increases cited by contacts were rising fuel costs related to the Middle East conflict and spillover effects on material and service costs through increased fuel surcharges. Manufacturing and agriculture contacts reported cost spikes for fertilizer and petroleum-based products, such as resin, due to the Middle East conflict. Retailers highlighted elevated food costs, particularly for beef. Some contacts compared current input cost uncertainty and supply constraints to COVID-19 pandemic-era challenges. Looking ahead, contacts anticipated nonlabor input cost pressures to remain robust.
Overall, contacts reported robust increases in selling prices in recent weeks, ticking up from previously reported moderate increases, reflecting intensifying cost pressures. Many manufacturers continued to raise prices to cover higher metals and tariff-related costs, and one began implementing surcharges, referring to them as the "new normal." Similarly, some freight contacts added fuel surcharges to cover higher costs and noted that reduced capacity in the sector had increased their pricing power. Still, some retailers reported that strong competition or weak consumer spending led them to make only targeted price increases or prevented them from fully passing on cost increases. One restaurateur increased menu prices by the "absolute minimum" to maintain demand.
Consumer Spending
Consumer spending declined slightly in recent weeks. Many retailers reported that higher fuel costs and related inflation had further dampened consumer spending, leading to decreased sales across various retail sectors including convenience and grocery stores, auto dealerships, and restaurants. One national retailer noted that consumers have become "extremely price sensitive" and credited unplanned promotions with keeping sales flat. Another contact noted an uptick in credit card use among customers, a situation which they believed to be a sign of financial stress. Consumer spending was expected to increase slightly in the coming months. However, several large retailers reported that the Middle East conflict, inflation, and tariff uncertainty obscured their forecasts.
Manufacturing
Contacts reported that demand for manufactured goods grew robustly, though this strength was largely driven by data center development. As such, producers of metal and metal products, electrical components, and others selling into energy generation continued to report higher orders. However, several producers noted that strong demand from data center buildouts was masking weakness for other business lines. Three producers attributed higher orders to elevated uncertainty, with customers buying ahead of price increases or cautiously managing inventory through more frequent orders. Manufacturers generally expected demand to rise at a moderate pace in the coming months.
Real Estate and Construction
Residential construction and real estate activity increased moderately in recent weeks. Single-family affordable housing initiatives bolstered demand for one homebuilder's services, and demand for custom, luxury homes remained solid. More homeowners put their houses on the market after previously delaying moving, somewhat easing supply constraints for existing homes. However, two real estate brokers said that higher mortgage rates continued to dampen activity. Contacts anticipated modest demand growth in the coming months.
Nonresidential construction and real estate contacts reported moderate demand growth in recent weeks. Data centers continued to drive commercial building demand, and some international firms were in the early stages of onshoring operations to the Fourth District. While activity increased overall, contacts commonly mentioned input cost increases putting pressure on project budgets and, in some cases, causing them to be delayed or canceled. On balance, contacts expected strong demand growth over the next two months.
Financial Services
Overall, bankers reported moderate growth in loan demand in recent weeks. One commercial banker noted increased credit utilization for capital expenditures and merger and acquisition activities, while another mentioned some developmental projects stalling because of higher materials costs. On the consumer side, one banker mentioned that credit card applications increased as consumers covered essential purchases like gasoline and groceries. Meanwhile, another banker suggested that auto loan demand had decreased because macroeconomic and geopolitical uncertainty were causing consumers to delay large purchases. Looking ahead, bankers expected a strong increase in loan demand as commercial projects move forward.
Nonfinancial Services
On balance, contacts expected the recent robust demand for nonfinancial services to continue. An increase in cyberattacks drove demand for legal services regarding data privacy and cybersecurity. Meanwhile, several accountants attributed increased demand to a reduction in regional competition. Looking ahead, a law firm expected high fuel prices to increase demand for restructuring, bankruptcy, and commercial lending services. While freight contacts reported increased demand, some questioned whether the demand growth reflected a trend, seasonality, or a decline in industry capacity as some carriers exited the market because of high fuel prices. In contrast, airport contacts reported declines in passenger and cargo volumes.
Community Conditions
County government and nonprofit contacts shared the impacts of rapidly rising costs on the people they serve and their organizations. One county government contact said that employees were more frequently requesting pay raises to offset the rising cost of living, and in recent union negotiations, some unions requested more than double their typical wage increase. This county's operations and maintenance costs climbed, causing them to consider workforce reductions to balance the budget and minimize any tax increases. A housing contact shared that property tax and insurance increases have prevented low-income renters from transitioning to homeownership, and another reported a noticeable increase in homelessness among seniors.
For more information about District economic conditions visit: https://www.clevelandfed.org/en/region/regional-analysis.