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 moderate growth expected in the months ahead. Demand for manufactured goods continued to grow robustly, driven by data centers and defense spending. Consumer spending declined modestly for the fourth consecutive period as higher fuel and food prices strained household budgets. Employment levels increased slightly, and wage pressures remained moderate. Nonlabor cost pressures remained robust for the tenth consecutive period, driven by higher fuel costs, while selling prices increased moderately as firms balanced rising input costs against competitive pressures and consumer price sensitivity.
Labor Markets
Employment levels increased slightly on net in recent weeks, with overall commentary indicating stable conditions. Many manufacturing and construction firms added staff to pursue growth opportunities. However, continued shortages in skilled trades constrained some hiring plans, with one construction contact noting that they were in "dire need of younger skilled labor." Some retailers reduced staffing levels in response to soft demand. AI's impact on staffing was mixed. Some contacts hired to expand AI capabilities; others noted a reduced need for administrative staff due to AI. On balance, contacts expected employment levels to grow modestly in the coming months.
Contacts continued to report moderate increases in wages on balance. To help employees manage higher costs, a few contacts increased wages earlier or by more than the usual amount, while others offered a flexible work schedule to reduce commuting costs. Some manufacturers raised wages to compete for scarce labor or offered additional overtime until fully staffed, and some professional and business services firms noted that continued competition for specialized talent was pushing up wages. A few contacts reported easing wage pressures as labor demand cooled. Multiple firms held wages steady, cut bonuses, or reduced commissions in response to soft customer demand, and one services firm implemented a 10 percent salary reduction for top staff as part of a broader cost-cutting measure.
Prices
Nonlabor input cost pressures remained robust for the tenth consecutive reporting period amid rising fuel costs related to the conflict in the Middle East and resulting spillover effects on material and freight costs. One manufacturer described these as "shockwaves through the chemical supply chain." Many manufacturing and construction contacts reported rising utilities and materials costs, particularly for steel, copper, and aluminum, with several attributing the increases to tariffs. Many services and retail contacts reported continued increases in health insurance costs, with one noting that the pace was "unsustainable." Looking ahead, contacts anticipated nonlabor input cost pressures to remain robust.
Overall, contacts reported moderate increases in selling prices in recent weeks, driven by rising input costs. Manufacturers continued to raise prices to cover higher energy, raw materials, and tariff-related costs, while retailers raised prices to offset higher goods costs. One large retailer noted that prices for petroleum-based products increased by more than 20 percent compared to 2 to 3 percent for non-petroleum-based products. Some restaurateurs and grocers raised prices selectively because of consumer price sensitivity. Some contacts across sectors reported holding or even cutting prices to maintain market share amid competitive pressures.
Consumer Spending
Consumer spending decreased modestly in recent weeks, marking the fourth consecutive reporting period of decline. Retailers across sectors continued to attribute flat or softer sales to higher prices—particularly for fuel and food—and general economic uncertainty. One contact added that the previous boost from tax refunds had dissipated. Reports from auto dealers were mixed. Some noted stable or increased sales as consumers moved forward with postponed purchases; others reported still-soft demand due to high vehicle prices and interest rates. Looking ahead, retailers expected flat sales on balance, with continued high prices leading consumers to limit discretionary purchases.
Manufacturing
Demand for manufactured goods increased at a robust pace, driven by data center development and defense spending. Some producers absorbed demand from competitors who were facing supply chain constraints, while others saw higher orders as customers replenished inventories. One contact reported increased orders as unseasonably warm weather strained the electrical grid, increasing the need for maintenance. A few other firms saw flat or softer orders, a circumstance which some attributed to general economic uncertainty. One producer reported losing orders to an international competitor that relocated production to circumvent U.S. tariffs. Manufacturers generally expected demand to rise at a robust pace in the coming months.
Real Estate and Construction
Residential construction and real estate activity increased slightly in recent weeks. One homebuilder reported that higher affordable housing demand was outweighing a slowdown in their market-rate business, and another noted that demand for their custom homes was stable at a high level. While one real estate broker saw continued high demand for existing homes, a lack of supply dampened sales activity as homeowners remained reluctant to move. Several contacts noted that higher long-term interest rates contributed to lock-in for existing homeowners. Contacts anticipated little to no demand growth in the coming months.
Nonresidential construction and real estate contacts reported moderate demand growth in recent weeks, with industrial demand stabilizing and still-strong demand for data center construction. Contacts differed in their assessment of firms' decisionmaking; two commercial developers said projects previously on hold were beginning to come to fruition, while one industrial developer observed little change from the previously cautious environment. Looking ahead, contacts expected strong demand growth.
Financial Services
Overall, bankers reported that loan demand grew at a robust pace in recent weeks. Commercial bankers cited new business activity, mergers and acquisitions (M&A), and commercial real estate transactions as catalysts for increased loan demand. One banker noted that their business banking division was on pace for its best year ever. On the consumer side, one banker reported increased demand for auto loans and home equity lines of credit. Despite reports of robust growth, some bankers reported seeing some clients discouraged by economic uncertainty and relatively high interest rates. Going forward, bankers expected loan demand to grow modestly, with continued demand growth from commercial clients and steady household demand.
Nonfinancial Services
Demand for professional and business services grew modestly in recent weeks, slowing from relatively strong growth in prior periods, with growth concentrated in corporate M&A activity, litigation work, and engineering and compliance services. Despite this recent slowdown, contacts expected strong demand growth in the coming months as clients move forward with capital improvements and other projects. Freight contacts continued to report robust demand growth due to increased business from new and existing clients. One contact mentioned particularly strong demand from the industrial sector. Looking ahead, freight contacts expected demand to increase moderately on balance.
Community Conditions
In a recent Districtwide survey, workforce development boards reported rising labor demand, especially in skilled trades, linked to economic development projects. Several respondents cited access to transportation and childcare as persistent barriers to employment and training. Most respondents noted using AI in their operations, with the remaining boards planning to adopt AI within the next 12 months. Current AI users said they were leveraging it for administrative efficiency. Half of respondents indicated that AI was partially integrated into their processes, potentially signaling a shift in how workforce boards operate and deliver services.
For more information about District economic conditions visit: https://www.clevelandfed.org/en/region/regional-analysis.