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Fed’s Beige Book Attributes Summer Economic Slowdown to Delta, Ongoing Supply and Labor Issues

  • Federal Reserve’s Beige Book shows moderating economic growth in July and August as the Delta variant drove a pullback in some consumer behaviors
  • Supply and labor constraints, along with inflation, were also posing ongoing challenges for businesses
  • The New England region experienced healthy economic growth, although its commercial real estate market remained uncertain

Summary by Dirk Langeveld

Economic growth moderated over the summer as the Delta variant created more consumer wariness, according to the Federal Reserve’s Beige Book. Businesses in New England, where the increase in COVID-19 cases has been less severe, were generally more optimistic about economic conditions but also faced the same supply and labor challenges that have affected companies nationwide.

The Beige Book uses formal and informal methods to track economic changes across the 12 Federal Reserve Districts. Reports are issued eight times a year.

Nationally, the Fed said that there was a noticeable decline in consumer demand for dining out, traveling, and tourism. It suggested that this was due to increasing cases of COVID-19 through the months tracked in the report, and sometimes by international travel restrictions. Manufacturing, transportation, non-financial services, and residential real estate proved to be more resilient in the face of this economic slowdown.

Diminished economic activity in some areas was attributed to supply disruptions and labor shortages rather than a decline in demand. The Fed said a slowdown in auto sales is due to a shortage in microchips, while low housing inventory is to blame for constrained residential real estate sales.

Hiring was up across the Federal Reserve Districts, though businesses continued to report challenges in finding enough workers. Companies said increased turnover in employees, early retirements (especially in health care), child care responsibilities, and enhanced unemployment benefits (which ended over the Labor Day weekend) were contributing to the issue. Businesses also faced challenges in negotiating job offers, frequently having to offer higher wages, bonuses, training, and flexible work arrangements in order to attract job candidates and retain existing workers.

All districts reported moderate or strong price increases, with businesses in several districts saying they anticipate “significant hikes” in their sales prices in the near future. Elevated costs were especially pronounced in metals, metal-based products, construction materials (with the exception of lumber, where prices have retreated from recent highs), and freight and transportation services.

Businesses in the district served by the Federal Reserve Bank of Boston, which encompasses most of Connecticut as well as all other New England states, reported moderate to strong growth. Supply shortages were the most common drag on sales, typically resulting in delayed deliveries rather than higher prices.

Apparel and home goods businesses in the region enjoyed strong demand, and manufacturers (especially those involved in the production of semiconductors) saw better sales than a year ago. The region also experienced healthy summer tourism and strong restaurant sales, even though eateries were more likely to raise their menu prices due to inflationary pressures and some areas saw reinstated COVID-19 restrictions.

Employers in the district expressed greater concern about the challenge of filling open positions than the upward push on wages. However, some businesses said pay equity has made it more difficult to raise wages for new hires, or that salaries for certain occupations such as logistics specialists have skyrocketed since the pandemic began.

Businesses reported higher input costs, but generally continued a strategy of cutting costs or improving productivity to respond to them rather than raising consumer prices.

The commercial real estate market in the district remained uncertain, with strong demand for industrial and life sciences facilities but tepid demand for retail and office space. Tenants seeking office space were also more likely to sign short-term renewals only when necessary due to the uncertainty created by the Delta variant.

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