Uncertainty Colors Business Outlook Even as Reopening Boosts Activity. In New York State, Furloughs Turn to Layoffs. - Barron's

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Federal Reserve Chairman Jerome Powell

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Business activity has mostly picked up across the U.S., though the outlook remains uncertain and activity remains well below pre-pandemic levels, the Federal Reserve’s latest collection of anecdotes from its 12 districts shows.

The beige-book report, prepared based on information collected by regional Fed banks on or before July 6, gives investors an anonymized glimpse of the economy from businesses at the ground level. As lockdowns lifted and businesses reopened, many respondents reported that demand picked up and prompted hiring. But as the coronavirus continues to spread and threatens reopenings, businesses remain worried about the magnitude of the pandemic’s economic implications.

“Uncertain” remained the buzzword for the latest beige book, appearing 16 times, notes BMO Capital’s Jon Hill. For context, the word “Covid” appeared 47 times, above May’s 42 but below April’s 62 count. With the timing around a vaccine still unknown, Hill says, it’s likely these uncertainties will persist for sometime. While the Fed’s summary depicted an economy that is improving month over month, it’s still well below year-ago levels. “Cue rates staying at the effective lower bound for the foreseeable future,” Hill says.

Here’s a selection of nuggets from Wednesday’s beige book:

Summer in Boston

Travel-industry contacts reported improved bookings of hotel stays and short-term rental properties. In one coastal area, hotel bookings have nearly returned to 2019 levels for July and August, though restaurants in these areas continue to report difficulties adjusting to distancing restrictions. Air travel remains sharply lower because of the pandemic; total air passengers in Boston in June were still down more than 85% from the same time last year. That’s hitting aerospace companies, which say a travel recession until 2022 means airlines don’t want to take delivery of new planes.

Distancing in Chicago

Contacts reported large increases in boat and RV sales. There were reports of low inventories for both.

Mass Layoffs in Minnesota

Announcements of temporary and permanent mass layoffs rose notably in June in Minnesota and Wisconsin after slowing significantly in May. A contact in the Bakken region of North Dakota reported that energy-related firms “would not try to save their employees” as they had during the downturn in oil prices five years ago, and that wide-scale layoffs had begun “and will continue at a fairly expedited rate.” A workforce contact in northern Minnesota said that some businesses expected somewhat higher permanent layoffs than they were communicating publicly with employees.

Derailed in Dallas

Some 43% of respondents to a June Dallas Fed survey of 400 Texas manufacturing and services firms indicated reduced employment levels due to Covid-19 and, among this group, 26% said it would take more than a year to get back to pre-Covid headcounts while 19% said they don’t ever expect employment to get back to pre-Covid levels. Many contacts cited challenges in bringing workers back given rising infection rates, quarantined employees, and confirmed positive Covid-19 cases among staff.

Lackluster Labor Market in Cleveland

Labor demand remained soft across most industry segments even as more of the district’s economy came back on line, thanks to weak demand for goods and services in addition to workers’ fears of contracting Covid-19, a lack of child care, and generous unemployment benefits. Many firms instituted pay freezes, others temporarily put off merit increases, and more firms reportedly cut worker pay since the last report (particularly for higher salaried employees) and asked workers to take unpaid leave.

Urban Flight

Home sales markets across the New York district have been mixed, with New York City’s sales and rental markets sluggish but some markets in less urban areas and in upstate New York showing strength. In New York City, closings were down more than 50% from a year earlier, while new contract signings were down roughly 75%.

Deferral Deadlines

Banking contacts in Philadelphia noted generally increased optimism among their clients as Paycheck Protection Program loans, loan deferrals, and other assistance had supported many businesses. However, one banker cautioned against a false sense of security. Most bankers noted that the third and fourth quarters will be telling as deferrals run out and businesses must begin to meet their loan obligations.

Driving Demand in New York

Vehicle sales rebounded fairly sharply in May and June, according to dealers in upstate New York, though they remained somewhat below comparable 2019 levels. Contacts expressed concern that lean inventories of both new and used vehicles may constrain sales through the summer.

Malls of America

A Minnesota mall reported that many tenants were still closed in late June. Those that were open “are really struggling, nowhere near break-even,” and leases for virtually all tenants had been altered or renegotiated.

Online Retailers Are Hiring While Others Are Not

An online retailer in Boston is hiring more workers, particularly customer service, to meet increased demand.

Grocery Gains

A large majority of transportation contacts in Cleveland reported an increase in freight demand in recent weeks, coinciding with a resumption of manufacturing activity and continued gains in shipments from grocers. One contact said that demand from grocers was 40% higher than before the pandemic, which offset weaker demand from some other sectors. However, a few haulers were forced to accept below-cost shipments to maintain cash flow.

Fleeting 401(k) Contributions in St. Louis

Some firms have reported cutting nonwage benefits, such as matching 401(k) contributions, to control costs.

Clearing the Coast

In Idaho and eastern Washington, observers saw early evidence of buyers moving from higher-cost coastal markets after starting permanent teleworking.

Sluggish Hiring in New York

One employment agency in upstate New York noted that some previously furloughed workers have more recently been laid off permanently. That agency along with another in New York City noted that hiring has remained sluggish, and a number of firms providing business and office services have reduced staffing levels, hours, and salaries as customers cut back on such services.

Rethinking Staffing in Atlanta

Some employers reported taking measures to cut less productive processes and employees, while others were able to acquire more skilled and productive staff due to greater talent availability. Many firms indicated success with remote arrangements and noted they will continue this stance for the near term and possibly beyond. As the support from the PPP winds down, many employers indicated that they will be forced to lay off workers should business remain weak.

Feeling the Movie Freeze

A toy company in Boston said business had slowed significantly since April, partly because the cessation of movie production hit their media tie-ins, and partly because of production difficulties.

Looser Leasing

Several tenants in Richmond asked for short-term lease renewals in order to allow them to re-evaluate their use of and need for office space. Multifamily leasing was somewhat soft, and some landlords increased concessions to attract tenants, though industrial leasing remained strong as companies look to hold more inventory.

Rehiring Roadblocks in Philadelphia

Among nonmanufacturing firms in the Philadelphia region reporting difficulties rehiring workers, an equal 30% share of contacts noted fear of infection, child-care needs, and expanded unemployment insurance benefits as impediments to hiring.

Clinging to Cash

Deposit levels in the Cleveland region remained elevated as clients held on to cash from pre-emptive line-of-credit drawdowns, disbursements of PPP loans, and government stimulus checks. Most contacts reported that delinquency rates remained relatively low, but several expressed concern that delinquencies may increase when PPP funds run out and government-provided assistance diminishes.

Rent Pain

Commercial real-estate activity in the Chicago region was little changed and the market remains highly distressed. Industrial properties had the highest percentage of on-time rent payments, while many tenants in the retail, restaurant, and hospitality sectors had asked for forbearance through at least the end of the summer. Retail and restaurant store closures were reportedly accelerating. Rents moved down, while vacancies and sublease space increased.

Oil Price Pickup

Contacts in the Kansas City region expected oil and gas prices to rise modestly in the months ahead, but prices were expected to remain below the level needed for a substantial increase in drilling for more than a year. Additional deterioration was anticipated in the energy sector, although the pace of declines was expected to moderate. Despite weak conditions, over two-thirds of energy contacts reported that they could survive for more than a year if current revenue levels persisted.

Beware Budget Cuts

One firm in the Richmond area that contracts with government agencies expressed concerns about government budget changes in the wake of the virus. An executive from a firm that provides services to federal government agencies expressed concerns that budget cuts would result in reduced demand in 2021 after current contracts expired.

Housing Crunch in Atlanta

Pent-up demand and low interest rates accelerated home sales in the region. Despite low interest rates, affordability remained a concern as median home prices continued to reach new highs in several markets. 30-day delinquencies rose sharply, especially in South Florida markets, despite a surge in forbearances.

Write to Lisa Beilfuss at lisa.beilfuss@barrons.com

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