Holiday tourism picked up in late December in New York City but remained well below normal. Here, the scene on Christmas Eve in Midtown Manhattan.
Scott Heins/Getty ImagesMost parts of the country reported increased economic activity as the year ended, according to the Federal Reserve’s latest anecdotal report of business conditions in its 12 districts, though the recent surge in Covid-19 cases and resulting containment measures weighed on retail sales and the leisure and hospitality services industries.
The beige-book report, prepared based on information collected by regional Fed banks on or before Jan. 4, showed modestly higher growth in most parts of the country but found that two districts reported no change in activity (St. Louis and Kansas City) while two noted a decline (New York and Philadelphia).
Although vaccines have boosted businesses’ optimism, the report said, the recent Covid spike has challenged business conditions in the near term. The report also showed that auto sales weakened while activity in the energy sector was said to have expanded for the first time since the pandemic began in the U.S.
Manufacturing activity continued to recover in almost all districts, the report said, despite increasing reports of supply chain problems. Residential real estate activity remained strong, the report said, but weak conditions in commercial real estate markets have persisted.
On the job front, most districts reported that employment rose but the recovery remains incomplete and the pace of gains has been sluggish. Labor demand was strongest in the manufacturing, construction, and transportation sectors, with some employers noting staffing shortages and difficulty attracting qualified workers, the report said. Businesses in the leisure and hospitality sectors reported renewed employment cuts due to stricter Covid containment measures. Firms in most districts reported that wages increased modestly.
Here’s a sampling of lightly edited excerpted comments from Fed districts around the country:
Boston: Airline passengers into Boston remained down 70% in November, an improvement from year-over-year declines of over 95% this spring. International passengers were down nearly 80% in November. International travel to Europe was down sharply, but passengers heading to South America ticked up recently. Scheduled flights in early 2021 are up modestly.
New York: Tourism in New York City has remained exceptionally weak, though there was a modest pickup in the latter part of December. Restrictions on indoor dining combined with the onset of cold weather have hit restaurants hard. A number of hotels have closed, some permanently, and the occupancy rate among those still open has hovered around 35%—higher on weekends, lower during the week. With business travel moribund, most hotel stays are from weekenders and subsidized housing for the homeless.
Philadelphia: Staffing firm contacts described continuing demand for employees and an ongoing lack of willing and qualified job candidates. During the current period, this mismatch was compounded by increased workplace disruptions, as Covid-19 cases caused temporary plant or store shutdowns and forced employees to quarantine at home. Employers and staffing agencies alike noted difficulties finding workers to fill shifts. Given child-care needs, agencies are increasingly compelled to fill some positions with such hours as a candidate can supply.
Cleveland: Freight volumes increased notably again in recent weeks. The rise in activity resulted from three primary factors, according to contacts: more online holiday sales this year (and subsequent home deliveries), strong imports, and firms’ replenishing inventories. Seventy percent of freight contacts reported demand had increased in the last two months, and many had difficulty hiring enough drivers to keep up with demand. Looking forward, contacts expected shipments to remain strong in the near term as the pickup from holiday demand has historically continued into early February.
Richmond, Va.: Manufacturers of furniture, food, and construction materials saw especially strong demand. Several manufacturers pointed to supply chain problems resulting in delays and high prices of inputs. Some manufacturers also reported production constraints from understaffing while employees were on quarantine. Conversely, some manufacturers saw weak demand such as a South Carolina office supply producer and a Virginia souvenir manufacturer who were unsure how long they could remain open.
Atlanta: Despite high demand for low-skilled workers, most employers resisted raising wages, though many increased referral, signing, and productivity bonuses to attract and retain workers. The upward pressure on wages at the lower end of the pay-scale, along with challenges to sourcing the required skills, accelerated talks of increasing automation. In Florida, the majority of employers expect little impact from the mandated increases to minimum wage as market forces have already begun to push wages to $15 per hour or will before the 2026 deadline.
Chicago: Agricultural income for 2020 was better than contacts expected at the beginning of the year and at the onset of the pandemic. Contacts viewed government payments as an important reason many farms had profits. Corn and soybean prices continued to move higher over the reporting period, spurred by strong export demand. A larger than usual number of acres were planted with winter wheat, encouraged by higher prices for wheat and good fall weather.
St. Louis: Banking contacts continued to report a modest decrease in overall loan demand. Outstanding loan volumes have declined moderately since the previous report but remained strongly above year-ago levels. Growth in residential real estate and consumer loans was down compared with the previous period and fell below year-ago levels. On the other hand, commercial real estate loan volumes increased slightly. St. Louis bankers were cautiously optimistic about the second round of Paycheck Protection Program lending, hoping the additional funds would be helpful to some of the most distressed businesses, especially those in the entertainment industry. However, some bankers still voiced concern about the uncertain PPP guidelines that might discourage participation.
Minneapolis: Labor supply constraints remained significant. A handful of workforce development sources acknowledged a growing number of available jobs. But one contact noted that many available jobs lacked health care benefits and “just don’t pay enough” to take given higher health risks and other obstacles, like day care availability, transportation difficulties, or the possibility of being recalled from furlough. The prospect of further enhanced unemployment benefits was also keeping some workers on the sidelines.
Kansas City: Manufacturing activity expanded modestly since the last survey, but remained modestly below year-ago levels. Production and new orders rose moderately for durable goods, while activity for non-durables fell slightly for the first time since late spring. Contacts in both sectors expected production and new orders to rise in coming months. Capital expenditures were just below year-ago levels. Looking ahead, firms’ primary motivations for capital outlays in the coming year were to make investments in labor saving technology and equipment to enhance production capacity.
Dallas: The rebound in the energy sector solidified further over the reporting period, though the level of activity remained below year-ago levels. Rig count rose markedly, and drilling and well completion activity continued to improve. Contacts on both the exploration and production side and the oil-field services side reported stronger levels of business activity for the first time since the onset of the Covid-19 pandemic, and oil production stabilized after several months of decline. Outlooks generally improved, though rising Covid-19 cases and the prospect of tighter regulations weighed on contacts’ sentiment about future activity.
San Francisco: Activity in the consumer and business services sector was mixed. Demand for logistics and delivery services rose further, with providers working at full capacity. Shipping service quotas were implemented on many big box companies, with some reported order backlogs and shipping delays due to increased online sales volume during the holiday period. In health care, demand for elective procedures and mental health assistance continued to rebound from the pause earlier in the year, though providers expressed concerns about the recent surge in Covid-19 cases potentially limiting the volume of such services.
Write to Brian Hershberg at brian.hershberg@wsj.com
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