The U.S. economy grew modestly during July and August even as the labor market remained tight and drought conditions permeated the Midwest, according to the Federal Reserve’s Beige Book.
Job growth was limited amid ongoing worker shortages. Still, unemployment last month remained low at 3.5 percent while labor costs stayed high in most districts, having exceeded expectations during the first half of 2023. In the Chicago region, employment increased as contacts expect a similar pace of increases over the next year.
Contacts in the Kansas City region reported annual wage increases of between 6 and 10 percent during the first half of the year. In the Minneapolis region, a recent survey found that 60 percent of employers had raised wages by at least 3 percent over the last 12 months.
“Many also said hiring had become easier, and a staffing agency noted a decline in worker turnover,” the Fed stated. “Manufacturers were responding to slowing demand by using fewer temporary workers and cutting workers’ hours. Wage and benefit costs rose moderately, though several contacts noted a slowdown in the pace of wage increases.”
Financial conditions tightened in the Chicago region as bond and equity market asset values fell slightly and volatility edged up. Business loan demand fell while loan quality slightly improved. “Consumer loan quality deteriorated some, with multiple contacts noting an increase in credit card debt and one reporting that delinquencies for auto and card debt had risen back to pre-covid levels,” the Fed stated. “Consumer loan rates were moderately higher and lending standards tightened moderately.”
Banking conditions were stable in the St. Louis region as credit card loan demand and commercial, industrial and mortgage lending demand all fell from the previous quarter. Banks reported strong credit standards and quality with minimal past-due loans, charge-offs, collections or foreclosures.
Loan demand weakened in the Kansas City region as bankers adopted a more cautious approach amid high interest rates and economic uncertainty. “Several contacts also stated that credit standards for CRE loans had tightened in light of reduced risk appetite and expected deterioration in credit quality,” the Fed stated. “Deposit levels stabilized during the last couple of months, while the funding mix continued to shift from checking accounts to time deposits, driving up overall bank funding costs.”
Agricultural conditions weakened in the Minneapolis region as more than a third of respondents said farm income fell in the second quarter from the previous year. Drought conditions continued to wreak havoc in the Chicago, Kansas City and Minneapolis regions. In the Chicago region, expectations for farm income were mainly unchanged for this year but remained much lower than in 2022 even as farmland prices had increased from a year ago. A drop in input costs, especially fertilizers, increased net income prospects for next year.
Manufacturers reported being able to better fill existing orders as supply chain delays had eased. Manufacturing and real estate activity fell in the Minneapolis region. In the St. Louis region, manufacturing activity decreased as firms in both Arkansas and Missouri reported decreases in new orders and production but increases in inventories.
“New orders were stable or declined in most districts, and backlogs shortened as demand for manufacturing goods waned,” the Fed stated.