Going into this report, I was particularly interested in several possible problems. The first was prices -- or, more specifically, how were businesses coping with the now high state of commodity prices? Here is the general overview of the situation:
Input prices rose in most Districts, particularly for cotton and other agricultural commodities, petroleum-based products, and industrial metals. In addition, shippers added fuel surcharges in several Districts. Boston, Cleveland and Atlanta cited increasing cost pressures, and some manufacturers in Boston were raising their selling price to pass costs along to customers. The ability to pass through increases, however, varied in both the Chicago and Atlanta Districts, with manufacturers generally being more successful than retail or construction firms. Contacts in the San Francisco District reported a limited ability to pass through higher input prices on anything other than food and gasoline. Kansas Cited stated that more manufacturers and retailers expected to raise prices in coming months.Despite widespread price increases, passing on increases is not as easy as thought. While manufacturers in general have an easier time raising selling prices, consumers are much more price sensitive, preventing retailers from passing on price increases in a large way. In addition, there appears to be little impact of high food and gas prices on core prices -- which was confirmed by the latest CPI report.
Finally, the ability to pass on prices is also industry specific; real estate companies are dealing with a declining price environment, preventing them from passing on higher commodity prices. This is not the case, however, with anyone in the shipping business as they are already adding fuel surcharges. While price pressures are clearly increasing; but we are not a danger levels yet -- not by a long shot.
Secondly, I was very concerned about consumer spending, especially in light of high gas prices. This is what the report had to say about this part of the economy:
Consumer spending picked up modestly across most Districts since the last report. Consumers were shopping for necessities and looking for lower-priced options or promotional items in the Boston, Chicago, and San Francisco Districts. New York reported strong retail sales in February and March, but noted weaker sales at two major retail chains in New York. Retailers in the Cleveland District reported higher sales relative to a year ago, although a few contacts cited considerable stress in the low- to mid-market segments. Richmond reported weak sales, including for big-ticket items, and Boston received mixed sales reports. Big-ticket sales, particularly for home furnishings, picked up in the Boston, Philadelphia, and Dallas Districts, but remained subdued in the San Francisco District.
Automobile sales rose in most Districts. Dallas noted higher foot traffic at auto dealers and Cleveland, Atlanta, and San Francisco indicated that improved availability of credit helped to boost car sales. In the Richmond District, however, vehicle sales were generally unchanged or sluggish, while dealers in the Chicago District reported a slight decline. Contacts in several Districts expressed concern about potential supply chain disruptions due to production problems in Japan.
Consumer spending is increasing at a low rate. However, consumer behavior is clearly being influenced by the currently situation probably from gasoline prices; they are looking for cheaper alternatives and appear to be price sensitive. Also note that the "low to middle market segments" were experiencing some stress. Car sales were surprisingly strong. Much of the reporting on this area of the economy is mentioning pent-up demand as an motivator, which I believe is a plausible explanation. There is also a fair amount of writing stating that consumers are looking for more fuel efficient cars.
Finally, there is employment:
Most Districts reported that labor market conditions were generally stronger than in their last reports. New York, Richmond, Chicago, Minneapolis, Kansas City, and Dallas all noted increased employment activity, while Boston and Atlanta reported modest or gradual improvement. However, Philadelphia, Cleveland and San Francisco mentioned limited or delayed hiring, while labor market conditions were mixed in the St. Louis District. Boston, New York, Cleveland, Richmond, and Dallas cited noticeable improvements in the manufacturing sector, and Boston and Kansas observed increased labor demand in the technology sector. New York, Cleveland, Richmond, Chicago, and Minneapolis received upbeat reports from staffing agencies. New York said that a major employment agency experienced a marked pickup in hiring activity in March, describing it as "the best month in years." A staffing contact in the Cleveland District noted moderate growth in the number of new job openings, with vacancies concentrated in health care, energy and professional business services. A large staffing firm in the Chicago District reported solid growth in billable hours and a substantial increase in permanent placement and recruiting activity, while contacts in the Philadelphia District were inclined to delay additions to permanent or temporary staff. Employers in the Boston, Richmond, Chicago, and Kansas City Districts said that they were experiencing difficulty in recruiting highly specialized workers. Despite signs of improvement in most labor markets, St. Louis and Minneapolis reported examples of layoffs in the manufacturing sector of their regions.
The general tone of the overview was better; staffing companies are reporting increases, job openings are increasing, billable hours are up etc... One thing that has popped up in several reports is that some industries are having a hard time finding workers. However, the general tone was positive.