Federal Reserve: Increases in Hiring & Materials Cost

The “Beige Book” is a compilation of informal soundings of business conditions in each of the 12 Federal Reserve Districts, which are referenced by the name of their headquarters cities. The latest Beige Book, issued Oct. 18, is based on information collected from late August through October 6 and included these comments relevant to construction:
 
U.S. summary: Reports from all 12 Federal Reserve Districts indicated that economic activity increased in September through early October, with the pace of growth split between modest and moderate….Residential construction continued to increase, and growth in commercial construction was up slightly on balance….Many Districts noted that employers were having difficulty finding qualified workers, particularly in construction, transportation, skilled manufacturing, and some health care and service positions. These shortages were also restraining business growth. Firms in several Districts reported that scarcity of labor, particularly related to construction, would be exacerbated by hurricane recovery efforts. Despite widespread labor tightness, the majority of Districts reported only modest to moderate wage pressures. However, some Districts reported stronger wage pressures in certain sectors, including transportation and construction. Growing use of sign-on bonuses, overtime, and other nonwage efforts to attract and retain workers were also reported….Transportation, energy, and construction materials prices increased more rapidly, with some Districts citing effects from hurricanes.

Fourth District: Employment and wages: The past two months saw a boost in hiring across all reporting industries, with the strongest activity seen in construction, banking, and nonfinancial services. Many of our contacts reported creating new jobs during the current cycle, and a majority said that they have replaced departed workers. Greatest demand was for high-skilled workers, such as engineers and those in the building trades, and for low-skilled workers. Demand for the latter group was attributed to difficulties in retaining employees. A building contractor reported that his firm recently hired 15 newly graduated engineers and has openings for 10 additional entry-level engineers, but the firm has difficulty attracting qualified candidates. A chamber of commerce executive said that in order to avoid employee turnover, firms are incentivizing workers with bonuses and higher wages. This strategy has resulted in narrowing the wage gap between low- and middle-wage workers, drawing criticism from middle-wage workers. Competitive market conditions were cited as the primary factor for increasing wages, particularly in the construction and nonfinancial services sectors.
 
Prices: Upward pressure on prices paid increased moderately across industry sectors since our last report. The share of contacts who cited rising input prices is at its highest level since early in the second quarter and was most widespread in the manufacturing and construction sectors.
 
Manufacturing: The pickup in spending for structures and product development that began in the second quarter has weakened.
 
Real Estate and Construction: Demand for new homes is stable across price points. Upward pressure on base prices is increasing because of rising development costs and rising prices for labor and materials. Builders are concerned that rising base prices may force some first-time
buyers out of the market. Year-to-date estimates of single-family construction starts thru August are about 10 percent higher compared to those of a year earlier. Nonresidential construction activity remains at elevated levels. Property development was broad based except for retail, for which demand continued to be weak. Backlogs were relatively stable, although three contacts described their backlogs as very strong and higher than projected. That said, contacts reported a downturn in inquires beginning in the third quarter. One general contractor observed that companies that do site work are seeking jobs. As site preparation is the first phase of a project, this situation is a leading indicator of a potential slowdown in construction activity. Another builder said that in his industry things just sometimes calm down unexpectedly for no particular reason. Office vacancy rates remain stable, and asking rents are slowly rising. A strong increase was reported in selling prices for office properties during the first half of 2017 compared to those of a year ago, while selling prices of industrial properties were stable. Apartment rental increases were moderate.