Fourth District Beige Book—Complete Report

Date: 07/16/2014


The Fourth District's economy expanded at a modest pace during the past six weeks. New orders and production at District factories grew slowly. Demand for construction services increased slightly compared to earlier in the second quarter. Year-to-date sales of new cars were up moderately from a year earlier, while retailers saw higher same-store revenues compared to a year ago. Since our previous report, coal production and shale gas activity were little changed, freight volume continued to strengthen, and the demand for business and consumer credit moved slightly higher.

On net, payrolls showed a mild increase. Staffing firms provided mixed reports. Job openings were found mainly in energy, healthcare, and IT. Upward pressure on wages is being felt by the construction and freight transport industries. Input and finished goods prices were stable, apart from increases for some metals and agricultural products and a decline in coal prices.


Demand for business credit increased, but at a slower pace than earlier in the second quarter. Requests were strongest for commercial real estate loans. Some pickup was seen in C&I lending to manufacturers. Consumer credit demand was stable. Applications for auto loans remain strong, and households are making greater use of home equity products. Residential mortgage activity was flat. Purchase transactions dominated mortgage applications. Delinquency rates were stable. No changes were made to loan-application standards during the past six weeks. Core deposits held steady or showed modest growth, more so from commercial customers. Spreads between lending and deposit rates narrowed slightly, mainly from the lending side. On balance, banking payrolls were steady: hiring was mainly for staffing new branches or to work in regulatory compliance. We heard a couple of reports about staff cuts in mortgage business lines.


Sales of new and existing single-family homes improved during the past six weeks, when compared to earlier in the second quarter. However, year-to-date purchases of new and existing homes through May were somewhat lower than in 2013. One builder pointed to a lot shortage, which may be a contributing factor to softer sales in his service area. Another builder is concerned about a lot shortage putting upward pressure on home prices. Single-family construction starts across the District are on a slow upward trend and slightly ahead of year-ago levels. New-home contracts were mainly in the move-up price-point categories. A few builders noted a small resurgence in interest from first-time buyers. There was little change in new-home pricing during the past six weeks, although some builders said that they are considering raising prices in the second half of the year. Existing-home prices are trending slowly higher. Homebuilders' outlooks for the remainder of 2014 varied widely.

Nonresidential builders reported little change in their pipelines during the past six weeks, while most said that activity is above year-ago levels. In general, our contacts are seeing an improvement in the number of inquiries and growing backlogs. Demand was strongest from the energy, housing (public and private), retail, and healthcare markets. Most builders are fairly optimistic in their outlook, but they remain concerned about labor issues and tight margins. One builder mentioned that rising margins contributed to a decline in his contract win rate.

Homebuilders reported that banks remain reluctant to finance single-family tract development, while commercial developers indicated that banks and insurance companies are more willing to finance projects, including multifamily developments. Construction-material pricing is projected to rise 2 to 5 percent this year. Highest increases are expected for hardwoods, concrete, and steel. General contractors reported seasonal hiring, including college recruitment, is at a normal rate. Little additional hiring is expected for the remainder of the summer. Craft- workers are difficult to find and are driving up wages (general and subcontractors). Builders reported that a movement of trade workers among competing firms has picked up. They attributed the job changes to offers of higher wages, especially from oil and gas companies.


Reports from District factories indicated that new orders and production were stable or grew at a modest pace during the past six weeks. Strongest demand came from the motor vehicle, oil and gas, and residential construction markets. We heard comments about domestic markets gaining traction, while European sales showed only slight gains. Finished goods inventories decreased since our last report: Several manufacturers noted that the change was in response to rising demand; others cited a rise in raw material prices as a reason to keep inventories low. Our contacts are cautiously optimistic about the domestic outlook, and they project a modest rise in demand relative to current levels in the coming months. Steel shipments grew slightly since our last report, with a further gradual improvement anticipated through year's end. Year-to-date auto production (through May) at District assembly plants is 8 percent higher as compared to 2013. An original equipment manufacturer (OEM) told us that his company's projection for 2014 sales of autos and light trucks industry wide has been revised upward to 16.3 million units.

Capital expenditures are in line with budgeted amounts for the fiscal year. Those intending to increase capital budgets as the year progresses reported that the additional monies would be used for productivity enhancements or research and development. There is concern about the negative impact on capital spending due to the elimination of the 50 percent accelerated depreciation rule. Raw material prices were largely unchanged. However, several manufacturers reported a rise in metal prices (copper, nickel, and steel), which they successfully passed through to customers. Hiring of production workers continued to pick up, but the net gain in payrolls is small. Wage pressures are contained.

Retail Sales

Retail sales during May and into early June were consistent with or moderately higher than those seen earlier in the second quarter. Same-store revenues were generally higher than a year ago. One retailer attributed revenue growth to an ongoing effort to update her product mix, not increased foot traffic. Another observed that consumer confidence and her company's domestic sales are both exhibiting slow growth and that the total value of goods purchased by the typical consumer is on a decline. As a result, the industry is increasing the use of promotions. Retailers are hopeful that third-quarter revenues will be about 1 to 3 percent higher compared to a year earlier. We heard reports about a run-up in dairy and meat prices that is being partially offset by a decline in the prices of some other agricultural commodities. Food inflation this year is expected to be about 3 percent. Otherwise, vendor and shelf prices held steady. Several of our retail contacts noted that additional monies have been added to their capital budgets, mainly for brick-and-mortar projects. Payrolls are stable.

The number of new motor vehicles sold in May declined on a month-over-month basis. However, year-to-date sales through May were moderately higher compared to 2013. Consumer preferences shifted away from smaller, fuel-efficient cars to SUVs and crossover vehicles. New car inventory has increased since our last report. Used-car purchases have fallen off during the past couple of months, but year-to-date sales through May of used vehicles were stronger than for the same time period in 2013. The outlook by dealers for the summer season is positive, and they foresee a slight increase in unit volume year-over-year. Leasing continues to be a very popular alternative for potential new-vehicle buyers. We started to hear reports about dealers investing in showroom renovations and expansions that are not being mandated by OEMs. A need for service technicians is growing, but dealers are having difficulty finding qualified workers.