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Fourth District Beige Book

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Summary of Economic Activity

Economic activity grew moderately on balance across the Fourth District during the current reporting period. Labor markets continued to show signs of tightening, with moderate wage gains. Upward pressure on prices paid and prices received dampened slightly. Consumers continued to favor Internet and mobile shopping over brick and mortar. Motor vehicle sales spiked higher in January. Production picked up at manufacturing plants. Nonfinancial services firms experienced slight revenue growth overall, but demand was strong for IT and data analytics services. The housing market improved, with higher unit sales and higher prices. Commercial builders believe 2017 will be a solid year for their industry, though some expect that 2017 will also be the peak of the current construction cycle. Lending pipelines remain relatively strong.

Employment and Wages

Reports indicated continued tightening in labor markets. Staffing increases were prevalent in the nonfinancial services and the real estate and construction industries. Manufacturing saw a pickup in hiring after reporting flat or lower payrolls since late last summer. Attracting and retaining qualified employees in the skilled trades and technical positions such as engineering and data analytics remain challenging and are fueling wage and benefit increases across industry sectors. One large manufacturer noted that the average time required to fill skilled production or professional job openings has risen from two months to six months. Reports of average wage increases during 2017 are generally expected to fall within the 2 percent to 3 percent range, but there were a few reports of 3 percent to 5 percent increases.


Upward pressure on prices paid and prices received has dampened over the period. Several nonfinancial services providers reported that they are holding their billing rates in check, excluding inflation adjustments, because of pushback from clients when they attempted to raise rates. Similarly, suppliers of healthcare products sold to hospitals indicated that they are holding their prices in check until potential changes in the Affordable Care Act are clearer. A data analytics firm reported that brick-and-mortar retailers generally are experiencing 1.5 percent to 3 percent price declines. One factor driving the declines is competition from their Internet counterparts. An auto dealer noted that the average transaction price is approaching a historic high mainly because of the popularity of light trucks, which have higher sticker prices than cars. He believes that rising interest rates will help temper further sticker price increases. Manufacturers are seeing modest increases in raw material prices, which they attributed to the rising cost of steel products and suppliers finally raising prices after having delayed such increases during the past few years. Wellhead prices for natural gas continue to trend slowly higher, but they remain below the threshold that would significantly boost upstream activity.

Consumer Spending

Reports indicated that Internet retailers are experiencing strong revenue growth, while same-store sales were flat. Although traditional brick-and-mortar retailers are investing in ecommerce, their combined sales have increased at a slower pace than the sales of Internet specialists. That said, a furniture chain reported a significant boost in post-election consumer confidence, which when combined with low interest rates contributed to fourth quarter revenues at a historic high. Strong sales continued into January. Similarly, car dealers reported a spike in unit sales of new and used vehicles during January when compared to those of the same time period a year earlier and when compared to December's transactions. One dealer attributed the increase in sales to an ongoing post election boost in consumer confidence and to rising OEM incentives. Unit sales increases are reportedly around 12 percent, with light trucks dominating sales.


Factory output picked up slightly since our last report. Activity for suppliers to the aerospace, construction, and motor vehicle industries remains elevated. Manufacturers of food service and warehouse automation equipment cited strong growth during 2016. Factors tempering output growth for other manufacturing industries include ongoing weakness in the oil and gas industry and the strong dollar. The auto industry is concerned about the possible impacts of a border-adjustment tax. Auto parts cross borders multiple times prior to final assembly. A border tax policy would likely result in higher sticker prices and an increase in OEM incentives.

Nonfinancial Services

Activity in the nonfinancial services sector grew slightly over the period. Strongest demand was seen in the IT and data analytics, commercial real estate services, and management consulting segments. Several contacts observed that clients were in a wait-and-see mode prior to the presidential election and that demand for services picked up post election. An engineering design firm reported that through much of 2016, clients had been hesitant to move forward with projects, especially large projects. That said, there was a noticeable pickup in project feasibility studies since the presidential election. Similarly, a law partner noted that demand for legal services was stable through most of 2016. However, in the fourth quarter, his firm saw a broad-based uptick in demand. A landscape architecture firm reported a large spike in RFPs during December, especially for nontraditional services. The firm indicated that many of these projects had been postponed for years and that property owners are now feeling confident about the economy.

Real Estate and Construction

Unit sales of new and existing single-family homes for all of 2016 increased almost 7 percent compared to those of a year earlier. The average sales price rose 4.5 percent. Realtors reported that rising consumer confidence and the likelihood of higher interest rates are factors motivating buying decisions. Low inventory of existing homes for sale is helping boost prices. Estimates of single-family construction starts for 2016 were higher in Ohio and eastern Kentucky, compared to those of a year earlier.

Overall activity in the commercial construction market remains elevated. Contacts expect that 2017 will be a solid year for their industry, though some noted that 2017 may be the peak of the current construction cycle and that they anticipate uncertainty surrounding business activity in 2018. General contractors are seeing strong demand from healthcare and industrial customers. The latter group's demand is especially pronounced for warehousing and distribution facilities. An Internet retailer announced plans to construct a major hub in the District. A commercial real estate services contact noted a large post election spike in commercial property transaction fees after business had been flat for most of 2016. General contractors cited two issues that may be dampening multifamily construction: First, uncertainty about the administration's tax policies is causing worry among sellers of affordable housing tax credits. Even though no new tax policies are in place, firms are holding off on purchasing tax credits because of speculation that they won't need to offset their taxes as much as in the past. Second, banks are moving more cautiously when considering financing multifamily developments out of concern that some hotter markets may be overbuilt. As a result, developers are being required to hold equity positions that are about 10 percentage points higher compared to requirements of a couple of years ago.

Financial Services

Bankers reported that lending pipelines remain relatively strong. The outlook is more positive since the presidential election because of an increase in consumer and business confidence that bankers believe will fuel increased demand for their products and services. However, the boost in demand may not occur until after midyear 2017. In contrast, potential changes in US trade policies could restrain the business activities of corporate clients with large global business models. Another reported concern is that non amortizing loans issued to commercial developers prior to the financial crisis are coming due. Already there are some developers turning over collateral rather than repaying loans because many retail properties are worth less than the loan value.

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    InterAgency Collaboration Roundtable

    The InterAgency Collaboration Roundtable is an event for regulatory agencies to network and identify similar work that results in creating more efficient approaches within financial supervision.

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    2017 Policy Summit on Housing, Human Capital, and Inequality

    On June 22 and 23, the Cleveland Fed holds its biennial Policy Summit on Housing, Human Capital, and Inequality. The forum highlights the latest research and field initiatives on topics related to equitable development.