Fourth District Beige Book
The Beige Book—officially known as the Summary of Commentary on Current Economic Conditions by Federal Reserve District—is produced eight times each year prior to Federal Open Market Committee (FOMC) meetings. The information in the Beige Book is gathered primarily through interviews with business people in each District, as well as from Federal Reserve Bank and Branch directors. The publication’s original purpose was to supplement official statistics with more current anecdotal accounts of the economic environment in order to assist policymakers during FOMC deliberations.
Summary of Economic Activity
Business activity grew at a moderate pace in the Fourth District since our last report. Labor markets continued to tighten. Challenges in attracting and retaining qualified workers contributed to wage pressures. Supply chain disruptions furthered upward pressure on input costs. Retailers saw a boost in brick-and-mortar traffic, while new motor vehicle sales strengthened. Manufacturing output grew at a modest pace overall, but production at District motor vehicle assembly plants trended lower. Nonfinancial services and freight transport firms saw moderate to strong gains in activity. Homebuilders and realtors expressed concern about the impact of rising home prices on the first-time buyer market. Activity in commercial real estate remained elevated.
Employment and Wages
A boost in hiring that began in the third quarter continued during the survey period. The strongest activity was found in the construction and nonfinancial services sectors. Retailers reported a seasonal increase in payrolls. The spike in bank hiring late in the third quarter has faded. Staffing changes at banks are now in line with levels seen for most of 2017. A majority of contacts reported they are replacing departed workers and that the share of firms creating new jobs remains high. Attracting and retaining qualified workers, both low- and high-skilled, is a challenge facing many of our contacts across industry sectors. A growing number of firms reported increasing wages more frequently or giving mid-year bonuses as a means of retention. The strongest wage pressures were found in the banking and retail sectors.
Upward pressure on input costs remained strong, while the share of contacts who reported they were increasing selling prices was at its highest level since the end of the second quarter. Higher input costs were widespread in the construction, manufacturing, and nonfinancial services sectors. Construction contractors generally attributed higher materials prices to rebuilding efforts resulting from recent hurricanes and ongoing disputes with Canada over lumber tariffs. Manufacturers cited hurricane-related damage to petrochemical plants as the primary reason for near-term price spikes for a wide-range of petrochemical products. One report indicated that the price of resins has risen 20 percent. Another manufacturer pointed to speculation driving up commodity prices to unsustainably high levels, causing material costs to grow significantly. However, he expects these prices to fall from these high levels. The home building and freight hauling industries reported the highest share of companies raising their selling prices. Several freight haulers reported that FEMA contracted with carriers from across the country to assist in hurricane rebuilding, further limiting freight capacity, which is already tight. The end result is a boost in freight rates and higher labor costs. Once the hurricane damage is overcome, expectations are that freight rates will decline.
Retailers' outlooks were generally more upbeat when compared to their outlooks during recent reporting periods. A few contacts noted that efforts to improve the customers' shopping experiences, including technology upgrades, have resulted in increased store traffic. A specialty apparel chain reported that consumers seemed a little more confident and that the chain's products are resonating with customers. A furniture retailer said that despite higher expectations set earlier in the year, he is still experiencing revenue growth across his stores ranging from 2 percent to 5 percent. Most contacts are cautiously optimistic heading into the holiday shopping season. Year-to-date unit sales through September of new motor vehicles rose 2 percent compared to those of a year ago. That said, auto dealers reported that they are starting to see a slowing in demand after seven consecutive years of gains. One OEM remarked that the outlook for 2018 and 2019 is uncertain, but early projections call for new vehicle transactions nationally to decline about 2 percent from 2017 levels.
Little change was seen in the manufacturing sector during the period, with output largely expanding at a modest pace. The strongest levels of activity were reported by suppliers to the aerospace, consumer electronics, motor vehicle, oil and gas, and residential construction industries. An aerospace executive noted that her industry is reporting strong backlogs and order books and more aggressive production schedules. Steel producers and service centers are seeing rising volume. One service center indicated that volume increased 13 percent when compared to year-ago levels. Year-to-date production through September at District auto assembly plants declined about 20 percent when compared to that of the same period a year earlier. The decrease can be attributed to retooling for two next-generation vehicles and to cutbacks in small passenger car production. Manufacturers reported an increase in spending for plant expansions and product development after spending declines in the third quarter. The outlook by our contacts calls for a gradual pickup in the pace of growth in the near term.
Real Estate and Construction
Year-to-date unit sales through September of new and existing single-family homes increased 1 percent compared to those of a year earlier. The average sales price rose 5 percent. Homebuilders are concerned about rising input costs (land, development, materials, and labor) and the negative impact these costs may have on the first-time buyer market. One builder reported that he can no longer build a starter home for less than $200,000. A realtor noted that although the market is seeing a high number of first-time buyers, the major challenge is a shortage of properties, a limitation which results in multiple-offer situations.
Comments from commercial contractors were mainly unchanged from our last report. Activity remains at elevated levels. Property development was broad based except in retail, for which demand continued to be weak. Backlogs were stable at high levels. The downturn in inquires cited in the third quarter has abated. A moderate increase was reported in selling prices for office and industrial properties during the first nine months of 2017 compared to those of the same period a year ago. During the same time-frame, reports indicated a decline in the number of apartments coming on the market. Apartment rents continued to trend moderately higher.
Business and consumer lending increased during the period, but both segments reported a modest pace of growth. On the business side, M&A financing and CRE loans are healthy, while the market for C&I loans to manufacturers is soft. Indirect auto lending and purchase mortgages remain relatively strong. When asked about why lending is not growing at a more robust pace, one banker reported that because of government uncertainty, customers are moving back to the sidelines. Another contact said that although the economic environment is positive, it is not yet strong. Some bankers mentioned their uncertainty about how much of their market share is being captured by non-bank lenders, especially for C&I loans. Credit quality was stable at a strong level.
Freight volume generally increased beyond what can be accounted for by seasonal factors. Rail and trucking firms cited growth in manufacturing output and the energy sector and a need to deliver supplies for hurricane relief as driving stronger demand. There is concern about the industry's facing capacity constraints by year's end because of electronic logging device requirements and rebuilding from recent hurricanes.
Professional and business services firms saw moderate to strong gains in activity during the period. Engineering and architecture firms attributed the gains to clients' rising capital budgets. One architect reported a two-year backlog. An IT firm remarked that clients continue to migrate toward cloud-based solutions versus premise-based solutions as clients struggle to staff their own IT departments.