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.
Aggregate business activity in the Fourth District grew at a modest pace since our last report. Manufacturing output continued to trend slowly higher on balance. The housing market improved, with higher unit sales and higher prices. Nonresidential contractors reported favorable results for 2015, and they expect these will carry through 2016. Results for the post-holiday shopping period at general merchandise retailers were mixed; auto dealers saw higher unit volume on a year-over-year basis. The demand for credit moved slowly higher. Oil and gas extraction and coal production declined. Freight volume trended lower.
Payrolls expanded on balance during the past six weeks, especially in the manufacturing, construction, and banking sectors. Reports indicated an ongoing tightening in labor markets. Job churning and wage pressure were most evident in the lower-skilled and service technician segments. Staffing firms reported an increase in the number of job openings and placements, primarily in healthcare and manufacturing. Overall, input and finished-goods prices were steady other than adjustments made for commodity price fluctuations.
Manufacturing output continued to trend slowly higher on balance over the period. Demand for consumer and intermediate goods was stronger than for industrial products. Activity for suppliers to the motor vehicle, construction, and aerospace industries remains elevated, but the pace of growth has slowed. Key factors tempering output include a strong dollar, low commodity prices, aggressive competition from foreign producers, and softness in the energy sector and in some emerging market economies. Auto production at District assembly plants for all of 2015 was on par with 2014 levels and near historic highs. Although the steel industry remains depressed, three of our contacts noted a slight improvement in January volume compared to December's. Capacity utilization showed a moderate increase over the period. Contacts had differing views about the outlook. Manufacturers who sell to industrial customers generally anticipate flat or sluggish growth. Otherwise, our contacts expect that business activity will expand during 2016.
Capital spending budgets increased slightly over the period. Monies were allocated primarily for new equipment and maintenance projects. Finished-goods prices held steady for the most part, though a few manufacturers reduced their prices in response to lower demand or declines in raw material prices. Others reported widening margins because of lower energy costs. On balance, manufacturing payrolls expanded moderately across job segments. Those cutting employment cited a need to preserve margins. Cost-of-living increases for production workers averaged 2 percent to 3 percent.
Real Estate and Construction
Sales of new and existing single-family homes for all of 2015 rose 8.5 percent compared to those of a year earlier. The average sales price increased by more than 4 percent. Several builders and real estate agents commented that the unusually mild weather is having a positive impact on sales and that the threat of higher interest rates is providing consumers with the impetus to buy. Estimates of single-family construction starts rose moderately across most regions of the District. New-home contracts remain concentrated in the move-up price point categories. Condo sales are reportedly increasing. Most builders reported increasing home prices over the period, a circumstance which they attributed to rising labor, material, and land development costs and limited inventory. Homebuilders and real estate agents expect little change in market conditions in the coming months.
Nonresidential contractors reported very favorable results for 2015, and they expect 2016 will be moderately stronger. Demand is being driven by healthcare and higher education and to a lesser degree by manufacturing, commercial real estate (excluding office buildings), and multifamily housing. Some reports indicated that vacant industrial space is being filled at a faster pace and that this is driving up asset values. Over the past several months, many general contractors were able to increase their billing rates with little pushback. These higher rates enabled them to cover rising labor costs and to build margins.
About half of our contacts announced increases to this year's capital investment budgets. Monies are being allocated primarily for new equipment and facility expansion. General contractors reported rising prices for concrete, glass products, and plumbing supplies. Prices declined for commodity-based products such as shingles and wiring. Otherwise, materials costs were stable. Construction payrolls rose moderately across job segments since our last report. Hiring is expected to pick up as the spring construction season approaches. Subcontractors remain very busy. They are being challenged by a labor shortage, and, as a result, many are selective when bidding. We heard a couple of reports about subcontractors abandoning a project mid-cycle because more lucrative opportunities became available. In order to widen margins, most subcontractors are increasing their rates, and some are not passing through reductions in materials prices.
Reports on post-holiday sales at retail outlets were mixed. Consumers seem reluctant to take on additional debt, especially for large-ticket items. One contact suggested this may be attributable to financial market volatility. Apparel sales, especially cold-weather items, were lower. In contrast, sales of electronics were up. Restaurateurs experienced moderate to strong revenue growth during the fourth quarter of 2015 when compared to prior years' results. Our contacts credited low energy prices and expanded menu offerings for the increase. The retail environment is changing rapidly. Chains are allocating larger shares of their capital budgets to technology and repositioning existing stores to be more attractive to Millennials. Underperforming assets are being shuttered at a faster pace. Vendor and shelf prices were fairly stable, though supply-side prices for selected food products and cotton apparel declined. Two contacts noted they are working on simplifying supply chains to become more cost effective. Retailers are facing stiff labor competition. Higher turnover combined with a smaller pool of qualified workers is driving up wages.
Sales of new motor vehicles for all of 2015 were more than 2 percent higher compared to those of a year earlier. This growth has carried over into January. Purchases of light trucks and SUVs continue to dominate the market. A few reports indicated that sales of luxury brands are on the decline. New-vehicle transactions in 2016 are expected to remain elevated, though some dealers believe the pace of growth will level out. Dealers are experiencing margin erosion, which they attributed to OEM demands for increased capital expenditures and rising regulatory compliance costs. Payrolls held steady over the period, but the market for sales and service personnel is tight, putting upward pressure on wages.
Business and consumer lending expanded modestlysince our last report. On the commercial side, credit was used mainly for financing acquisitions and to fund CRE projects. However, the pace of growth for CRE loans is slowing. Bankers reported that businesses are using their own liquidity to finance capital projects and to pay down existing lines. That said, our contacts are fairly confident about expanding loan portfolios in the first half of the year. In retail banking, the slow downward trend in auto lending continued as consumers increasingly turn to non-bank competitors for credit. Mortgage activity was seasonally lower, while drawdowns on home equity products picked up. Credit card usage was down slightly. Little change was reported in loan-application standards and delinquencies. Despite customers' paying down loans, core deposit balances remain very strong. Capital budgets increased slightly over the period. Spending was primarily for technologies, especially mobile and, to a lesser extent, IT upgrades and regulatory compliance requirements. Banking payrolls moved modestly higher in aggregate. Newly created jobs in commercial lending and regulatory compliance offset declines in retail banking.
The number of drilling rigs operating in the Marcellus and Utica Shales trended lower over the period and is currently 62 percent below its peak level recorded late in the fourth quarter of 2014. Nonetheless, regional natural gas output remains at historic highs. Reduced demand owing in part to unusually warm weather has boosted inventories and put further downward pressure on wellhead prices. Prices for natural gas liquids are also declining. Significant layoffs in the upstream segment continued. Reports indicate that investment continues in pipeline and mid-stream projects and that the refining (oil) segment is doing well. Coal production is lower. Not much change is expected across the sector during 2016.
Reports indicated that on net, freight volume contracted further over the period. This situation was attributed primarily to softness in the manufacturing and energy sectors and to high inventory levels. However, two contacts reported that conditions are beginning to stabilize. Some carriers saw a boost in volume related to select consumer products, motor vehicles, and building materials and hardware. The outlook by our contacts has improved since the previous cycle, and a majority of contacts now expect that business will expand in the upcoming months. Although diesel fuel prices have declined (fuel surcharges have been largely eliminated), several contacts reported negotiating higher shipping rates. Rate adjustments were needed to cover rising costs for labor and new equipment. Some reductions were taken to capital investment budgets. Spending is mainly for maintenance projects and equipment: replacement and, to a lesser degree, adding capacity. On balance, freight payrolls were flat. A reduction in drivers was offset by an increase in service technicians. Difficulties finding qualified technicians are putting upward pressure on wages.