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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

Aggregate business activity grew at a moderate pace in the Fourth District since our last report, an improvement from the modest growth seen in the prior period. Labor markets expanded, with wage pressures reported primarily in the construction, manufacturing, and energy sectors. Upward pressure on prices paid was prevalent in the construction industry. Freight carriers and construction contractors increased billing rates and reported little pushback. Consumer spending at brick-and-mortar establishments rose slightly, while new motor vehicle sales strengthened. Manufacturing activity grew slightly overall, but production at District motor vehicle assembly plants trended lower. Nonfinancial services firms saw moderate gains in activity. Year-to-date residential real estate unit sales stayed above year-ago levels and selling prices were higher. Activity in the commercial real estate market remained elevated.

Employment and Wages

District payrolls continued to expand, although at a slower pace than in the previous reporting period. Staffing increases were notable in the manufacturing and construction sectors. In contrast, energy firms and brick-and-mortar retailers described payrolls as flat. Several industrial products manufacturers filled openings that had previously been left vacant, or they created new positions because of rising demand and an improving outlook for sustained business growth. Construction contractors reported a shortage of experienced labor, making it difficult to fill newly created positions. To be in compliance with newly enacted electronic logging regulations, freight carriers anticipate adding drivers in order to maintain capacity. Wage pressures were felt primarily in the construction, manufacturing, and energy sectors in response to employee turnover. Mid-year wage increases were widespread in most other industry sectors.

Prices

Similar to the previous reporting period, upward pressure on prices paid eased somewhat when compared to that of the second quarter. Construction contractors saw rising prices for lumber, concrete, and wiring products. A few manufacturers and upstream oil and gas companies cited an upward trend in steel prices. Selling prices for products and services were stable on net. Construction contractors and freight carriers increased billing rates and reported little pushback. Contractors attributed the need to increase rates to rising labor and material costs, and an increase in demand. Some freight carriers reported that they needed to offset higher labor costs and additional equipment purchases associated with electronic logging requirements. Projections call for an additional 500,000 off-lease motor vehicles in 2017 compared to the number in 2016. This increase will drive down used vehicle prices, a situation which will likely have an impact on new vehicle sales. However, OEM incentives continue to rise and are reportedly as high as 15 percent.

Consumer Spending

Consumer spending at brick-and-mortar department stores rose slightly during the period, whereas revenue growth at specialty stores was characterized as flat or lower. Contacts reported that revenue gains from online shopping have not yet offset declines from brick-and-mortar operations. Retailers were satisfied with sales of furniture, food, and women’s apparel. Purchases of electronics products remained soft. Year-to-date unit sales through July of new motor vehicles increased about 3 percent compared to those of a year ago. Auto dealers are concerned about above-normal inventories. Customers are reportedly waiting for higher OEM incentives.

Industrial Production

Overall activity in the manufacturing sector picked up slightly during the period. Factors contributing to the expansion included strong demand for construction materials, rising activity in upstream oil and gas markets, and rising exports to China. The latter was attributed to strong infrastructure spending in that country. In contrast, demand for consumer packaged products and capital goods was weaker than expected. Year-to-date production through July at District auto assembly plants declined more than 16 percent when compared to that of the same period a year earlier. Much of the decline can be attributed to retooling for three next-generation vehicles. Even with the decrease in auto production, some OEM suppliers reported satisfaction with their order books. Allocations of capital monies for plant expansion and product development rose. Many of our contacts are bullish in their outlook for the economy. However, some have tempered their outlook during the past few months, citing slowing demand from the transportation sector.

Reports through July indicated that the number of drilling rigs operating in the District increased significantly compared with that of a year ago. Natural gas output remains at historic highs. Thermal coal production declined because of reduced demand from a warmer-than-average 2016-2017 winter.

Real Estate and Construction

Year-to-date unit sales through July of new and existing single-family homes increased 1.5 percent compared to those of a year earlier. The average sales price rose almost 5 percent. A softening in the new-home market was attributed to rising list prices. Homebuilders cited a shift in buyer preference from homes in the move-up price point categories to those in the lower price points. One builder described this sudden shift as unusual. Slightly higher interest rates were not seen as a deterrent for purchasing a house. Although demand has softened, estimates of single-family construction starts for the first half of the year are more than 5 percent higher compared to those of a year earlier.

Nonresidential real estate activity generally remains at an elevated level. Building contractors reported strong backlogs, though inquiries are beginning to show signs of slowing. The highest demand was for commercial property development, including office buildings, and public infrastructure projects. Office vacancy rates are 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. Reports indicated a slowing in the construction of multifamily housing, as lenders and investors are considering pulling back from commitments to multifamily development projects. Apartment rental increases were described as moderate to strong.

Banking

Reports on commercial lending were more upbeat than in recent reporting cycles. Strongest demand was for CRE loans. Several bankers noted that customers have sufficient confidence in the current business climate to self-finance capital projects. Skittishness related to the political climate and rising competition from nonbank sources were cited as factors holding back more robust loan growth. Consumer lending was largely stable. Purchase mortgages were in high demand, while auto lending softened. Bankers reported generally improving loan quality. Loan application standards were little changed other than some tightening in auto lending.

Nonfinancial Services

Freight volume expanded along seasonal trends during the past couple of months and was relatively stable compared to that of the same period a year ago. Several contacts expressed concern about the effects of electronic logging on trucking capacity.

Professional and business services firms reported moderate gains in activity during the period. Strongest demand was seen by management consulting and software and IT services firms. Factors contributing to strong demand for the latter group include clients’ concerns about cyber-security and data protection.