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
Economic activity in the Fourth District expanded at a moderate pace since our last report. Labor markets expanded broadly, with employers looking for low- and high-skilled workers. Wage pressures were felt primarily in the construction and nonfinancial services industries. Upward pressure on prices paid increased across industry sectors; however, producers and service providers found it challenging to raise selling prices. Consumer spending at retail establishments was little changed, 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 gains in activity. Year-to-date residential real estate sales stayed above year-ago levels. Base prices for new homes rose. Activity in the commercial real estate market remained elevated.
Employment and Wages
The past two months saw a boost in hiring across all reporting industries, with the strongest activity seen in construction, banking, and nonfinancial services. Many of our contacts reported creating new jobs during the current cycle, and a majority said that they have replaced departed workers. Greatest demand was for high-skilled workers, such as engineers and those in the building trades, and for low-skilled workers. Demand for the latter group was attributed to difficulties in retaining employees. A building contractor reported that his firm recently hired 15 newly graduated engineers and has openings for 10 additional entry-level engineers, but the firm has difficulty attracting qualified candidates. A chamber of commerce executive said that in order to avoid employee turnover, firms are incentivizing workers with bonuses and higher wages. This strategy has resulted in narrowing the wage gap between low- and middle-wage workers, drawing criticism from middle-wage workers. Competitive market conditions were cited as the primary factor for increasing wages, particularly in the construction and nonfinancial services sectors.
Upward pressure on prices paid increased moderately across industry sectors since our last report. The share of contacts who cited rising input prices is at its highest level since early in the second quarter and was most widespread in the manufacturing and construction sectors. Several manufacturers reported rising prices for ferrous metals, increases which they attributed in part to domestic trade policies. For the most part, these higher input prices were passed through to the end user. Prices for natural and synthetic fabrics used in apparel manufacturing remain at a relatively low level. Selling prices rose slightly overall during the current cycle, and the share of companies increasing prices for their products or services was lower than in the first half of 2017. Several manufacturers and service providers reported that close scrutiny by customers’ procurement officers combined with global competition is making it difficult for them to raise their selling prices.
Retailers reported little change in consumer spending during the period. Department store chains are seemingly performing better than their specialty counterparts. One department store chain cited increased demand, which was qualified by citing an increase in traffic. A fast food chain reported much better results because of the introduction of new products and technology. An apparel retailer believes the removal of the border-adjustment tax proposal from the federal tax reform debate has eliminated an element of uncertainty and risk to the retail industry. Year-to-date unit sales through August of new motor vehicles rose almost 3 percent compared to those of a year ago. Auto dealers were concerned about above-normal new-vehicle inventory, which they attributed to an imbalance in supply and demand.
Activity in the manufacturing sector picked up from that of the previous reporting period; however, the overall pace of growth was modest. Several of our contacts cited confidence in the economy on the part of customers as the primary contributor to a rise in new orders. Other factors cited as contributing to the expansion in output include a strong housing market and strengthening in the oil and gas and primary materials industries. A few contacts reported an increase in orders for capital goods. Demand for consumer packaged products remained below projections. Year-to-date production through August at District auto assembly plants declined about 18 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. The pickup in spending for structures and product development that began in the second quarter has weakened. However, contacts reported increased spending on IT equipment and services. Many manufacturers remain bullish in their outlook for the economy.
Real Estate and Construction
Year-to-date unit sales through August of new and existing single-family homes increased almost 2 percent compared to those of a year earlier. The average sales price rose 5 percent. Demand for new homes is stable across price points. Upward pressure on base prices is increasing because of rising development costs and rising prices for labor and materials. Builders are concerned that rising base prices may force some first-time buyers out of the market. Year-to-date estimates of single-family construction starts thru August are about 10 percent higher compared to those of a year earlier.
Nonresidential construction activity remains at elevated levels. Property development was broad based except for retail, for which demand continued to be weak. Backlogs were relatively stable, although three contacts described their backlogs as very strong and higher than projected. That said, contacts reported a downturn in inquires beginning in the third quarter. One general contractor observed that companies that do site work are seeking jobs. As site preparation is the first phase of a project, this situation is a leading indicator of a potential slowdown in construction activity. Another builder said that in his industry things just sometimes calm down unexpectedly for no particular reason. Office vacancy rates remain 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, while selling prices of industrial properties were stable. Apartment rental increases were moderate.
On balance, business lending grew slightly over the period. Community bankers were more upbeat in their assessment of credit markets than were their counterparts at large banks. A few large bankers reported that loan demand is softening because of political uncertainty, with customers taking a wait-and-see approach. Consumer lending was largely stable. Fixed-rate purchase mortgages were in high demand, while credit card lending has softened, a situation one banker attributed to seasonal factors. Bankers reported improving loan quality. Loan application standards were little changed other than some easing in auto lending.
Freight volume generally increased beyond what can be accounted for by seasonal factors. Two carriers described intermodal as very strong. Other contacts reported increased volume because of a surge in e-commerce and an expansion in the oil and gas industry. 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 reported moderate gains in activity during the period. Strongest demand was seen by management consulting and IT services firms. A majority of our contacts reported that their customers are bullish on the economy and as a result are willing to invest more in technology.