The Fed just released its latest issue of the Beige Book, a collection of economic anecdotes collected by the Federal Reserve's regional banks.
According to the report, the Fed saw "modest to moderate" growth across the country, which was largely expected by economist.
"Consumer spending rose in most Districts, reflecting, in part, strong demand for automobiles and housing-related goods," they said.
However, in a worrisome sign, lending activity weakened. Financial conditions for consumers and businesses tend to be a leading indicator of jobs and economic activity. Here is the Fed's exact words:
Lending activity weakened a bit, and several Districts reported less-favorable conditions than in the preceding reporting period. Most Districts indicated no better than modest growth. Loan growth in the Atlanta, Chicago, St. Louis, and San Francisco Districts was slower than in the previous reporting period. Kansas City reported a decline in lending, reversing slight growth earlier in the summer. Several Districts characterized business lending as largely flat. Chicago reported that recent interest rate increases likely were depressing commercial investment. However, Kansas City noted that expectations for better economic conditions and stronger profit growth had offset any effects of rate increases on business loan demand. Demand for mortgage refinance loans declined in the New York, Philadelphia, Cleveland, and Richmond Districts. By contrast, purchase mortgage lending continued to grow moderately in most Districts, although San Francisco noted that applications have dropped a bit in some areas of that District. In the Atlanta District, increases in home values generated a surge in second mortgages, and Philadelphia and Cleveland reported modest increases in demand for home equity lines of credit.
Lending standards were largely unchanged, while credit quality improved. Reports indicated little change in standards across all lending categories. However, a few Districts commented that stiff competition for high-quality commercial borrowers was eroding loan volumes at banks that maintained prudent interest rates and terms. New York reported widespread declines in delinquency rates, especially for consumer loans and home mortgages, while Philadelphia, Cleveland, Richmond, and Kansas City all reported general improvement in loan quality.
"For most industries and occupations, hiring held steady or increased somewhat in most Districts," they said. "Hiring in manufacturing rose modestly."
Here's the full text of the Beige Book:
Summary of Commentary on Current Economic Conditions by Federal Reserve District
Reports from the twelve Federal Reserve Districts suggest that national economic activity continued to expand at a modest to moderate pace during the reporting period of early July through late August. Eight Districts characterized growth as moderate; of the remaining four, Boston, Atlanta, and San Francisco reported modest growth, and Chicago indicated activity had improved. Consumer spending rose in most Districts, reflecting, in part, strong demand for automobiles and housing-related goods. Activity in the travel and tourism sector expanded in most areas. Demand for nonfinancial services, including professional and transportation services, increased slightly on net. Manufacturing activity expanded modestly. Residential real estate activity increased moderately in most Districts, and demand for nonresidential real estate gained overall. Lending activity was mixed. Lending standards were largely unchanged, while credit quality improved. Demand for agricultural products was strong during the reporting period, but growing conditions and production in some areas were somewhat weak as a consequence of extreme weather. Demand for natural resource products was stable or up slightly, and extraction increased in anticipation of further demand growth.
For most occupations and industries, hiring held steady or increased modestly relative to the prior reporting period. Upward price pressures remained subdued, and prices increased slightly during the reporting period. Wage pressures continued to be modest overall.
Consumer Spending and Tourism
Reports indicated that consumer spending rose in most Districts. A few Districts mentioned that back-to-school sales contributed to overall consumer spending growth. Districts reported retail sales generally grew moderately in Boston, Kansas City, and Dallas; sales were mixed in New York; and sales grew more modestly in Philadelphia, Atlanta, Chicago, St. Louis, Minneapolis, and San Francisco. Cleveland noted that sales came in below many retailers' expectations, and Richmond indicated that sales revenues weakened. Boston noted that consumer confidence improved, while New York reported that it retreated a bit. According to reports from Boston, some retailers experienced robust demand gains, with "year-over-year comparable store sales increases between 4 and 5 percent." Many Districts noted strong demand for home furnishing and home improvement items. However, reports from several Districts indicated that consumers remained cautious in their purchases and highly price-sensitive. For example, Philadelphia observed that consumers engaged in "price-shopping," as "sales of children's apparel were stronger at outlets than at traditional malls."
Attractive financing conditions and pent-up demand supported a robust pace of automobile sales in most Districts. New York noted that sales of high-end brands were especially robust. Richmond reported that one dealership had its best sales month ever, and sales at another dealership doubled relative to twelve months earlier. Used vehicle sales were strong in Chicago, Kansas City, and San Francisco but a bit soft in New York. New car inventories rose or remained high in Cleveland and San Francisco, but dealers were generally satisfied with their inventory positions; by contrast, Minneapolis reported sales were constrained at some dealerships due to a lack of inventory. Reports from dealerships across the nation were optimistic about demand growth for new and used automobiles for the remainder of the year.
Many Districts pointed to solid gains or high levels of travel and tourist activity, with pickups evident in both the business and leisure segments. Travel and tourism activity expanded overall in the Boston, Philadelphia, Richmond, Atlanta, Minneapolis, and San Francisco Districts. Relative to the same period a year earlier, Richmond and Minneapolis reported that the number of camping permits and visitors at state and national parks in their Districts increased substantially. New York reported that business at Broadway theaters picked up since the previous reporting period, but Boston highlighted low attendance at some museums. New York and Kansas City both reported that some hotels experienced slightly lower occupancy rates, which may be a result of cutbacks in government travel. A few Districts indicated that business travel activity had also expanded.
Nonfinancial Services
Demand for nonfinancial services improved modestly overall since the previous Beige Book. Adjusting for seasonal fluctuations, providers of various professional and business services such as accounting, consulting, information, transportation, and legal services generally expanded their activities according to reports from Philadelphia, Richmond, St. Louis, Minneapolis, and Dallas. Providers of staffing services in the Boston and New York Districts reported improved business conditions. Several Districts noted increased demand at restaurants, although San Francisco was an exception, with reports from parts of the District indicating that demand had eased. Health-care organizations in the Richmond, St. Louis, and San Francisco Districts reported soft demand for various health-care services. Boston noted that sales of technology services to businesses and consumers were a bit weaker than expected, and reports from St. Louis indicated that some information technology firms may downsize their workforces. Cleveland indicated that ground cargo volumes were strong; Dallas reported an increase in railroad volumes but a decline in small parcel volumes; and Atlanta observed a decrease in overall trucking volumes. Both Cleveland and Atlanta noted a short supply of truck drivers as a consequence of new hours-of-service regulations. Air freight tonnage ran slightly above year-ago levels for the Atlanta District but was unchanged over the past six weeks for Dallas.
Manufacturing
Manufacturing activity expanded modestly during the reporting period. Kansas City noted a slight contraction in the previous reporting period but indicated that manufacturing activity had expanded moderately in recent weeks. Cleveland and Minneapolis also reported a moderate expansion, although Minneapolis specified that the pace of growth was uneven across District states. Atlanta noted a decrease in the pace of growth as indicated by modest decreases in new orders and production. Several Districts, including Philadelphia, Richmond, Atlanta, Chicago, Kansas City, and San Francisco, expressed that demand for inputs related to autos, housing, and infrastructure were strong. Chicago highlighted the auto industry as a main source of strength for that District's overall manufacturing sector, and contacts there expect demand for heavy and medium trucks to ratchet up further and to support growth in overall manufacturing for the remainder of the year. By contrast, Cleveland was the only District to report that auto production activity declined, although reports specified that it was a normal seasonal pattern and sales were up relative to twelve months earlier. In the Richmond District, a lumber company purchased new equipment to expand its production; and in Chicago, demand for construction equipment and materials continued to strengthen. Philadelphia reported some increased demand related to ongoing repairs of infrastructure damaged during Superstorm Sandy last year. Reports from San Francisco indicated that shipments of steel products used in nonresidential construction continued to increase, and reports from Chicago indicated that steel output grew at a moderate pace. Boston and San Francisco noted increased demand for semiconductors. High-tech manufacturing firms in the Dallas District noted that demand was stable, and, while Kansas City District firms reported that sales dipped, contacts there expect sales to bounce back in the next three months. In general, contacts in most Districts expressed optimism about a near-term pickup in overall manufacturing activity. Production in the defense industry was mixed across Districts. Contacts in the Boston District reported minimal direct effects of the federal sequestration, although they were concerned about the prospect of larger effects in the fourth quarter. On the other hand, defense firms in the Kansas City and San Francisco Districts reported that the effects of the sequestration have already been passed through to actual reductions in production.
Real Estate and Construction
Activity in residential real estate markets increased moderately. The pace of sales of existing single-family homes continued to increase moderately in most Districts. Sales activity in New York City's co-op and condominium market was described as unusually strong in July and August, and the Cleveland District reported that year-to-date sales of existing single-family homes were up substantially relative to the same period last year. Reports from several Districts suggested that rising home prices and mortgage interest rates may have spurred a pickup in recent market activity, as many "fence sitters" were prompted to commit to purchases. Sales of new single-family homes stabilized during the past few months in the Cleveland District after accelerating earlier in the year. New home sales declined slightly in parts of the Philadelphia and Richmond Districts in July. Philadelphia conveyed that some borrowers apparently preferred to lock in a mortgage rate for an existing home rather than wait for a new home to be completed and chance higher mortgage rates. Home prices climbed in most Districts. Richmond and Boston reported that houses in some areas were staying on the market fewer days and increasingly receiving multiple offers. New York noted that bidding wars were common in the Buffalo area. Many Districts reported that limited inventories of desirable properties contributed to upward price pressures. Single-family home construction was strong in the Minneapolis and Dallas Districts, and Chicago reported that a number of builders are planning new developments to begin later this year. However, several Districts noted constraints on the construction of single-family homes. San Francisco pointed to shortages of construction workers. In the Kansas City District, some building materials, such as drywall and roofing shingles, were in short supply.
Demand for nonresidential real estate increased. Office vacancy rates and other indicators in markets for office space improved modestly in the major metropolitan markets in the New York, Richmond, and St. Louis and Districts. Rents for Class B office space in Manhattan have risen more than 10 percent over the past twelve months. Demand for commercial real estate showed strong growth in the Dallas District and moderate growth in the Minneapolis District. Both Districts reported new plans for construction of industrial space. Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Kansas City, and San Francisco reported modest growth in demand for commercial real estate. Philadelphia highlighted a shift in recent leasing activity toward larger commercial spaces. The Boston, Philadelphia, Cleveland, Atlanta, Dallas, and San Francisco Districts all reported increases in construction of multifamily residential properties.
Banking and Finance
Lending activity weakened a bit, and several Districts reported less-favorable conditions than in the preceding reporting period. Most Districts indicated no better than modest growth. Loan growth in the Atlanta, Chicago, St. Louis, and San Francisco Districts was slower than in the previous reporting period. Kansas City reported a decline in lending, reversing slight growth earlier in the summer. Several Districts characterized business lending as largely flat. Chicago reported that recent interest rate increases likely were depressing commercial investment. However, Kansas City noted that expectations for better economic conditions and stronger profit growth had offset any effects of rate increases on business loan demand. Demand for mortgage refinance loans declined in the New York, Philadelphia, Cleveland, and Richmond Districts. By contrast, purchase mortgage lending continued to grow moderately in most Districts, although San Francisco noted that applications have dropped a bit in some areas of that District. In the Atlanta District, increases in home values generated a surge in second mortgages, and Philadelphia and Cleveland reported modest increases in demand for home equity lines of credit.
Lending standards were largely unchanged, while credit quality improved. Reports indicated little change in standards across all lending categories. However, a few Districts commented that stiff competition for high-quality commercial borrowers was eroding loan volumes at banks that maintained prudent interest rates and terms. New York reported widespread declines in delinquency rates, especially for consumer loans and home mortgages, while Philadelphia, Cleveland, Richmond, and Kansas City all reported general improvement in loan quality.
Agriculture and Natural Resources
Demand for agricultural products expanded during the reporting period, although production activity was limited by extreme weather in some areas. Droughts or dry weather in the Chicago, Kansas City, and Dallas Districts constrained farming activity, but some growing areas within the Chicago and Dallas Districts were relieved by much-needed rainfall. By contrast, extremely wet conditions led to delayed planting and reduced yields for some crops in the Richmond and Atlanta Districts. Kansas City noted that wheat production was below average and corn crops were threatened by disease, and Atlanta and Dallas indicated that the cotton crop was smaller than anticipated. Chicago noted that, despite the dry weather, corn and soybean crops were in better condition than they were during the drought last year. Meanwhile, the St. Louis District anticipates robust production activity, with corn crop yields expected to increase substantially over last year. San Francisco noted that demand was generally strong for most crop and livestock products, and Atlanta found that poultry farming and fruit production were robust.
For producers of natural resource products, demand was mostly steady, while production and extraction activity rose. San Francisco reported a modest decline in demand for some oil products, and Dallas reported stable drilling activity at a high level. Contacts in San Francisco and Dallas expect near- to medium-term oil-related sales and production activity to pick up; contacts in Dallas and Atlanta expect drilling activity in the Gulf of Mexico to increase as demand continued to grow. Richmond and Kansas City reported that the number of natural gas rigs increased, but coal production in the Cleveland, Richmond, St. Louis, and Kansas City Districts was below year-ago levels. Minneapolis reported upgrades to a nuclear power plant and development of oil sands production facilities, and Cleveland noted that unconventional drilling activity increased. Mining activity was flat in the Minneapolis and Richmond Districts.
Employment, Wages, and Prices
For most industries and occupations, hiring held steady or increased somewhat in most Districts. Hiring in manufacturing rose modestly. St. Louis reported increases in employment at a variety of manufacturing firms connected to the auto industry or the home construction industry. Boston, Richmond, and Minneapolis reported shortages of some types of skilled manufacturing workers. Hiring increased for selected services occupations. Increases in demand for information technology workers were widespread. Hiring increased for workers in accounting and health services occupations in several Districts. Retail employment gains were limited. Atlanta reported slight employment increases in Georgia and Florida, and Dallas reported gains in oil and gas producing areas. Cleveland noted that retail employment increases were limited to new stores. Boston and Richmond reported that temporary workers are increasingly being offered permanent employment. A health-care staffing firm in the Boston District reported a 30 percent increase in permanent placements this year. Similarly, a staffing firm in the Dallas District reported "near-record" levels of direct hiring by health-care and engineering clients.
Wage pressures remained modest overall. The Boston, Philadelphia, Cleveland, Atlanta, Dallas, and San Francisco Districts reported that wage pressures were largely subdued. Cleveland and Dallas highlighted that, overall, wage pressures at homebuilding and other construction-related firms were contained. New York reported that some firms have become increasingly willing to negotiate salaries, although pay rates have not escalated significantly. Reports from a few Districts highlighted significant labor supply constraints and, in some cases, large compensation increases for workers with specialized skills in selected sectors, including the construction and high-technology sectors in Atlanta and Kansas City and the engineering sector in Dallas. Kansas City also reported that some firms in the retail, leisure, and hospitality industries were beginning to raise wages to attract salespeople, housekeepers, maintenance staff, and clerical staff. Increases in the costs of employee health benefits continued to put upward pressure on overall compensation costs, although Minneapolis indicated that growth in the price of health-care has slowed.
Upward price pressures were subdued, and price increases were limited during the reporting period. Reports from many Districts indicated modest growth, no change, or slight decreases in overall commodity and input prices. In a few Districts, prices of some construction inputs in short supply increased, including lumber, drywall, concrete, and roofing shingles. However, Cleveland noted that the rate of increase for construction input prices slowed, and lumber prices in the Chicago District declined. Dallas reported that law firms had reduced their billing rates slightly. Atlanta and Chicago reported that firms have limited pricing power in general. Similarly, food costs continued to increase in the Kansas City District, but most restaurant owners did not increase menu prices. However, Richmond reported that several construction-related businesses said that they were able to pass along rising input prices.
First District--Boston
Economic activity in the First District continued to expand at a modest pace. Most contacts reported low-to-moderate single digit year-on-year growth rates. Higher interest rates appear to have different effects on commercial real estate where some contacts reported upward pressure on capitalization rates and residential real estate where contacts report that the prospect of rising rates "nudged" buyers into the market, increasing demand. No firms report major cyclical layoffs but hiring remains subdued except among fast-growing technology firms. Sequestration has yet to have had any direct effect on contacts with major government businesses but contacts anticipate weakness in the future. Contacts did not complain of higher input prices and did not report that they were raising prices significantly either.
Retail and Tourism
Most contacts report year-over-year comparable store sales increases between 4 and 5 percent. Demand remains quite strong for all apparel, home furnishing, and home improvement categories, as well as technology products like tablet computers. Contacts indicate that prices remain steady, and feel that consumer sentiment continues to improve. There is some cautious optimism that this more positive trend will continue but expectations for 2013 sales still center on modest single-digit increases.
Both business and leisure travel remain strong with leisure driven by both domestic and international visitors. Attendance at some museums and other attractions is below expectations. While a contact noted that July and August are not heavy months for government-related travel, there is some concern that U.S. government travel budgets, cut 30 percent because of the sequester, will start to have a negative impact on travel industry revenues later in the year.
Manufacturing and Related Services
Three companies--a semiconductor industry supplier, a medical device maker, and a fitness equipment manufacturer--reported double-digit increases in sales compared to the same period a year earlier, four reported single-digit increases from the previous quarter and three companies reported declines. Some contacts reported that sales in Europe were finally growing again. The majority of contacts report no change in prices from the first quarter, either the input prices they face, or their own sale prices. Employment growth continues to be modest. A rapidly growing medical device manufacturer reports increasing headcount at a 15 percent annualized rate but most firms are hiring only "selectively." One firm did report layoffs due to a repositioning of a formerly bricks and mortar business as e-commerce. Defense industry contacts reported little direct effect of sequestration but continued to worry with one contact mentioning rumors that major cuts would come in the fourth quarter. Contacts reported no major revisions of their investment plans and most expect single-digit year-on-year growth in the next quarter.
Software and Information Technology Services
New England software and information technology services contacts generally report weaker than expected business activity through August, with slow revenue growth. Several attribute this sluggishness to continued macroeconomic uncertainty in the U.S. and Europe. In contrast, a contact which mainly works with health care firms attributes the slowdown to the expiration of federal stimulus funding for health records software; however, business in the post-stimulus slump has been better than expected. A business advisory contact sees early signs of improvement in the overall market, as evidenced by an uptick in Q2 sales activity in terms of customer expenditure. Four out of five contacts continue to be cautious in hiring, and plan to remain close to their current headcounts through 2013. Both selling prices and capital and technology spending have gone largely unchanged in recent months. Looking forward, New England software and IT firms are cautiously optimistic, with most expecting only modest growth through the second half of 2013.
Staffing Services
New England staffing contacts generally report strengthened business conditions through August, characterized by mid-single-digit year-on-year revenue growth. This continued growth reportedly reflects both an increase in overall labor demand and a shift to more aggressive marketing strategies at the firm level. Generally, there is a high demand for skilled IT workers and engineers; contacts also report increased demand for manufacturers and medical assistants. On the supply side, there remains a shortage of skilled technical workers to fill high-end IT and engineering jobs. The general consensus is that despite a large pool of available workers, the skills mismatch prevents staffing firms from fully meeting client demand. The number of temporary-to-permanent placements continues to grow; a healthcare contact reports a 30 percent increase in permanent placements this year. Bill rates and pay rates are largely unchanged, with the exception of one firm reporting a decrease relative to May due to the current client mix. Looking forward, staffing contacts continue to be cautiously optimistic, expecting mid-single-digit year-on-year revenue growth through the remainder of 2013.
Commercial Real Estate
Contacts were mixed in their analysis of the effects of higher interest rates. In Boston and Providence, contacts reported upward pressure on capitalization rates noting that the frequency of renegotiation (or "re-trading") of deals in progress increased in recent weeks. Contacts in Hartford reported no effects so far of higher rates on demand for commercial real estate. A regional lender to commercial real estate continues to face challenges securing desired loan volume in the face of competition from other lenders willing to offer commercial mortgages at very low rates. Construction activity remained robust in greater Boston and the pipeline of deals yet to break ground increased significantly over one year ago. Current and planned construction projects in the Boston area are concentrated in high-end multifamily and mixed-use (retail/residential) structures, although construction activity is poised to rise in the hospitality sector and among institutions of higher education. Contacts continued to expect slow improvements in commercial real estate fundamentals in the coming months, but roughly half of contacts raised the uncertainty around their projections relative to last report, with much of the growing uncertainty linked to uncertainty over long-term interest rates.
Residential Real Estate
Throughout the First district, the market for single-family homes and condos continues to make a healthy recovery as sales and prices continued to increase and days-on-the-market continued to fall. According to contacts, increases in the mortgage rates have nudged potential buyers, hoping to take advantage of low-interest rates, to enter the market. In some areas, particularly in the Greater Boston area and Massachusetts, realtors have observed an increasing frequency of multiple offers being made on properties. Despite shrinking inventory, sources state that modest appreciation in regions where multiple bids are common indicates that the market is not overheating.
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Second District--New York
Economic growth in the Second District has continued at a moderate pace since the last report. Contacts indicate that cost pressures remain moderate, while selling prices continue to be steady to up slightly. Labor market conditions have shown further signs of improvement, while wage increases have remained subdued. Retailers report that sales picked up a bit in July and August and were on or close to plan; new automobile sales have strengthened since the last report. Tourism activity has been mixed since the last report. Commercial and especially residential real estate markets have shown signs of firming. Finally, bankers report steady to somewhat softer loan demand, little change in credit standards, some leveling off in loan spreads, and widespread declines in delinquency rates.
Consumer Spending
Retailers report that sales were mixed but on or close to plan in July and early August. A major retail chain reports that sales were on plan in July and in early August, with New York City stores out-performing the rest of the region somewhat. One major mall in upstate New York notes that sales have picked up in recent weeks, following a sluggish June when sales were hurt by inclement weather. However, another upstate mall reports that sales are down slightly from a year ago, in part reflecting fewer Canadian shoppers. Inventories are generally at or near desired levels. Prices are generally described as stable, though a few contacts say there is significant discounting.
Auto dealers in the Buffalo and Rochester areas report that new vehicle sales strengthened in July, running roughly 15 percent ahead of comparable 2012 levels; early indications are that sales in August have been similarly robust. High end brands are reported to be selling particularly well. Sales of used automobiles have been mixed but generally soft. Wholesale and retail credit conditions for auto purchases continue to be characterized as favorable.
Tourism activity has been mixed since the last report. Hotels across parts of upstate New York have seen some decline in occupancy rates. Business at Broadway theaters has picked up somewhat from mid-July to mid-August; attendance is still down modestly from a year earlier but not by nearly as much as in June and early July. Moreover, revenue was running ahead of comparable 2012 levels in July and the first part of August--the first such gain since March. Finally, consumer confidence in the region has retreated slightly since the last report: both The Conference Board's survey of residents of the Middle Atlantic states (NY, NJ, Pa) and Siena College's survey of New York State residents show confidence declining modestly in July but running roughly on par with a year earlier.
Construction and Real Estate
Residential real estate markets in the District have strengthened since the last report. Buffalo-area contacts describe market conditions as very robust, as demand continues to outstrip supply. Thus far, there has been little new construction, and the lack of inventory has pushed prices up. Bidding wars are common for desirable properties. Similarly, sales activity in New York City's co-op and condo market has been unusually strong in July and August. The inventory of available apartments for sale has declined further and is at new lows, except at the high end of the market. Prices have been rising only modestly in Manhattan, though in Brooklyn, prices are reported to be up by close to 10 percent over the past year. Manhattan's rental market appears to be at a plateau: rents have leveled off and are up only marginally from a year ago. Brooklyn rents, on the other hand are up 5-10 percent over the past year. As in the sales market, the inventory of available rentals remains tight throughout New York City.
An authority on New Jersey's housing industry reports that market conditions continue to improve gradually: sales activity has picked up somewhat and prices of existing homes are up roughly 2 percent from a year ago. Multi-family construction activity has been robust but single-family construction remains sluggish; there continues to be little or no spec building. A sizable inventory of distressed properties persists. The New Jersey shore rental market has not yet recovered to 2012 levels; markets in communities hardest hit by Sandy remain particularly depressed.
Commercial real estate markets across the District have been steady to slightly firmer since the last report. Manhattan's office vacancy rate remains little changed at a low level and is down modestly from a year ago; asking rents for Class A properties have been flat, whereas rents on Class B office space have been trending up and have risen more than 10 percent over the past year. Office vacancy rates in Northern New Jersey, as well as in Westchester and Fairfield counties, have come down since the beginning of this year, though they remain elevated. Long Island's vacancy rate is steady at a low level. Office markets in the Buffalo and Rochester areas have been stable, while Albany's has been somewhat softer.
Other Business Activity
The labor market has shown signs of strengthening. One major employment agency notes that summer business has been unusually strong across the board--in terms of both industries and occupations. Another major agency describes the improvement as more gradual. Both these contacts report that people are finding jobs more quickly and that demand for IT workers has been particularly strong. Companies are also described as increasingly negotiable on salary, though pay has yet to start escalating significantly.
Manufacturing firms in the District report a pickup in employment levels, and a growing proportion of contacts plan to add workers in the months ahead. More broadly, manufacturers report that business activity has continued to improve modestly since the last report, that input price pressures are steady and that selling prices are little changed. Non-manufacturing firms indicate that both business and hiring activity have been steady since the last report, though these contacts have become a bit more optimistic about the near term outlook and also in their hiring plans. Service sector firms report that cost pressures remain somewhat widespread but are more subdued than earlier in the year.
Financial Developments
Small- to medium-sized banks in the District report a decrease in demand for residential mortgages but little change in demand for other types of loans. Bankers report fairly widespread declines in refinancing demand--more so than at any time in the past three years. Respondents indicate that credit standards are little changed across all loan categories. Spreads of loan rates over costs of funds are reported to have narrowed, on balance, but to a lesser extent than has been the case for most of the past two years. Finally, bankers report widespread decreases in delinquency rates, particularly for consumer loans and residential mortgages.Return to top
Third District--Philadelphia
Aggregate business activity in the Third District continued at a moderate pace of growth during this current Beige Book period. Moderate rates of growth continued for general services, existing home sales, and home construction. Homebuilders felt their sales may have been partially dampened by rising mortgage rates; however, construction remained well above its level of a year ago. Meanwhile, auto sales continued their strong rate of growth; growth of freight shipping was also strong. General retail sales, commercial real estate leasing, staffing services, and tourism continued to expand at modest rates, while manufacturing and commercial real estate construction continued to expand only slightly. Loan volumes at Third District banks grew at a modest pace across most categories; credit quality continued to improve. Contacts reported slight increases overall for general price levels as well as for wages and home prices--similar to the last Beige Book period.
An overall outlook for moderate growth has continued since the last Beige Book. Contacts expressed greater confidence in the U.S. economy and in global conditions. However, firms remained cautious in their hiring and long-term capital expenditure plans and expressed concern about a potential fiscal crisis regarding the federal debt ceiling.
Manufacturing
Overall, Third District manufacturers reported further increases in orders and shipments since the last Beige Book, although overall growth remained slight. Makers of food products, paper products, and fabricated metals reported gains. Producers of lumber and wood products, primary metals, electronic equipment, and instruments reported lower activity, much of it seasonal in nature. Reports were mixed for makers of industrial machinery. Overall, firms continued to report strong demand from auto- and residential construction-related businesses. Firms also reported some demand related to infrastructure repairs in response to Superstorm Sandy. Several firms reported difficulties meeting demand because of insufficient physical capacity, an inability to train new workers quickly enough, and/or customers' expectations of shorter delivery times. A large supplier to a broad base of industry reported that business improved from early summer through early August, with larger backlogs in key segments.
Optimism has generally grown among Third District manufacturers that business conditions will improve over the next six months. A contact described U.S. manufacturing as "poised to grow" while citing signs of improvement globally, particularly in Europe and China. Some capacity expansion appears to be under way, as infrastructure projects that were being intentionally delayed are now coming on stream. Though generally positive, firms have lowered their expectations somewhat regarding hiring and capital spending plans since the last Beige Book.
Retail
Third District retailers reported modest growth overall since the last Beige Book, though results were mixed between outlets and traditional malls. Contacts said sales were soft in July, possibly dampened by excessive heat, but began to pick up in August with more back-to-school shopping. Sales of children's apparel were stronger at outlets than at traditional malls, indicating that consumers were doing more price-shopping. Mall retailers were optimistic that sales would continue to pick up into the fall.
Auto dealers continued to report strong sales growth in July and the beginning of August. Pickup truck sales have been strong in the shore areas as rebuilding efforts continue. Contacts cited healthier household balance sheets, pent-up demand, and attractive leasing options as factors for strong sales. Dealers noted lean inventories as production has generally kept in line with demand. Dealers remain very optimistic, although their hiring continues to lag rising sales.
Finance
Overall, Third District financial firms continued to report modest increases in total loan volume. The most notable difference from the last Beige Book period was the further reduction in mortgage refinancing in response to higher interest rates. Contacts noted that demand for mortgages to purchase homes continued to increase modestly, as did demand for home equity lines and commercial real estate and C&I loans. Stronger increases were noted for most types of consumer lending, although credit card volumes fell off slightly. Contacts uniformly reported that small businesses remain very cautious, doing little or no borrowing for expansion and needed infrastructure. Credit standards have changed little, according to most banking contacts. However, many expressed concern about very tough competition on rates and terms – reflecting a "lack of reason," according to one banker. However, most bankers reported that business was good overall and the credit quality of their loan portfolios was healthier. They remained "cautiously optimistic."
Real Estate and Construction
Homebuilders throughout most of the Third District remained moderately busy with existing projects from spring sales. However, several builders reported a dip in traffic and new sales contracts in July, with modest sales growth resuming in early August. Higher interest rates were partly blamed for the lull: Locking in a mortgage rate now for an existing home appeared preferable to getting a mortgage later when the new home is completed. Sales of existing homes continued to grow at a moderate pace into August, according to residential brokers. A broker in the greater Philadelphia area described sales growth as "good steady improvement, not soaring." Sales closed and sales pending grew by double digits (year over year) in some of the larger metropolitan areas in the Third District and by nearly double digits in a few others. The estimated months of supply of homes has risen since May in several areas, described as a seasonal trend rather than evidence that the shadow inventory of homes is emerging.
Nonresidential real estate contacts continued to report little change in the modest pace of overall leasing activity and slight growth of construction. However, architecture and engineering firms were seeing greater interest and increased workflow, which are expected to generate construction activity in the future. Meanwhile, general contractors reported that activity was very slow, with heavy competitive bidding on each project. New and ongoing projects continued to be heavily represented by industrial structures, institutional facilities, multifamily residential units, and public utilities. Market analysts observed a shift in recent leasing activity by large users of commercial space away from a contraction in square footage to some expansion. In addition, some companies are opening branches in the Philadelphia area market. Contacts remained generally optimistic for slow, steady growth.
Services
Third District service-sector firms continued to report a moderate pace of growth overall. After a slow start to the summer, traffic counts, bookings, and boardwalk sales at shore destinations in Delaware and southern New Jersey picked up to a modest pace. A Delaware hotel group reported that its properties matched or exceeded last year's record; another hotel reported that July was its best month ever. However, those parts of central New Jersey hardest hit by Hurricane Sandy continued to struggle, with low numbers of returning summer residents and tourists. Throughout the District, tourists continued to spend cautiously. Atlantic City casino revenue continued its years-long downward spiral.
Other service firms reported continued moderate growth, although some cited seasonal slowdowns for the summer. One staffing firm explained that its clients' decision-makers are away for much of the summer. A large consumer firm anticipates higher activity in September following a typical August lull. Freight shipments have grown robustly throughout the District, tied to the expansion of intermodal facilities along the I-81 and I-76 corridors and to refinery activity along the Delaware River. Overall, service-sector firms remained optimistic about future growth.
Prices and Wages
Overall, price levels continued to increase slightly, similar to the previous Beige Book. Manufacturing firms reported that prices paid and prices received again increased modestly; the increases were even slighter this period than last. Auto dealers reported no changes in pricing. A mall operator noted apparel inflation in recent months. Builders continued to report land selling at a premium, rising land development costs, and difficulty finding qualified tradespersons. Most real estate contacts reported rising prices for lower-priced homes; price trends for higher-priced homes are closely tied to local market conditions. Recent safety regulations for truckers are expected to tighten capacity and spur higher prices this fall until more workers and new equipment are brought online. Generally, however, there are few wage pressures, according to most firms, including staffing companies.
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Fourth District--Cleveland
Business activity in the Fourth District expanded at a moderate pace since our last report. On balance, demand for manufactured products grew at a moderate rate. Housing market activity has leveled out after a six-month period of strong growth; sales of new and existing homes were above year-ago levels. Nonresidential builders experienced a rise in backlogs and the number of inquiries. Retailers were disappointed with sales during June and July, while new motor vehicle purchases posted robust gains on a year-over-year basis. Shale drilling picked up in regions rich in wet gas and was above year-ago levels. Output at coal mines trended lower. Freight transport volume remained strong. Applications for business credit were flat, while consumer demand for credit rose slightly.
Hiring was sluggish across industry sectors. Staffing firm representatives reported that the number of job openings increased, with vacancies found primarily in healthcare and manufacturing. However, job placements were lower. Wage pressures remain contained. Input and finished goods prices saw little change, apart from increases in construction materials and oil.
Manufacturing
Reports from District factories indicated that demand grew at a moderate pace during the past six weeks. Companies seeing the strongest activity were suppliers to the energy, housing, medical device, and transportation industries. Defense contractors are still coping with uncertainty. Compared to a year ago, manufacturing production levels are similar or higher. Many of our contacts are optimistic and they expect that demand will rise during the next few months. Steel producers and service centers reported that shipping volumes were stable or fell below expected levels. Some respondents continue to express concern about the quantity of steel imports and the negative impact it is having on domestic producers. The outlook by steel producers is uncertain. As a result, they have been reducing inventories. District auto production showed a substantial decline in July on a month-over-month basis, due to normal seasonal retooling for model changeovers. Compared to a year ago, July production figures revealed a sizeable increase.
We heard some reports about a need by motor vehicle parts suppliers and assembly plants to expand capacity in order to meet demand. Other reports indicated that small manufacturers have reduced capacity utilization rates and bypassed growth opportunities because they were unable to hire skilled production workers. A majority of our contacts anticipate increasing capital budgets in the upcoming fiscal year. Raw material and finished goods prices were generally flat or trended lower, although producers acknowledged volatility in commodity prices. Steel producers who attempted to raise prices met with limited success. Factories expanded payrolls at a modest pace. Wage pressures are contained, though there is concern about rising health insurance premiums. One executive commented that he sees downward pressure on domestic labor costs due to excess production capacity off-shore.
Real Estate
Sales of new single-family homes have stabilized during the past couple of months, when compared to the solid growth seen earlier in the year. Builders characterized their sales as good, and most reported that they are higher than a year ago. One builder commented that he is concerned about a lot shortage in the near term. On-line traffic and inquiries are rising. New home contracts were found mostly in the mid- to higher-price-point categories. Demand for multifamily housing remains strong. Builders expressed confidence that demand for new homes will persist in the upcoming months, but they are apprehensive about rising interest rates and difficulties in obtaining construction loans. They also believe that a rise in consumer confidence would bring additional first-time buyers into the market. Selling prices of new homes across the District were up about 5 percent on average year-over-year due to rising costs and larger building footprints. The number of existing single-family homes sold year-to-date is up substantially across many regions of the District, relative to a year earlier. Contract prices rose moderately. In some regions, the supply of existing homes for sale is a challenge, which is leading to higher prices.
Nonresidential builders continued to see slowly improving business conditions. Although inquiries have picked up, uncertainty about interest rates and the economy led to hesitancy on the part of some customers. Backlogs have grown substantially. The strongest activity was on the industrial and manufacturing side. The former is related to shale gas work and the conversion of coal-fired generators to natural gas. Work in higher education has replaced government-sponsored projects as a major revenue source. Multifamily housing, including senior living, was also strong. Our contacts were more optimistic about near-term growth prospects than they have been in recent months.
We heard many comments from homebuilders about price increases for construction materials (lumber, drywall, and concrete), though the rate of increase has slowed during the past month. Several builders reported that they plan to retain their temporary summer workers through the fall season. Hiring of permanent employees (office and field) was modest. Wage pressures are contained. General contractors reported a shortage of qualified subcontractors. On the residential side, requests for higher rates by subcontractors were met with mixed results. Commercial builders said their subcontractors are having difficulty obtaining operating capital.
Consumer Spending
Retailers were disappointed with their June and July sales. They cited consumers being strapped for money and unseasonably cool weather as factors that held down spending. On a year-over-year basis, same-store revenues were fairly even or lower. Products in greater demand included core goods such as food, back-to-school items, and furniture. Looking ahead, fourth-quarter sales are expected to improve slightly when compared to those in the third quarter. Inventories were characterized as a little high, but manageable. Vendor and shelf prices held steady. Capital expenditures were on plan for the fiscal year, with no changes expected in the near term. Hiring will be limited to staffing new stores.
Sales of new motor vehicles increased at a robust pace during July, and year-to-date sales were running ahead of last year's pace. The number of new vehicles sold in July was moderately higher than in June. Buyers prefer smaller, fuel-efficient vehicles. One dealer commented that the unpredictability of gasoline prices is a primary factor behind the sales of smaller cars. New-vehicle inventories are rising, but a majority of dealers said that they are satisfied with their inventory positions. Our contacts are optimistic about sales for the remainder of the year. Dealers pointed to pent-up consumer demand, the availability of financing, and the option to lease as reasons for their optimism. Dealer service departments in the eastern third of the District are especially busy due to the influx of work generated by shale gas activity. Used-vehicle purchases rose during the past six weeks. Inventory is building as lease rollovers start to come in, which is putting some downward pressure on used-car prices. Even with an increase in business, dealers are reluctant to hire a large number of employees. For the few open positions, finding qualified applicants remains difficult.
Banking
Bankers reported that their industry is functioning in an environment of low interest rates, rising operating costs, and over-capacity. Net interest margins are showing signs of widening but remain below acceptable levels. Demand for business credit is flat or up slightly, with no loan category or industry performing significantly better than others. Our contacts attribute this to firms holding large cash reserves. A financial intermediary reported on a loosening in venture capital funding and commented that a substantial number of startups in the District are now contemplating an S-1 filing. Consumer-credit demand improved slightly, especially for auto loans, credit cards, and home equity lines of credit. Several bankers reported a slowing in residential mortgage activity. While new-purchase mortgages are trending higher, refinancing has dropped off. No changes were made to loan-application standards. Delinquency rates declined slightly. There were few reports about workforce reductions.
Energy
District coal production remains below year-ago levels, with the largest declines seen in eastern Kentucky. Spot prices for steam-coal declined slightly, whereas metallurgical coal prices were flat. Unconventional drilling picked up in regions rich in wet gas since our last report, and the number of drilling rigs is higher than last year at this time. However, in dry gas regions, drilling has declined during the past 12 months due to the low price for natural gas. Total output from gas wells was down slightly, while oil production was stable. Well-head prices for natural gas are flat to down, while oil prices were up substantially. Capital expenditures remain at targeted levels. One driller commented that the low price for natural gas is affecting the value of his reserves, which he uses as collateral for loans. As a result, banks are increasingly reluctant to extend credit for drilling new wells. On balance, little change was seen in production equipment and material prices. Labor costs are steady other than for rising healthcare insurance premiums.
Freight Transportation
Freight executives reported that shipping volume remains strong and they are seeing an improvement in net profits. Their outlook is cautiously optimistic. Freight haulers are still sorting through the effects of the hours-of-service regulations (HOS) that went into effect on July 1. The primary concern focuses on the availability of drivers and the ability of shipping companies to effectively schedule those drivers. Prices for equipment and maintenance items were stable. Capital outlays were allocated more for equipment replacement than capacity expansion. Some of our contacts have begun evaluating the use of tractors that run on compressed natural gas (CNG). Preliminary results indicate that these trucks may be more suitable for short-haul situations due to infrastructure issues. The industry is still experiencing a shortage of drivers, due in part to HOS rules and a high turnover rate.
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Fifth District--Richmond
Economic conditions in the Fifth District improved moderately since our last report. Manufacturing shipments and orders rose, and capital spending increased. Retail weakened, with the exception of robust auto sales. Revenue growth was strong among non-retail services firms and tourist destinations reported good attendance. In banking, lending activity slowed somewhat under the pressure of higher interest rates. Residential real estate and construction activity varied, while commercial real estate and construction markets were little changed. Heavy rains in the Mid-Atlantic hindered harvests and raised concerns about crop damage. In energy markets, natural gas production increased sharply as more infrastructure came online; in contrast, coal mining declined. Conditions in District labor markets improved modestly. Growth in manufacturing prices for inputs and finished goods slowed; service sector price increases also slowed. Average wages rose in both sectors.
Manufacturing
Manufacturing shipments and orders rose moderately, and reports of greater spending on plant and equipment increased. Producers of auto parts, plastics, and textiles were buying machinery. A lumber company executive said his business had purchased new equipment to increase production in response to higher order volume. Another contact indicated that demand had picked up for mid-range and high-end cabinetry. In contrast, a furniture producer reported that all employees had to take unpaid time off in recent weeks, and a machine parts manufacturer worried that he might have to begin layoffs by early autumn. According to our latest manufacturing survey, growth slowed in prices of both raw materials and finished goods.
Ports
District port contacts indicated that bulk and container shipments grew briskly in recent weeks. Agricultural products accounted for much of the increase in exports, while auto-related products were a large share of the growth in imports. Coal exports declined in recent weeks while remaining slightly up for the year. The ports' peak season began in July, as retail imports allowed stores to stock up for the holidays. Port officials were monitoring developments in the Middle East closely because the Suez Canal is a "vitally important artery" for shippers.
Retail
Sales revenues weakened since our last report. Retail and wholesale suppliers of construction inputs gave mixed reports. A West Virginia building materials wholesaler commented that his sales were flat and cautioned, "Contractors who normally have a six-month backlog of work are down to two months." Several grocers, convenience stores, and pharmacies also reported flat sales, while sales at art and hobby shops and an electronics retailer declined. Auto sales were strong; a dealer in West Virginia remarked that his dealership had its best thirty days ever this summer and a dealer in the Washington, D.C. beltway area said his sales doubled compared to this time last year. He noted, however, that purchases were based on need, rather than discretionary spending. Average retail price growth picked up slightly. In particular, a grocery wholesaler noted gradual but steady increases in his cost of meat, poultry, and seafood.
Services
Non-retail services firms reported generally robust growth in recent weeks. Among the categories noting stronger revenues were architectural services, IT, business law, advertising, and accounting. A financial services executive reported that clients were becoming more aggressive with respect to the amount of risk they would assume while remaining "a little nervous under the surface." Construction-related businesses such as contracting reported more bidding opportunities and project starts; several also commented that they were able to pass along rising input prices. Healthcare organizations reported softer demand and many were making cost reductions to help offset lower reimbursements, sequestration, and uncompensated care. Smaller hospitals continued to express concern about their viability under the Affordable Care Act, and the solution for some has been to pursue affiliation with a larger healthcare system. Growth in overall services prices slowed.
Tourism representatives reported strong attendance at resort locations. Year-over-year National Park visits in the Washington, D.C. area increased. A contact on the outer banks of North Carolina indicated hotels bookings were up and rentals were good, albeit not quite "the banner year" people had expected. She noted that restaurants were generally busy, although budget-conscious tourists were primarily frequenting "tapas and deck parties" instead of fine dining establishments. A resort executive in western Virginia reported that occupancy rose and revenues increased by double digits over this time last year. He observed that "the family vacation seems to be coming back." In central North Carolina, an hotelier reported that corporate bookings were up, while government stays fell.
Finance
The pace of growth in District lending slowed somewhat as many bankers reported a drag from higher interest rates. On the business side, contacts generally indicated that any adverse impact from the modest increase in interest rates was being offset by expectations for better economic conditions and stronger profit growth. One banker flatly stated that "CFOs understand that rates remain near historically low levels." Small business loan volumes increased modestly. A lender in the D.C. area noted that some small businesses that wan