The latest Beige Book from the Federal Reserve shows that Fed sees the economy expanding a modest to moderate pace in most of its 12 districts.
The Beige Book is a report of economic anecdotes gathered by members of the Federal Reserve's 12 districts.
Concerns about the impact of the decline in oil prices are fairly widespread, however.
Reports from the Dallas district said that energy outlooks for the first half of 2015 in Texas are "very uncertain and significantly weaker than in the prior reporting period, with firms expecting anywhere from a 15 to 40 percent decline in demand for their services."
In the Atlanta district, contacts in the energy sector, "reported that the downturn in the price of oil has influenced their outlook and strategic planning for 2015, including a heightened focus on cost management, more prudent investments, and faster, more efficient drilling techniques."
Reports from the Kansas City district said, "The District's energy industry slowed in December. Most respondents reported lower drilling activity, and demand for oilfield services fell. Oil rigs decreased marginally while natural gas rigs increased. Future drilling activity, employment, and capital expenditures were projected to be significantly lower in response to lower oil prices."
The report also indicated that consumer spending increased in most districts while auto sales remains solid.
On the wages front, the report said that "significant wage pressures were largely limited to workers with specialized technical skills."
On balance, however, the report showed that most districts reported "modest" or "moderate" pace of economic growth.
Here's the complete text of the latest Beige Book:
Reports from the twelve Federal Reserve Districts suggest that national economic activity continued to expand during the reporting period of mid-November through late December, with most Districts reporting a "modest" or "moderate" pace of growth. In contrast, the Kansas City District reported only slight growth in December. However, most of their contacts, along with those of several other Districts, expect somewhat faster growth over the coming months. The Dallas District indicated that growth slowed slightly during the reporting period and that several contacts expressed concern about the effect of lower oil prices on the District economy. Consumer spending increased in most Districts, with generally modest year-over-year gains in retail sales. Auto sales showed moderate to strong growth. Travel and tourism picked up during the reporting period. The pace of growth of demand for nonfinancial services varied widely across Districts and across sectors, but appeared to be moderate on balance. Manufacturing activity expanded in most Districts. Single-family residential real estate sales and construction were largely flat on balance across the Districts, while commercial real estate activity expanded. Demand for business and consumer credit grew. Credit quality improved a bit further overall. Agricultural conditions were mixed. Overall demand for energy-related products and services weakened somewhat, while the output of energy-related products increased.
Payrolls in a variety of sectors expanded moderately during the reporting period. Significant wage pressures were largely limited to workers with specialized technical skills. Prices increased slightly, on balance, in most Districts.
Consumer Spending and Tourism
Consumer spending increased in most Districts, with generally modest year-over-year gains in retail sales. Contacts reported slight to modest gains in the Boston, Dallas, Philadelphia, and Cleveland Districts. Sales were solid in Atlanta. Moderate holiday sales growth exceeded expectations in Chicago and met expectations in San Francisco. General merchandise retailers in the New York District indicated that sales were largely sluggish and below plan for the holiday season. The Kansas City District reported that retail sales were lower than a year earlier, with a few retailer contacts noting a drop in sales of high-end products. In contrast, Philadelphia and San Francisco reported that high-end merchandise continued to sell well.
Auto sales showed moderate to strong growth on a year-over-year basis, with Philadelphia, Cleveland, and Dallas at the lower end of this range, and Atlanta and Chicago at the higher end. Atlanta auto dealers noted that lower gas prices quickly boosted purchases of larger vehicles. However, some dealers in the St. Louis District reported excess inventories of luxury cars. Kansas City reported that auto sales decreased during the reporting period but remained higher than 12 months earlier. Auto sales were robust in some areas of the San Francisco District, but were somewhat below expectations in other areas.
Travel and tourism picked up during the reporting period. The Boston, New York, Atlanta, and San Francisco Districts reported strong travel and tourism activity. Broadway theaters reported that attendance and revenues were up more than 10 percent from the same period in 2013. Tourism in the Richmond and Kansas City Districts was at or above normal seasonal levels. However, ski resorts in the Philadelphia District struggled to attract visitors in the midst of unseasonably warm weather. Warm December weather in the Minneapolis District also reduced winter tourism there.
Nonfinancial Services
The pace of demand growth for nonfinancial services varied widely across Districts and sectors during the reporting period, but appeared to be moderate on balance. Overall, nonfinancial service-sector firms in the Philadelphia and San Francisco Districts continued to report moderate growth. Most nonfinancial service firms in the Dallas District reported flat or higher demand. Activity at professional business services firms in Minneapolis and Kansas City increased. However, contacts in the Kansas City District expect that pace of growth to slow somewhat in coming months. The Boston District reported that some consulting and advertising firms grew rapidly. Demand for staffing services in the Dallas District was mixed, with some contacts reporting strong increases in demand and others reporting slight decreases. Freight volume in the Cleveland District increased during the reporting period, but contacts stated that freight transportation capacity constraints remained an issue. Freight volume in Atlanta, Kansas City, and Dallas held steady or increased on a year-over-year basis.
Manufacturing
Manufacturing activity expanded in most Districts. Philadelphia reported that manufacturing activity grew at a modest pace during the current reporting period, with a slight slowdown relative to the previous period. Reports regarding new orders and shipments in the Philadelphia District suggested some further slowing moving forward. Manufacturing shipments and new orders grew modestly in the Richmond District. Contacts at factories in the Cleveland District reported that demand increased a bit on balance. Manufacturing activity grew at a moderate pace in Boston, New York, Chicago, and San Francisco. However, a manufacturer in the Boston District indicated that congestion at West Coast ports had impeded its exports. Activity in the auto industry in the Chicago District remained a source of strength for the region. Atlanta reported that manufacturing activity strengthened overall. Minneapolis and Kansas City reported that manufacturing activity increased only slightly during the reporting period.
Real Estate and Construction
Single-family residential real estate sales and construction were largely flat on balance across the Districts. Sales declined somewhat on a year-over-year basis in the Boston, Cleveland, Atlanta, Chicago, Minneapolis, Kansas City, and Dallas Districts. In the Philadelphia District, year-over-year existing home sales finished lower in November, but pending December sales in some areas were up notably over December 2013. However, builders of new homes in the Philadelphia District reported weak traffic for prospective buyers and fewer contract signings. San Francisco reported that overall home sales picked up in December. Richmond reported a modest increase in housing market activity. Home prices increased modestly, on balance, in the Boston, Philadelphia, Cleveland, Atlanta, Chicago, and Dallas Districts. The Cleveland, Atlanta, Chicago, Minneapolis, and Kansas City Districts all reported slightly slower single-family residential construction activity. However, the pace of single-family home construction increased in some areas of the San Francisco District.
Commercial real estate activity expanded in most Districts. The Philadelphia District reported a modest pace of growth for commercial real estate leasing activity, and Boston reported improving conditions in commercial real estate markets overall. Commercial real estate activity in the Chicago and Kansas City Districts expanded at a moderate pace. The Dallas District noted that office leasing activity remained strong, but one contact noted a slight pullback in demand from oil and gas firms. Demand for apartments in the Dallas District also remained strong. New York City's co-op and condo market showed continued strength in the final quarter of 2014; apartment sales volume was down from the exceptionally high levels of the prior year but still fairly brisk, while selling prices were up moderately. Commercial construction activity increased in most Districts. Activity grew modestly in the Philadelphia District and a bit faster in the Atlanta and Chicago Districts. Atlanta cited the multifamily residential segment as a source of growth, while Chicago credited demand for industrial and office buildings. Commercial builders in the Cleveland District reported a moderate to robust increase for projects in the pipeline. Dallas reported that overall commercial construction was strong. San Francisco reported that multifamily residential construction was strong in many areas of that District and that retail, office, industrial, or infrastructure projects were widespread across that District.
Banking and Finance
Demand for business and consumer credit grew during the reporting period. Overall loan demand increased slightly in the Richmond, Kansas City and Dallas Districts. Philadelphia reported a modest increase in total loan volume. Contacts in the San Francisco District gave mixed reports regarding total loan growth. Demand for business credit in the Cleveland District grew overall during the reporting period. Demand for auto loans in the Chicago District grew moderately, and one contact noted a significant spike in credit card applications.
Credit quality generally remained good, with overall reductions in loan delinquencies. According to the Philadelphia District, most of their financial industry contacts reported continued improvements in their customers' overall credit quality and in their own loan portfolios. However, high rates of severely distressed mortgages persisted in New Jersey and Pennsylvania. Contacts reported little change in their own lending standards. However, several Districts commented that their contacts indicated that stiff competition for high-quality borrowers was leading to lower underwriting standards among lenders more generally.
Agriculture and Natural Resources
Agricultural conditions were mixed during the reporting period. Contacts in the Richmond District reported that agribusiness conditions were better than in the same period a year earlier. The St. Louis District reported that winter wheat harvests are likely to be lower than average, largely reflecting planting delays in Illinois due to wet weather in October. The level of red meat output in the St. Louis District through November was below year-earlier levels, while hog and milk output in the Chicago District was higher than expected during the reporting period. Agricultural lenders in the Minneapolis District expected farm incomes in the fourth quarter of 2014 to come in below the level of the same quarter in 2013. Prices received by farmers in the Minneapolis District in December decreased from the previous year for corn, soybeans, wheat, hay, and milk; prices increased for cattle, hogs, eggs, and poultry. Agricultural growing conditions in the Kansas City District were generally favorable in December, and crop prices rose modestly. Kansas City reported that wheat prices increased modestly amid global supply concerns about limits on Russian grain exports and lower production estimates in Australia. The Dallas District reported that agricultural conditions improved slightly, but drought conditions continued in portions of Texas. Some areas of the Atlanta District saw a moderate improvement in drought conditions. Dairy farm profits in the San Francisco District increased significantly over the past year, but milk futures prices declined recently. Uncertainty regarding future water availability in California slowed new plantings of permanent crops.
Overall demand for energy-related products and services weakened somewhat during the reporting period. The Kansas City and Dallas Districts reported that demand for oilfield services decreased, while the Atlanta District reported that growth in the supply of crude oil and natural gas continued to outpace demand growth. However, contacts in the San Francisco District reported that energy demand from manufacturers was solid. The overall output of energy-related products increased. Natural gas production in the Richmond District increased moderately during the reporting period, and the number of natural gas rigs in the Kansas City District increased. The pace of coal production in the St. Louis District during the reporting period exceeded that of the same period in 2013, and year-to-date coal production in the Cleveland District slightly exceeded prior year levels. The rate of coal production in the Richmond District remained slow during the reporting period. The Cleveland District reported that natural gas extraction activity remained at a high level. Oil drilling activity in the Kansas City District declined, and contacts expect that District's energy sector to slow further in response to lower energy prices.
Employment, Wages, and Prices
Payrolls in a variety of sectors expanded moderately during the reporting period. The Chicago District reported that overall hiring increased, and the Minneapolis District indicated that labor markets continued to tighten. Contacts at staffing firms in the Philadelphia District reported continued moderate increases in hiring for both temporary and permanent positions. Labor demand in the Richmond District increased, and the Atlanta District saw job gains across most sectors. Payrolls increased at a modest pace in the Cleveland District, primarily in banking, freight services, and manufacturing. Manufacturing payrolls also expanded in the Richmond and St. Louis Districts. In contrast, the Boston District reported that manufacturers were not hiring. Reports of hiring in the Dallas District were slightly less widespread than in the previous reporting period, and a few energy firms in that District reported hiring freezes and layoffs.
Significant wage pressures continued to be limited largely to workers with particular technical skills. Indeed, the Philadelphia, Cleveland and Chicago Districts noted that upward wage pressures tended to be limited to experienced and technically-skilled personnel. The Richmond District reported that overall wage pressures were mild during the reporting period and that average wage growth in manufacturing slowed somewhat. The Dallas District noted fewer reports of rising wage pressures than in the previous reporting period. In contrast, Kansas City reported that wage growth accelerated slightly, with many contacts citing labor shortages.
Prices increased slightly, on balance, in most Districts during the reporting period. Overall prices in the Cleveland, Chicago, and Dallas Districts were largely stable. Businesses in the Atlanta District continued to report little input cost pressure and limited pricing power. Boston indicated that cost pressures varied, with selective price increases planned by some respondents. Contacts in the Philadelphia District reported little change to the steady, slight pace of price increases. Overall prices increased modestly in the Kansas City and San Francisco Districts. The Richmond District reported that retail prices grew at a slower pace than in the previous reporting period, while price inflation in the non-retail service sector increased slightly. The Cleveland District reported scattered indications of declining prices for petroleum-based products and some metals. However, several Districts reported that the cost of a variety of construction materials increased.
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First District--Boston
Sales or revenues are ahead of year-earlier levels according to most First District business contacts in the manufacturing, retail, and advertising and consulting sectors. Commercial real estate markets are steady to improving and most residential real estate markets in the region continue to see price increases and sales declines. With a few exceptions, manufacturers and retailers are not increasing employment, while advertising and consulting firms continue to add modestly to headcounts. Cost pressures vary, with selective price increases planned by several respondents. The 2015 outlook is positive for almost all responding firms.
Retail and Tourism
Retail respondents this round report December or Q4 year-over-year comparable-store sales ranging from a low single digit decrease to an increase of slightly over 7 percent; the decrease reflects extra-strong year-earlier sales as a result of Hurricane Sandy rebuilding. Three of these contacts end their fiscal year on or near December 31, and preliminary analysis shows 2014 total sales down 1 percent to up almost 6 percent compared to 2013. While overall business is good, there has been some softening in the apparel categories; demand for home furnishings and home improvement categories remains strong. One contact characterizes the current daily retail environment as consisting of "higher highs and lower lows." As in the previous round, some respondents say their prices remain steady, while others cite price changes for some items of plus or minus 1 percent. Based on their own manufacturing costs and vendor prices, one contact says that prices for fall 2015 merchandise will be up about 3 percent overall from fall 2014. Most retail respondents are optimistic about the outlook for 2015, given that business is currently good and consumer sentiment seems more positive, partly because the cost of oil is low.
The Boston area continues to enjoy a strong boost from travel-related spending. Hotel occupancy rates for 2014 are high and combined with higher average room rates, the preliminary estimate is that 2014 hotel revenues will be up almost 10 percent over 2013, which was a record-setting year. Through October, museum attendance was up 14 percent year-over-year, and contacts note many bookings of restaurant and museum space for year-end functions. 2015:Q1 will be stronger than 2014:Q1 due to more corporate meetings and conventions, and hotels have strong advance international bookings. The initial projection for 2015 is a 7 percent increase in hotel revenues, with a slight drop in occupancy rates from record highs compensated for by higher average room rates.
Manufacturing and Related Services
Of the 11 manufacturing firms contacted this cycle, all but one report stronger sales. The exception is a frozen food producer who attributes the weakness to a highly competitive market. Otherwise, many contacts express surprise at how strong demand has been in 2014. For example, one firm says that sales of mail-related devices and services was up in the fourth quarter, reversing years of decline. A manufacturer of testing equipment says sales are strong overall but flat in China, a big change from historical annual increases of 20 percent. By contrast, a toy manufacturer says problems at West Coast ports has hurt sales as they couldn't get some products to market.
Only one of 11 contacts reports serious materials cost pressure; that contact cites sharp increases in chemical prices and says the firm will try to raise their sales prices to offset the increased costs. Four contacts indicate the strengthening dollar is reducing profits or raising costs for them overseas. A semiconductor manufacturer notes that the rising dollar reduced dollar sales by about 1.2 percent in 2014. No firms report any significant changes in inventories. Most are trying to lower inventory costs; however, a semiconductor maker wants to increase inventories but a tight supply chain makes that difficult.
Only one contacted manufacturer reports lower employment; they closed their direct sales channel which led to a 400-person reduction in headcount. A pharmaceutical firm is adding to New England employment. On the negative side, no firms report significant upward revisions to their hiring plans and five cite no significant headcount increases. A semiconductor manufacturer with sharply higher sales is increasing overtime rather than headcount. Capital expenditures are steady or up at all but one contacted firm; the exception is a publishing company which says it is considering reducing investment to build up a reserve for future investments. Some contacts do report unusually high levels of investment but generally say they are consistent with long-term plans and not due to high frequency changes in demand.
The outlook is positive for all respondent manufacturers, even though three contacts specifically mention Europe as a cause for concern. One semiconductor manufacturer predicts a fall in sales in 2015 but as payback for above-trend growth in 2014.
Selected Business Services
Consulting and advertising firms experienced varying positive levels of growth this past quarter. Growth ranges from moderate--for a high-end economic consulting firm as mortgage-backed securities litigation finally slows--to rapid, for a particularly well-positioned healthcare consulting firm. A second healthcare consulting firm experienced a strong rebound from a slow third quarter, as hospitals figured out their budgets and demanded more help with compliance. A strategy consulting firm reports strong year-over-year growth, but is down modestly from last quarter, as private equity due diligence work returns to historically normal levels. An advertising materials firm continues its trend of growing with the economy, and capped off the year with their strongest quarter in 2014.
Consulting firms are seeing moderate to modest increases in costs, although the bulk of their expenses are in personnel and rent, and wages in these firms are generally increasing in proportion to the level of growth the firm is experiencing. Contacts generally adjust their prices up once a year to pass the majority of costs along, so early 2015 will see most firms' prices for these services increase from 0 percent to 5 percent. An advertising materials firm will have to adjust their cost structure in early 2015 in anticipation of a revision in UPS and FedEx freight calculations, but they are unsure how much resistance they will face as they try to pass this on to customers.
All contacts increased personnel modestly in 2014, and plan on further increases in 2015. Health care and economic analysis contacts cite plenty of slack in labor markets for consultants and analysts at all levels, but say that tech and data analyst positions continue to be competitive to fill, a sentiment echoed by an advertising materials contact who notes continuing difficulty filling e-commerce related positions. A strategy consultant notes decreased interest in strategy consulting by MBAs.
All contacts are bullish on the U.S economy, and are optimistic about business conditions for the next year. The high end economic consultant expects flat to modest growth for next year, but says the firm has been operating beyond capacity, and looks forward to the chance to "absorb" their recent success. Health care consultants have seven-figure deals in the pipeline, and anticipate high growth in 2015, despite general concern over federal budget and regulatory agencies efforts to continue rolling out the Affordable Care Act. Advertising materials and strategy consulting firms both anticipate continued robust growth for 2015, and cite only potential geopolitical turmoil as a risk factor.
Commercial Real Estate
Commercial real estate markets are steady or improving in the First District. According to contacts in Boston, office leasing fundamentals are unchanged since the last report and improved modestly on average compared with a year ago. Contacts continue to be impressed by the strength of demand for commercial property in Boston among foreign investors, who continue to pay prices that reflect highly optimistic expectations concerning growth in operating income. A regional lender to commercial real estate posted its best year yet in terms of loan volume, despite a very slow fourth quarter. A commercial real estate brokerage in Portland also had a record year in 2014 in terms of total revenues, a year that ended with very strong investment sales activity in the fourth quarter. Also in Portland, construction activity remains robust in the retail, residential, and hospitality sectors, while speculative office construction is not expected to occur for at least another year. In Providence, leasing deals under negotiation promise to boost absorption of office space in the near term, and office leasing fundamentals improved on net in 2014.
Concerning the outlook, Boston contacts expect investment sales activity to remain robust, even if short-term or long-term interest rates increase in 2015. One Boston contact wonders whether growth among the city's tech start-up firms can be sustained in 2015, noting attendant risks for office demand in the Seaport District. The 2015 outlook is favorable for Portland's commercial real estate market and cautiously optimistic for the Providence market.
Residential Real Estate
Closed sales of single family homes declined in November in at least four of the six states in the First District compared to November 2013. Vermont saw an increase in sold homes; contacts in New Hampshire were unavailable. Sales also dipped in the condominium (condo) market in all responding states. Median sales prices rose in November in both single family and condo markets regionwide, with the exceptions of Maine, where prices decreased for single family homes, and Connecticut, where condo prices declined. In Massachusetts, prices have risen year-over-year in 25 of the last 26 months for single family homes and 17 of the last 18 months in the condo market. Contacts in Massachusetts say the driving forces are a shortage of inventory and steady consumer demand. The level of inventory heading into December in Massachusetts is the lowest in a decade, with only a 4.6 month supply for single family homes and a 2.0 month supply in the condo market. November is the 33rd consecutive month of year-over-year inventory decline in the Massachusetts single-family home market and the 49th consecutive decline in the condo market. In at least three other states, inventory declined in both the single family and condo markets; months of supply increased in Rhode Island. Realtors say they are cautiously optimistic because they remain busy; they hope interest rates will remain low and say markets will show further significant improvements only when high paying jobs become more available and new listings provide more options for buyers.Return to top
Second District--New York
Growth in the Second District's economy has continued at a moderate pace since the last report. Businesses report that cost pressures overall have abated further, though there are some reports of increased wage pressures; selling prices remain generally stable to up slightly. In general, businesses report that conditions have improved somewhat since the last report. Labor market conditions appear to have strengthened further in the final weeks of 2014. Retailers report that holiday season sales were somewhat disappointing and little changed from 2013 levels, though sales picked up toward the latter part of December. Auto dealers characterize sales as sluggish in November, though both picked up, to varying degrees, in December. Tourism remained fairly robust in late 2014, and consumer confidence climbed to a multi-year high. Housing markets were mixed but, on balance, somewhat stronger in the final weeks of 2014; multi-family construction has been fairly brisk. Office markets have been generally steady, while the market for industrial space has strengthened a bit. Finally, banks report increased loan demand--particularly from the commercial sector--as well as narrowing loan spreads; delinquency rates continued to decline for commercial loans and mortgages, but picked up for residential mortgages.
Consumer Spending
General merchandise retailers indicate that sales were generally sluggish and below plan for the holiday season overall. However, most retail contacts noted that, while November and early December were sluggish, sales did pick up toward the latter part of the month, especially in the week after Christmas. The mid-November snowstorm that hit large parts of metropolitan Buffalo shut down many retailers for a number of days; in general, contacts in upstate New York note that sales picked up somewhat in December (especially toward the end of the month) but were little changed from the prior holiday season. Similarly, two major retail chains report that holiday-season sales across the region were below plan and little changed from 2013 levels, though both noted that sales picked up toward the latter part of December--especially after Christmas. Overall, prices were described as little changed from a year earlier; some contacts report heavier discounting this past holiday season than in 2013, while others characterize it as about the same. Post-holiday inventories are generally said to be in fairly good shape.
Reports from auto dealers across upstate New York indicate that sales were sluggish in November but picked up somewhat in December. Rochester-area dealers note that new vehicle sales weakened substantially in November but rebounded in early December, while used car sales improved. Buffalo-area dealers paint a more mixed picture: new auto sales have not rebounded substantially from November's weather-depressed levels, though sales of used vehicles have picked up somewhat. Auto dealers in both areas note that both wholesale and retail credit conditions remain favorable.
Consumer confidence in the region climbed in December, based on the Conference Board's survey of residents in the region. Confidence rose to a 10-month high in New York State and to a more than one-year high in the broader Middle Atlantic region (NY, NJ, PA). Tourism continued to be strong in late 2014. Broadway theaters report that attendance and revenues accelerated in December, and were up more than 10 percent from comparable 2013 levels. Manhattan hotels also report that business has continued to be brisk toward the end of the year.
Construction and Real Estate
The District's housing markets have shown signs of picking up in the closing weeks of 2014. Real estate contacts in western New York State indicate that the housing market has gained some momentum in the final months of 2014, particularly for trade-ups to mid-priced homes. New York City's co-op and condo market showed continued strength in the final quarter of 2014: apartment sales volume was down from the exceptionally high levels of a year ago but still fairly brisk, while selling prices were up moderately.
New York City's residential rental market has been mixed: Rents in Manhattan and Brooklyn have picked up somewhat and are up roughly 5 percent from a year ago, while Queens rents have been fairly steady. Residential rents elsewhere around the New York City metro area are reported to be up 4-6 percent from a year ago, while rents across upstate New York are up about 2 percent. Rental vacancy rates have risen slightly across the District, though they remain fairly low, especially in New York City. Multi-family construction remained fairly robust throughout most of the District in the fourth quarter.
Commercial real estate markets were mixed but, on balance, somewhat stronger in the fourth quarter. In New York City, office availability rates continue to drift down to new multi-year lows, while asking rents are running 6-8 percent higher than a year ago. Availability rates also edged down in northern New Jersey but edged up in Long Island and across upstate New York. Rents outside New York City are generally little changed from a year earlier. Office construction across the District continues to be sparse at best. Industrial markets, however, mostly improved in the fourth quarter, as industrial availability rates continued to trend down in Long Island and northern New Jersey, while asking rents rose moderately.
Other Business Activity
Manufacturing contacts across the District generally report that conditions improved somewhat in late 2014. Moreover, a survey of New York City area purchasing managers points to an acceleration in business activity in December; and a trucking industry expert reports that business conditions have improved substantially in late 2014, reflecting both strong demand and falling diesel prices; truck drivers are in high demand.
The job market overall showed further signs of strengthening in December, though contacts noted that this is a difficult time of year to gauge the market. Still, one employment agency notes that hiring activity has remained unusually robust across a range of industry sectors during this typically slow month. Another employment agency reports more of a typical seasonal lull but notes that more job candidates seem to be receiving multiple offers. Both contacts note increasing upward pressure on wages. Various contacts mention particularly strong demand for workers in information technology, human resources, customer service and trucking.
Financial Developments
Bankers report increased demand for commercial mortgages, commercial and industrial loans but steady demand for consumer and residential mortgage loans. Bankers note a continued decrease in demand for refinancing. Banks report that credit standards were mostly unchanged though there were slight indications of tightening in consumer loans and commercial mortgages. Respondents report a slight decrease in spreads of loan rates over cost of funds--mainly on consumer, as well as commercial and industrial loans. Respondents indicate no change in the average deposit rate, on balance. Finally, bankers report continued decreases in delinquency rates on commercial mortgages and commercial and industrial loans, but an uptick in delinquencies for residential mortgages and some leveling off in rates on consumer loans.
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Third District--Philadelphia
Aggregate business activity in the Third District continued to grow at a modest pace during this current Beige Book period, with very few changes in the growth rates of specific sectors. Manufacturers reported modest growth after a somewhat faster pace during the previous period. Auto dealers, staffing firms, and other general service-sector firms continued to report a moderate pace of growth. Nonauto retailers continued to report modest growth, while tourism activity appears to have slowed, with mixed reports coming from contacts at different destinations. Residential builders continued to report a slight decline in contract sales of new homes. Overall, brokers noted little change in existing home sales (sales of existing homes had risen slightly during the prior period). The commercial real estate sectors continued to report modest growth for construction and for leasing of existing commercial properties.
Lending volumes continued to grow at a modest pace, and credit quality continued to improve; however, more contacts expressed concern about loosening underwriting standards. As in the previous Beige Book, contacts reported slight increases in wages, home prices, and general price levels. Contacts continued to anticipate moderate growth of economic activity over the next six months.
Manufacturing
Third District manufacturers reported that current activity resumed growing at a modest pace after rising more briskly during the previous Beige Book period. Reports of new orders and shipments also suggested continued growth, but with less vigor. About twice as many firms reported decreases in new orders and shipments compared with last period. Gains in activity appeared to be stronger among makers of primary metals, chemicals, and paper products; activity appeared weaker among makers of lumber and wood, rubber, and plastic products. Contacts continued to report that stronger demand emanated from the automotive and commercial aviation sectors.
Expectations of positive growth during the next six months remained at historically elevated levels and were broad-based. Nearly two-thirds of the Third District manufacturing contacts reported positive expectations for growth. Overall, about one-third of the firms' contacts also continued to report that they expect to increase employment levels and capital expenditures. Only 10 percent or fewer of manufacturing contacts expected a decrease in employment, capital expenditures, or general activity.
Retail
Third District contacts have continued to report modest growth in nonauto retail sales since the prior Beige Book period. An operator of area malls reported that sales were better in 2014 than they were in 2013, but they were not spectacular. Higher-end merchandise continued to sell strongly, as it has for much of the recovery. Although contacts anticipate that retail sales will improve in 2015, one contact cautioned that more retail bankruptcies may occur in early 2015 due to shifting trends in tastes.
Auto dealers continued to report moderate growth in sales year over year. A Pennsylvania contact described sales levels throughout the state as strong overall through two-thirds of December despite the typical seasonal slowdown. Statewide sales in New Jersey were steady between October and November; however, the year-over-year change was flat in October and up 8 percent in November. Auto dealers remain bullish for 2015, and low oil prices are shifting purchases from cars to trucks.
Finance
Third District financial firms have continued to report modest increases in total loan volume since the previous Beige Book. Volumes increased rapidly for credit card lines in a typical seasonal shift. Moderate growth was reported for commercial and industrial lending, while modest growth was reported in several loan segments, including commercial real estate and some consumer credit lines, such as auto loans. Only slight growth was reported for mortgages and home equity lines of credit. Most contacts reported continued improvements in their customers' credit quality and in their own loan portfolios. However, most contacts also warned that underwriting standards have loosened. A mortgage servicing contact expressed concern about loan performance in 2015 and 2016 even as the rate of mortgage delinquencies appear to be bottoming out in most states. New Jersey and Pennsylvania remain exceptions with persistently high rates of severely distressed mortgages. Contacts remained optimistic about growth prospects for the nation's economy and are especially bullish about the potential impact of low-cost natural gas on Pennsylvania's industrial prospects.
Real Estate and Construction
Overall, Third District homebuilders continued to report weak traffic and declining numbers of contract signings. One builder reported more potential buyers and was more optimistic for December than he was in the prior two months. Builders reported ongoing price pressures from contractors for their labor costs and continued difficulty attracting first-time homebuyers out of the rental market. Builders expect that 2015 will be a better year than 2014, but they expressed a range of opinions on whether household formations will return to the prerecession rate or settle into a new, lower normal trend. Brokers reported that existing home sales finished lower in November on a year-over-year basis; however, a broker compiling data on a 10-county Philadelphia region reported that pending sales were up in double digits through mid-December. Contacts continued to report slight overall increases in home prices. Brokers are generally more optimistic for a return to growth in 2015.
Construction and leasing continued at a modest pace, according to nonresidential real estate contacts. Demand continued for new industrial/warehouse projects and for projects in Center City Philadelphia and some outlying suburbs. Contacts from architecture and engineering firms reported a significant increase in bids emerging for new projects, while competition from other firms has begun to abate. The falling competition was attributed to increased demand that has begun to stretch the capacity of some firms. Contacts continued to report incremental improvements in leasing activity in downtown and suburban Philadelphia, especially for office, residential, and retail spaces in Center City and select suburban office markets. The office space demand primarily represents a shift in the desired type of office space, rather than growth of office employment. Still, contacts are optimistic for continued growth of both new construction and leasing activity in 2015.
Services
Third District service-sector firms have continued to report moderate growth in activity since the previous Beige Book. Nearly half of all firms reported increases in new orders and sales. Two large national firms reported ongoing growth that was meeting expectations for the fourth quarter despite some headwinds from shifting consumer trends. Staffing contacts in eastern and central Pennsylvania continued to report moderate increases in hiring for both temporary and permanent positions. Staffing requests continued to flow in on the Monday before Christmas. Christmas week is typically slower, as staffing orders slump to their seasonal low during the week of New Year's. Staffing firms remained very positive for growth prospects in 2015. Overall, about three-fourths of all service-sector contacts reported expectations that growth trends for their firms will remain positive over the next six months; none anticipated declines.
Third District tourist areas reported mixed conditions for the early winter months. Several larger ski resorts have established a two-foot base of snow after a pre-Thanksgiving snowstorm staked them to an early season. However, unseasonably warm weather caused all the resorts to struggle to maintain good snow conditions and to attract winter tourists. The warmer weather and special events have kept the shore destinations reasonably busy during their off-season. However, many contacts remain concerned about the long-term impacts of casino closings in Atlantic City. Casino revenues were down about 10 percent in November year over year.
Prices and Wages
Overall, Third District contacts reported little change to the steady, slight pace of price level increases that was seen in other recent Beige Book periods. Manufacturing contacts have reported little change in their prices paid and prices received since the prior period, with about two to three times more firms expecting increases versus decreases. Among nonmanufacturing firms, contacts have reported fewer increases and more decreases of prices paid and prices received since the prior period, with little net difference. Manufacturers and construction firms continued to note wage pressures to attract skilled workers. Other contacts, including those from staffing firms, continued to note little significant change in wage pressures. Most contacts expect lower energy prices to broadly boost consumer spending, with more upside potential in Pennsylvania than downside risk to the state's energy-producing sectors.
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Fourth District--Cleveland
The economy in the Fourth District expanded at a modest pace during the past six weeks. Most of our contacts have a positive outlook for the new year, and they expect demand for their products and services to remain at current levels or rise. Manufacturers reported that business activity increased at a modest rate. Demand for nonresidential construction strengthened, while the residential market was stable. Retail spending during the holiday shopping season was slightly above year-ago levels, and year-to-date auto sales posted moderate gains compared to 2013. District coal production is up slightly year-over-year, while shale gas activity remains at a high level. Freight shipments were strong, but capacity issues are limiting growth. The demand for business and consumer credit moved higher.
Payrolls increased at a modest pace, primarily in banking, freight services, and manufacturing. Staffing firms reported that the number of job openings and placements in energy and manufacturing companies had risen slightly. Upward pressure on wages is limited to experienced and technically skilled personnel across industry sectors. Overall, input and finished goods prices were stable. There were scattered reports of declining prices for metals and petroleum-based products and rising prices for some building materials.
Manufacturing
Factory representatives reported that demand ranged from stable to showing a moderate improvement during the past six weeks. Any declines in orders were attributed to seasonal factors. Year-to-date results were generally better compared to those in 2013; several producers cited growth in the construction, shale gas, and auto industries as contributing to higher revenues. Our contacts are fairly optimistic and expect moderate to strong growth in 2015, though some expressed concern about weakening foreign economies and a decline in the price of oil. The seasonal slowdown in steel shipments that typically begins in November was slightly deeper than expected. A few contacts believe that customers are waiting for steel prices to stabilize at a lower level. Due to pricing and market uncertainties, some steel producers are reducing their finished goods inventory. Year-to-date auto production through November at District assembly plants was more than 4 percent higher compared to the same period in 2013.
A large majority of factory representatives reported that capital spending in fiscal year 2015 will be moderately higher than prior-year levels, with monies being allocated mainly for new IT and capital equipment. Raw material prices were stable or lower during the past six weeks; declines were seen in steel, copper, and petroleum-based products. Finished goods prices held steady. New hiring continued at a modest pace, mainly in production and sales. Wage pressures are limited to high-skilled production workers, engineering, IT, and computer system personnel.
Real Estate and Construction
Year-to-date sales through November of new and existing single-family homes were slightly below levels seen in 2013, while the average sales price was moderately higher. New-home contracts were mainly in the move-up price-point categories. Since our last report, single-family construction starts were down slightly, while the number of single and multifamily building permits issued moved mildly higher. Homebuilders pointed to a scarcity of lots in strong markets and stringent mortgage standards as factors that are constraining sales activity. The outlook for the new year is best described as cautious; while most respondents are expecting some growth, none are projecting robust activity. A majority of builders announced price increases averaging 3 percent, which will go into effect at the start of 2015. These increases will mainly cover rising costs, including higher rates from subcontractors.
Nonresidential builders reported pipeline activity generally ranging from moderate to robust, and they indicated that the level of activity has increased relative to a year ago. One builder commented that his customers feel more certain about risk-taking on high-value projects. For the most part, contractors are satisfied with their backlogs going into 2015. Market demand is broad based, although demand from manufacturers, healthcare providers, and higher education is strongest. There has also been a pickup in requests for commercial space. Builders are optimistic in their outlook for 2015. We heard a few comments about widening margins and growing opportunities for developing spec buildings. Several contractors reported that they are increasing their capital budgets for 2015, mainly to purchase heavy machinery.
Building materials prices were stable other than for drywall and concrete, which have increased. The diesel fuel surcharge is being reduced or eliminated. New hiring has diminished appreciably since early November due to the onset of winter weather. Several contractors reported that they are starting seasonal layoffs. Unless business conditions deteriorate, hiring will resume later in the first quarter. Wage pressures are limited to craft workers and more experienced engineers and project managers. Subcontractors are pushing through rate increases at a faster pace than general contractors had anticipated; these increases are needed to cover rising costs, including for labor and to widen margins.
Consumer Spending
Retailers reported that revenues from this year's holiday shopping season were slightly higher than those in 2013. Product lines in highest demand included apparel, electronics, and physical fitness. Retailers continued to run a significant number of promotions, which for some store chains is narrowing profit margins. Reports on the impact of lower gasoline prices were mixed. Many of our contacts were uncertain about sales expectations for the first quarter of 2015. Those making projections believe that same-store revenues will be only mildly higher year-over-year. Vendor and shelf prices held steady, other than anticipated increases for dairy products. Capital spending for 2014 was in-line with budgeted amounts. Capital plans for fiscal year 2015 are still in process, but most retailers are projecting little change in budgeted amounts. Hiring is limited to new store openings.
Year-to-date sales through November of new motor vehicles were about 5 percent higher compared to the same time period in 2013. Across many regions of the District, the share of SUV and truck sales was at its highest level of the year during November. Luxury vehicle purchases also picked up. These strong sales were mainly attributed to declining gasoline prices. Our contacts are satisfied with current inventory. Looking at 2015, dealers anticipate that the year-over-year change in unit volume will be positive, but increases will not be as strong as in 2014. There is some uncertainty as to the impact of sustained lower gasoline prices on new motor vehicle transactions. Little change in payrolls is expected during the winter months. Dealers continue to have difficulty finding skilled labor, especially technicians.
Banking
Bankers reported that demand for business credit exhibited modest to moderate growth during the past six weeks. While demand was described as broad based, it was strongest for commercial real estate and commercial and industrial loans. Consumer credit demand moved slightly higher, especially for auto loans and home equity products. Households are making marginally greater use of credit cards. Though the pricing environment remains competitive, interest rates were mainly steady for business and consumer credit and for residential mortgages. Many of our respondents noted that activity in their residential mortgage business has declined considerably. One banker reported that nonbank entities seem to be the biggest source of growth in residential mortgages and that it is becoming less and less a part of his business. Delinquency rates were stable or improving across loan categories. No changes were made to loan-application standards since the last report. Core deposits were described as good or strong and growing. A majority of bankers indicated that payrolls are rising at a slight pace, especially in the areas of commercial lending, risk management, and regulatory compliance. A few reported that they are beginning to feel some wage pressure and expect that it will intensify in 2015.
Energy
Year-to-date coal production across the District is slightly above prior-year levels. Output is projected to increase in Pennsylvania and northern West Virginia with no material change expected in eastern Kentucky and Ohio. Low natural gas prices have been reducing demand for thermal coals domestically. Spot prices for steam and metallurgical coal have declined since our last report. Activity in the Marcellus and Utica shale formations remains at a high level. However, a sustained decline in oil and gas prices may pose some downside risk to drilling and production, and it is uncertain what the effect will be on hiring and wages in the near term. Overall pricing for materials and equipment is down slightly during the past six weeks. Capital spending is projected to decline in 2015.
Freight Transportation
Freight volume increased since our last report, with demand being described as broad based. Profit margins improved due to lower diesel fuel prices. Although capacity constraints remain an issue industry-wide, carriers are encouraged by amendments to the hours-of-service rules that were included in the recently passed federal omnibus bill. Our contacts are optimistic in their outlook and they believe that strong growth trends should continue into 2015. A pickup in the number of consolidations within the freight industry is expected to continue. Little change in prices for parts and tires was reported. Capital spending in 2015 is projected to be strong, with monies being allocated for replacement and expansion. Hiring drivers is an ongoing process and industry executives agree that their ability to attract and retain truck drivers is critical to their ability to expand capacity.
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Fifth District--Richmond
The Fifth District economy expanded modestly since our previous report. Manufacturing activity improved with somewhat higher shipments and new orders. Retail sales grew moderately, while non-retail services revenues were little changed. Tourism was at or above normal seasonal levels. In the finance sector, loan demand rose slightly. Real estate activity increased at a mild pace. District agribusiness contacts reported a seasonal slowing, although business conditions are better than last year at this time. Coal production remained at low levels. Natural gas production increased moderately in recent weeks and prices decreased slightly. Labor demand rose since our previous report, led by growth in the Carolinas. According to our most recent surveys, manufacturing employment grew at a slightly faster pace while average wage growth slowed somewhat. In the service sector, the rate of hiring moderated from the strong pace of a month earlier and wages generally rose modestly. Price increases in raw materials and finished goods slowed in recent weeks. Retail prices also grew at a slower pace. In contrast, prices in the non-retail service sector rose slightly faster.
Manufacturing
Manufacturing activity advanced, but responses were more uneven than in the previous report. Shipments and new orders grew modestly, and expectations for the months ahead remained optimistic. Inventories of finished goods rose at a faster pace, and growth in inventories of raw materials slowed. A source in West Virginia reported that some smaller manufacturers that supply materials to the natural gas industry were seeing strong growth. A plastic resin and synthetic fiber manufacturer in South Carolina stated that his company was experiencing solid growth in sales across the company's various lines including aerospace, utilities, industrial materials, medical equipment, and telecommunications. On the other hand, a flooring manufacturer in West Virginia reported that production slowed in the fourth quarter and sales were below a year ago. Manufacturers of primary metals, transportation equipment, electrical equipment, and machinery reported a slight slowdown in business since the previous report, but they expected better conditions in the months ahead. Prices of raw materials and finished goods rose at a slightly slower pace in recent weeks.
Ports
Officials at the District's major ports reported strong growth in the volume of container traffic since the previous Beige Book. The volume of imported loaded containers exceeded the exported volume. According to one port official, imports of appliances, apparel, and footwear increased more quickly. Auto imports remained solid at another port, and imports of auto parts remained strong at all ports. Containerized grains and soybeans, as well as dry animal proteins and dried distiller grains (from production of ethanol), continued to lead exports. Exports of auto parts and plastic resins grew more rapidly in recent weeks. Previously reported railroad issues have eased somewhat. Port officials expressed concern that the strong dollar was affecting demand for U.S. exports.
Retail
Retail sales grew moderately since our previous report. The manager at a Virginia discount chain store said that holiday sales of electronics were strong, but that people were "still very conservative" in purchasing other goods. Another discounter commented that holiday business was slightly slower than typical. The manager at a store offering a lay-away plan reported that the program did well this year but that an unusually large amount of goods were returned to stock because customers were unable to complete sales. In West Virginia, a sporting goods store manager commented that online shopping had eroded his in-store sales. A central Virginia retail representative reported that advertising encouraging consumers to buy from local small retailers had boosted November sales revenues, but that many had a decline in sales in December. A wholesale foods executive commented that lower fuel prices reduced costs, helping to offset the effect of rising protein prices. Dealers stated that sales of autos and light trucks remained strong since the last report. Retail prices grew at a slower pace in recent weeks.
Services
Services firms' revenues were little changed since the previous Beige Book. Professional, scientific, and technical firms reported that demand was unchanged from previously reported levels; hospitals also reported flat demand. Trucking executives reported a normal seasonal surge in demand and continuing difficulty finding drivers. Prices in the service sector rose slightly faster.
Tourism was at or above normal seasonal levels in the weeks since our prior report. A Baltimore hotel manager said that advance bookings were at expected levels, while an executive at a resort in the North Carolina mountains reported that the entire fourth quarter was very strong and advance bookings for 2015 were ahead of last year's pace. In Virginia and South Carolina, bookings were up, and a South Carolina hotelier commented that people were spending more frequently on holiday parties. A contact on the outer banks of North Carolina stated that advance bookings were at typical levels, and current tourist activity was "humming along." Rental rates and hotel rates were generally unchanged.
Finance
Loan demand rose slightly since our most recent report. Residential mortgage demand was mostly unchanged in the District, although there was some increased demand in Virginia and North Carolina. A lender in Virginia said that the favorable rate environment had raised residential mortgage demand and generated some growth in refinance lending. Commercial and industrial lending was higher in the Carolinas, Virginia, and West Virginia.