The Federal Reserve's December Beige Book is out.
The report on U.S. business conditions based on anecdotal data characterized economic growth as "modest to moderate," as it did in October.
"Hiring showed a modest increase or was unchanged across Districts," reads the text of the report. "Difficulty with finding qualified workers, especially for high-skilled positions, was frequently reported. Upward pressure on wages and overall price inflation were contained. Contacts in many Districts voiced concern about future cost increases attributable to the Affordable Care Act and other types of federal regulation."
Here is more on the employment situation:
Hiring showed a modest increase in the Philadelphia, Richmond, St. Louis, Minneapolis, and Dallas Districts, while hiring in the remaining Districts was largely unchanged. Industries that reported moderate employment growth included construction, software and IT services, manufacturing, and healthcare. Temporary holiday hiring is in progress.
Cleveland reported that year-over-year growth in retail holiday hiring is expected to be flat; however, some employers noted that they are having difficulty finding seasonal workers. In Chicago, part-time seasonal hiring is slightly lower than normal as a result of retailers' choosing to increase current employees' hours instead of hiring new workers.
Some employers in the Philadelphia, Cleveland, Richmond, Atlanta, Kansas City, and Dallas Districts reported having difficulty finding qualified workers for certain permanent, high-skilled positions. In Philadelphia, a builder reported that contractors are reluctant to hire workers who require training. Instead, contractors are aggressively hiring skilled labor from each other. On net, staffing services across Districts remain more optimistic than they were three months ago, expecting steady growth through the end of the year and into 2014.
Below is the full text of the release:
Summary of Commentary on Current Economic Conditions by Federal Reserve District
Prepared at the Federal Reserve Bank of Cleveland and based on information collected on or before November 22, 2013. This document summarizes comments received from business and other contacts outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials.
Reports from the twelve Federal Reserve Districts indicated that the economy continued to expand at a modest to moderate pace from early October through mid-November. Activity in the New York, Cleveland, Richmond, Atlanta, St. Louis, Minneapolis, and Dallas Districts grew at a moderate pace, while Philadelphia, Chicago, Kansas City, and San Francisco cited modest growth. Boston reported that economic activity continued to expand.
Manufacturing activity continued to expand in most Districts, with gains noted in the motor-vehicle and high-technology industries. Manufacturers in many Districts expressed optimism about near-term growth prospects. Demand for professional business services experienced stable to moderate growth, especially in computer technologies. Freight volume showed signs of strengthening. Reports on retail spending were positive. Looking forward to the holiday shopping season, retailers reported being hopeful, but cautious. Sales of new motor vehicles were reported as moderate to strong across much of the United States. Tourism increased in most reporting Districts, although the federal government shutdown had a negative impact in some areas. Residential real estate activity improved across many Districts, with multifamily construction experiencing moderate to strong growth. Some slowing in single-family home sales was attributed to seasonal factors. Activity in nonresidential real estate was stable or improved slightly across many Districts. Agricultural conditions were generally favorable. Mining activity was mixed, while natural gas production increased. Banking conditions were largely stable, with some improvement seen in loan demand. Several Districts reported an easing of lending standards.
Hiring showed a modest increase or was unchanged across Districts. Difficulty with finding qualified workers, especially for high-skilled positions, was frequently reported. Upward pressure on wages and overall price inflation were contained. Contacts in many Districts voiced concern about future cost increases attributable to the Affordable Care Act and other types of federal regulation.
Manufacturing
Manufacturing activity expanded at a modest to moderate pace in most Districts during the reporting period. Firms in Philadelphia and Cleveland are beginning to take a more conservative stance toward capital spending, while capital outlays remain solid in Boston and Kansas City. Companies across a number of sectors in Philadelphia noted a reduction in activity due to the federal government shutdown, while defense contractors in Boston reported that sequestration has not yet affected them significantly. Chicago highlighted the motor-vehicle industry as a main source of strength due to a large number of new vehicle launches and increasing demand for medium- and heavy-duty trucks. Cleveland and St. Louis also reported increased motor-vehicle production. Steel producers in Dallas and San Francisco indicated that demand was steady, while producers in Cleveland and Chicago experienced a slight drop-off in production, even though they are beginning to see a reduction in the quantity of steel imports. San Francisco noted an increase in demand for semiconductors driven by demand for mobile-technology products, while the aerospace industry in the Pacific Northwest reported a large backlog of orders for commercial aircraft. High-tech manufacturing firms in the Dallas District said that demand was flat to modestly weaker; however, respondents expect a gradual increase in demand over the next three to six months. In Kansas City, sales among high-tech firms moderated but were positive overall; several firms cited a reduction in government contracts due to sequestration as the main cause for the slowing. Wood-product manufacturers in Minneapolis and San Francisco saw an improvement in business activity. Contacts in the Boston, New York, Philadelphia, Chicago, Minneapolis, and Kansas City Districts expressed varying degrees of optimism about near-term business activity. Nonetheless, some contacts in Cleveland and Chicago observed that heightened levels of uncertainty, driven in part by fiscal issues, could dampen demand.
Nonfinancial Services
Demand for nonfinancial services was stable or grew at a moderate pace across most reporting Districts. Boston and San Francisco noted that demand for software and information technology (IT) services was strong. IT contacts in Boston have grown more optimistic and are expecting continued growth into 2014. The Richmond District noted growth in server farms. Dallas reported that multiple service sectors, including accounting, legal, and intellectual property, were experiencing stable to improving demand. Most of the Districts that commented on the partial shutdown of the federal government said that its impact on service providers was modest or temporary. The Dallas District reported that airline activity is mixed but has increased since the cessation of the shutdown; however, seasonal factors were also noted. Concerns linger in Dallas about the upcoming second round of sequestration cuts.
Transportation and freight services, especially those related to railroads, ports, and trucking, strengthened across Districts. Port activity in Richmond was robust, with exports of containerized grain and imports of housing-related products continuing to grow. Imports and exports of autos and auto parts remained strong. Year-to-date shipping volumes were higher in Cleveland when compared to the same time period in 2012. Freight haulers were hiring for both replacement and capacity expansion. Retail and e-commerce activity in Dallas continued to drive growth in the transportation sector. Logistics contacts in Atlanta were forecasting record volumes during the holiday season due to online sales.
Consumer Spending and Tourism
Consumer spending increased in almost all Districts at a modest to moderate pace. A Boston retailer noted that sales performance during the 2013 holiday season will be a better test of what seems to be an improving trend. Philadelphia retailers reported hopeful, but very uncertain expectations for the holiday season, while retailer expectations in the Atlanta District for the holiday season are only mildly optimistic. Stores in Minneapolis and Kansas City are cautiously optimistic about the buying mood of holiday shoppers. Demand for home furnishings was strongest in Boston, Richmond, Chicago, and Kansas City. Apparel sales were strong in the Boston, Cleveland, and Kansas City Districts. Retailers in Boston, New York, Cleveland, and Dallas indicated that their store inventories are at desired levels.
Sales of new motor vehicles continued at a moderate to strong pace across most Districts, although Dallas reported a slight decline, which was attributed to a lack of consumer confidence and continued uncertainty. Motor-vehicle purchases in Kansas City were flat. Dealers in Cleveland and St. Louis saw a pick up in purchases of SUVs and cross-over vehicles. Chicago indicated that lower gasoline prices were motivating buyers to shift away from more fuel-efficient vehicles. Used-car sales were mixed, with Cleveland and St. Louis reporting an increase, while purchases in the New York District were soft.
Reports on tourism varied. Due to the federal government shutdown, tourist destinations in the Boston, Richmond, and Minneapolis Districts experienced lower traffic. In Philadelphia, some super-storm Sandy-affected areas of the New Jersey shore continued to experience lighter traffic than normal. Boston reported that tourism activity at hotels and restaurants exceeded usual expectations due to additional business brought in by the World Series. New York reported strong tourism activity attributed in part to Broadway performance openings. Cold-weather expectations have boosted ski bookings in Richmond. Contacts there noted that the strength in bookings has allowed them to raise rates for the first time in several years. Atlanta and Minneapolis reported that tourism expanded. In the San Francisco District, Hawaii maintained its solid pace of growth. In contrast, Las Vegas tourism remained relatively weak, and contacts pointed to a moderate year-over-year decline in automobile traffic in the region.
Real Estate and Construction
Residential real estate activity improved in Boston, Philadelphia, Chicago, St. Louis, Minneapolis, and San Francisco, while remaining steady or softening in other Districts. Some slowing in single-family home sales was attributed to seasonal factors. Nonetheless, sales remain largely above year-ago levels. Increasing demand, low to declining levels of inventory, and slowly rising new-home construction were cited by almost all Districts as reasons for a continued rise in home prices, but at a slower pace than was observed earlier in 2013. Historically low inventories of unsold homes were reported in Philadelphia, Richmond, Chicago, Kansas City, and Dallas. Chicago noted that the inventory of homes for sale is at a record low. In the Philadelphia, Cleveland, Kansas City, and San Francisco Districts, builders continued to face a scarcity of high-skilled trade workers. Boston, New York, Philadelphia, Cleveland, Richmond, and Chicago indicated that multifamily construction continued to experience moderate to strong growth, with strength concentrated in the apartment segment. Vacancy rates declined across most Districts.
Commercial real estate activity remained stable or improved slightly across many Districts. Philadelphia, Cleveland, Richmond, Chicago, St. Louis, and Minneapolis all saw gains in industrial construction, while Boston, Chicago, and St. Louis cited a rise in hotel construction. The technology sector drove demand for commercial real estate in the San Francisco District, and Cleveland saw gains in affordable housing and shale-gas-related activity. The outlook of market participants is for continued improvement in the Philadelphia, Atlanta, Kansas City, and Dallas Districts, while contacts were cautiously optimistic in Boston and Cleveland.
Banking and Finance
On balance, banking conditions remained stable in a majority of reporting Districts. Loan volume showed a modest increase in Philadelphia, Chicago, and San Francisco, while Boston and Atlanta reported a moderate rise. Dallas noted that loan demand softened across most lines of business during the reporting period. An increase in business-credit activity was seen in a number of Districts. Commercial real estate lending increased in New York, Cleveland, Atlanta, Chicago, Kansas City, and San Francisco. Demand for commercial and industrial (C&I) loans rose in the New York, Atlanta, and Kansas City Districts, but weakened in St. Louis. C&I lending was unchanged in Chicago. In the Philadelphia, Richmond, Atlanta, Chicago, and San Francisco Districts, some bankers eased lending standards in response to aggressive competition for quality loans. Lending standards remained unchanged across loan categories in New York, Cleveland, St Louis, and Kansas City. Consumer borrowing weakened in a few Districts, including New York, Richmond, and St. Louis. In Cleveland, Kansas City, and Dallas, demand for consumer loans was little changed, while it increased in Chicago. Lower residential mortgage activity was reported in many Districts. Bankers in Cleveland, Richmond, and Atlanta attributed the decline in part to higher interest rates than earlier in the year. New York, Atlanta, Chicago, and Dallas reported declines in refinancing activity as well. Several Districts reported increased credit quality, as delinquencies have continued to decline and fewer problem loans have been reported.
Agriculture and Natural Resources
Strong crop yields were reported, while in general, agricultural commodity prices fell and drought conditions stabilized or improved. Richmond, Chicago, and Kansas City reported strong crop yields for fall harvests. Contacts in the Kansas City District noted decreases in farm incomes and increases in the demand for farm operating loans, as prices softened in response to rising yields. The Chicago, Kansas City, Dallas, and San Francisco Districts indicated strong demand and increased profitability in livestock due to lower feed costs. Atlanta contacts reported making investments in various types of agricultural equipment as a means to further improve production and contain costs. Prices paid to farmers for wheat, corn, and soybeans fell in Atlanta, Chicago, and Minneapolis. However, in Chicago, higher exports cushioned the decline. The Kansas City District indicated rising farmland values, although the rate of increase slowed.
Reports indicated a continued expansion in energy demand and production. Coal mining activity was mixed across the Cleveland and Richmond Districts and higher in St. Louis. In Cleveland and Richmond, the completion of pipeline connections and gas-processing plants contributed to an increase in natural gas drilling and extraction, while gas production rose in the Minneapolis, Dallas, and San Francisco Districts. San Francisco noted an increase in wind and solar energy production facilities. In Minneapolis, regulatory approval has been obtained for a large wind farm in North Dakota. The Minneapolis District also reported solid mining activity in precious metals and an increase in iron ore production, while oil and gas exploration was flat or fell slightly.
Employment, Wages, and Prices
Hiring showed a modest increase in the Philadelphia, Richmond, St. Louis, Minneapolis, and Dallas Districts, while hiring in the remaining Districts was largely unchanged. Industries that reported moderate employment growth included construction, software and IT services, manufacturing, and healthcare. Temporary holiday hiring is in progress. Cleveland reported that year-over-year growth in retail holiday hiring is expected to be flat; however, some employers noted that they are having difficulty finding seasonal workers. In Chicago, part-time seasonal hiring is slightly lower than normal as a result of retailers' choosing to increase current employees' hours instead of hiring new workers. Some employers in the Philadelphia, Cleveland, Richmond, Atlanta, Kansas City, and Dallas Districts reported having difficulty finding qualified workers for certain permanent, high-skilled positions. In Philadelphia, a builder reported that contractors are reluctant to hire workers who require training. Instead, contractors are aggressively hiring skilled labor from each other. On net, staffing services across Districts remain more optimistic than they were three months ago, expecting steady growth through the end of the year and into 2014.
Overall wage pressures remain contained across most Districts, with a modest increase reported in Boston, New York, and Dallas. Contacts in the Cleveland, Atlanta, Kansas City, Dallas, and San Francisco Districts noted some upward pressure on wages for skilled jobs, such as craft labor, engineering, IT, and accounting. Contacts in California's restaurant industry projected higher labor costs, as the state's minimum wage increases take hold over the next few years. Builders in the Philadelphia and Cleveland Districts cited a scarcity of high-skilled trade workers. As a result, there is upward pressure on wages, and subcontractors are demanding and getting higher rates.
Price inflation is contained, with phrases such as "minimal," "no change," and "stable" being common across most Districts. However, in New York, service-sector firms reported that price pressure was moderate and that a sizable number of firms were planning at least some price increases in the coming months. The Cleveland, Kansas City, and San Francisco Districts also commented that prices for residential construction materials, such as lumber and drywall, continued to rise, but the Cleveland District noted that the rate of increase has recently slowed. Contacts across many Districts continue to voice concerns about future cost increases attributable to the Affordable Care Act and other types of federal regulation.
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First District--Boston
Economic activity continues to expand in the First District. Most respondents in manufacturing, retail and tourism, software and IT services, and the staffing industry report year-over-year increases in revenue, while both residential and commercial real estate contacts indicate that market conditions continue to improve. Most firms are holding headcounts level; wages are steady or increasing modestly. Upward price pressures remain minimal. Many firms are cautiously optimistic about the outlook, a more upbeat tally than in the October round of calls.
Retail and Tourism
This round's retail contacts report year-over-year comp store sales increases between 7 percent and 25 percent, with one firm down 3 percent. Demand continues to be strong for apparel, home furnishings, and furniture. Inventories are well managed and prices remain steady. Compared to earlier rounds this year, sentiment is a bit more optimistic, or as one source opines, conditions "will not get any worse." Another respondent notes that the first two weeks of November showed some real underlying strength, but also states that sales performance during the 2013 holiday season will be a better test of what seems to be an improving trend. About one-third of contacts have raised their expectations for overall 2013 sales in light of their third quarter results.
October was particularly good for Boston hotel and restaurant activity, exceeding the usual expectations for this traditionally busiest month, on account of the additional business brought in by the World Series appearance of the Red Sox. Hotel revenues were up 7.5 percent year-over-year, supported by an increase in occupancy rates. Transportation services also benefitted from higher-than-usual demand. Some New England tourist attractions suffered from the government shutdown, notably those run by the National Park Service or the Navy (U.S.S. Constitution) and the private firms depending on their visitors. Museums and other attractions continue to experience declining attendance; their revenues are down 6 percent year-over-year.
Manufacturing and Related Services
Only one of the ten firms contacted this cycle reports falling sales. A plastics firm indicates that its core bulk chemical business is slowing--"coming in for a landing"--and its retail garden hose business is "the worst in memory." Two contacts report that sales growth is flat. The first is a computer software firm that largely serves the defense industry; the second is a manufacturer of electrical distribution equipment for whom strong residential demand is being offset by very weak non-residential. A firm that makes tools for home improvement reports that sales are up, but less than they had expected. Defense firms continue to say that sequestration has not yet affected them significantly.
All manufacturing respondents report it is difficult or impossible to raise their product prices. A contact in the bulk chemical business said input prices are falling, which he sees as evidence that "no one in the industry is buying." A commercial aircraft parts manufacturer says that major firms in the industry are trying to drive costs down and, among other things, forcing more and more subcontracting.
None of our contacts reports staff cuts, but only four indicate they are increasing staff. The home improvement equipment firm reports they are bringing 250 jobs back to the United States from China and Mexico. A semiconductor equipment firm plans to hire only contract workers. One contact says the Affordable Care Act is significantly increasing health care costs for his firm.
Most First District respondents continue trying to keep inventories low. Firms that increased inventory mostly say they are doing so in anticipation of higher sales. By exception, the hose manufacturer cites massive inventory accumulation due to low demand. Two contacts report lower capital spending while the rest cite either no change or an increase since the last conversation. One firm reducing investment did so because a major project was completed. A manufacturer of electrical distribution devices says the only thing holding back investment is a shortage of "talent" to execute new projects.
First District manufacturers are mostly optimistic, but guardedly so. The bulk chemical business contact says the slowdown in his industry is serious but not long-term. Firms with substantial exposure to defense are unwilling to make any forecasts due to uncertainty about the budget process.
Software and Information Technology Services
New England software and information technology services contacts generally report stronger-than-expected business activity through November, with modest improvements in both revenues and earnings since August 2013. Contacts attribute this growth to factors ranging from increased consumer demand to improved execution at the firm level. Most contacts expect to report positive year-over-year earnings growth at the end of 2013. By contrast, a healthcare contact reports negative growth due to the expiration of federal stimulus funding for health records software; however, this decline is much smaller than expected. While one firm shed some jobs, most firms either maintained headcounts or slightly increased their hiring pace. Wages have been steady, with plans for merit increases at the end of this quarter in the 3 percent to 5 percent range. Both selling prices and capital and technology spending have gone largely unchanged in recent months. Looking forward, New England software and IT contacts are more optimistic than they were in August, expecting continued growth through the first quarter of 2014.
Staffing Services
New England staffing contacts generally report strengthened business conditions through November, with low-double-digit quarter-over-quarter revenue growth, and year-over-year revenue growth in the 3 percent to 10 percent range. This uptick reportedly reflects both an improved macroeconomic climate and changes in firms' business development strategies. Only one staffing contact reports softer results, with revenues in New England down 10 percent year-over-year. Labor demand is largely unchanged since August 2013; one contact reports increased demand in the software and mobile application development sector. Labor supply has thinned in recent months across all industries, and is particularly tight in the software/IT and engineering sectors. Firm strategies to attract more job candidates include improved marketing tactics, and an exchange program that temporarily brings in IT professionals from abroad. The temporary-to-permanent rate continues to be strong, with one contact reporting a 50 percent increase this year. Bill rates and pay rates have either remained flat or have modestly increased since August. Looking forward, staffing contacts are generally more optimistic than they were three months ago, expecting steady growth through the end of the year.
Commercial Real Estate
Contacts across the First District report that leasing fundamentals maintained a very slow pace of improvement in recent weeks, consistent with minimal-to-slow employment growth. However, in some parts of Boston--the Seaport District and Back Bay--absorption has accelerated in recent months and, for the first time since before the Great Recession, speculative office construction is starting to occur. In Rhode Island, tenants are showing an increased willingness to commit to longer-term lease renewals (5-10 years), following an extended period during which shorter-term renewals were favored. At the same time, projected state budget deficits for Rhode Island, and political uncertainty over how such budget gaps will be closed, are seen as a crimp on business expansion in the state. A Connecticut contact echoes the theme of political uncertainty as a drag on growth, as that state is also facing large budget shortfalls in coming fiscal years. A regional lender to commercial real estate cites the U.S. government shutdown as the cause of a sharp decline in loan inquiries, but borrowing activity at the bank has since resumed at a healthy pace. The lending environment remains highly favorable to borrowers, with historically low borrowing rates and increasingly loose lending standards--even too loose in relation to fundamentals, according to some contacts. Abundant investment capital continues to flow into commercial properties across the region, sourced from private equity firms, pension funds, foreign investors, REITs, and high net-worth individuals. Leverage ratios are reportedly on the rise among some investors, but one contact points out that they remain low in absolute terms.
In Boston and surrounding suburbs, construction activity (both current and planned) is reportedly on the rise in both the hotel and retail sectors. The growth rate of multifamily construction--recently quite high in metro Boston--is expected to slow considerably within 12 to 18 months, while construction in the health care sector across the region is seen as restrained by uncertainty over the implications of national health care reform.
Contacts are cautiously optimistic across the region. Forecasts call for more slow improvement in fundamentals moving forward, pending steady (if slow) employment growth. However, fiscal policy uncertainty at both the state (noted above) and national levels is mentioned by a few contacts as a downside risk to employment growth and hence to improvements in leasing and construction activity.
Residential Real Estate
Based on numbers for September and contacts' "sense" of October results, it appears that sales of single-family homes and condos continue to improve throughout New England, while prices continue to approach, and in some states exceed, pre-recession levels. Sentiment across the region is that the recovery is well underway, but sales activity will likely begin to moderate in the months ahead as winter approaches. Pending sales are expected to decline in a few states, and contacts in the field attribute the decline at least partially to a drop in consumer confidence resulting from the recent government shutdown. While some contacts cite consumers upgrading homes, respondents in other states say sales growth is driven primarily by first-time home buyers. Contacts in Maine and Connecticut also cite an uptick in foreclosures and short sales coming onto the market. The other New England states, however, claim unconventional sales generate a relatively small percentage of total sales. New federal flood insurance legislation and new flood maps drawn by FEMA continue to generate concern across the region as insurance rates are expected to rise and make houses located in potential flood areas more expensive to own. Those worries notwithstanding, the overall message is that this has been a turnaround year in First District residential markets, although economic factors could still change the trajectory of the recovery.Return to top
Second District--New York
Economic growth in the Second District has continued at a moderate pace since the last report. Contacts report that cost pressures have abated slightly, while selling prices are steady to up moderately. Service sector firms generally indicate a pickup in activity, while contacts in the manufacturing sector report that it has leveled off. Overall, there were no reports of any major disruptive effects from the federal government shutdown. Labor market conditions have continued to improve modestly since the last report, and there has been some upward pressure on wages. General merchandise retailers indicate that sales picked up a bit in October and were somewhat ahead of plan, with favorable trends continuing into November. New auto sales have continued to be robust, whereas used car sales remain soft. Tourism activity has remained fairly strong in recent weeks. Both residential and commercial real estate markets have been mixed since the last report. Finally, banks report some weakening in loan demand from the household sector, but increased demand for commercial mortgages and loans, little change in credit standards, and steady to declining delinquency rates.
Consumer Spending
Retailers report that sales have improved since the last report and have generally been ahead of plan. One major retail chain reports that sales were on plan in October and looking stronger in early November, while another chain indicates that they have been above plan throughout. New York City stores have continued to out-perform slightly those in the rest of the region. Contacts at major malls in upstate New York note that sales picked up somewhat in October and early November and are running roughly on par with 2012 levels. Inventories are said to be at desired levels. Retail contacts widely describe the pricing environment as more promotional than in 2012.
New auto sales are characterized as quite strong: auto dealers in both the Buffalo and Rochester areas report that new vehicle sales were up 20 percent or more from a year earlier in October, with strength projected to continue into November. Sales of used automobiles, in contrast, have remained soft. Wholesale and retail credit conditions for auto purchases are again reported to be in good shape.
Tourism activity has remained strong since the last report. Manhattan hotels report that occupancy rates remained high in October, with room rates up moderately from 2012 levels. Hotels in the upper Hudson Valley also report that business has been strong. Attendance and revenues at Broadway theaters have continued to trend up in October and into early November, as more shows have opened. While year-earlier comparisons are distorted due to Sandy disruptions last November, recent levels look robust for this time of the season.
Consumer confidence in the region weakened in October. The Conference Board's survey of residents of the Middle Atlantic states (NY, NJ, Pa) shows confidence retreating from a nearly six year high, while Siena College's survey of New York State residents indicates a more pronounced drop, to a nearly two-year low.
Construction and Real Estate
Residential real estate markets in the District have been mixed since the last report. Contacts in western New York State continue to describe market conditions as robust in October and into early November: sales volume has been exceptionally strong, prices continue to rise, and there are ongoing reports of multiple offers and price wars. Sales activity in New York City's co-op and condo market, on the other hand, has retreated in the 4th quarter, following an exceptionally strong third quarter, and prices have leveled off. While there is a reasonable amount of new development at the high end of the market, inventories across the rest of the market remain lean. Manhattan's rental market has also softened slightly, with rents running modestly lower than a year earlier. A contact in New Jersey's housing industry reports some seasonal slowing in activity in October, suggesting some leveling off in market conditions. Single-family construction in the state remains weak, though there is a fair amount of multi-family development, as well as renovation and alteration work. A large overhang of properties in foreclosure is said to be holding back prices and dissuading some owners from selling.
Commercial real estate markets have also been mixed thus far in the fourth quarter. In Manhattan, the outer boroughs, and Long Island, office vacancy rates continue to drift down, while asking rents continue to rise--though only modestly for Class A properties. Northern New Jersey's office vacancy rate is little changed at a high level, while asking rents are flat. However, in the Westchester/Fairfield markets and across upstate New York, vacancy rates climbed to multi-year highs. Industrial markets have also been mixed, with conditions strengthening noticeably in downstate New York and northern New Jersey, but slackening across upstate New York.
Other Business Activity
On balance, the labor market has been steady to slightly stronger since the last report. Overall, businesses indicate that they are increasingly likely to add workers in the months ahead--particularly manufacturers. One major employment agency reports that the government shutdown in October took some momentum out of hiring, but that business has been steady in recent weeks. Another agency indicates little change in the market, with somewhat less of a seasonal slowdown than expected thus far--possibly due to mild weather. Salary offers have reportedly increased slightly. One employment agency contact observes that companies are increasingly inclined to hire long-term, full-time workers, as opposed to temps.
Manufacturing firms in the District report that activity has leveled off in recent weeks. But businesses in other sectors report increasingly widespread increases in activity. Both groups continue to express fairly widespread optimism about the near-term outlook. Businesses generally report some easing in input price pressures; manufacturers report that their selling prices remain steady, though service-sector firms overall report moderate price hikes, and a sizable number plan at least some price hike in the months ahead.
Financial Developments
Small to medium sized banks across the Second District report decreased demand for consumer loans and residential mortgages but increased demand for commercial mortgages and commercial & industrial loans. Bankers also report a decrease in demand for refinancing. Respondents indicate that credit standards were unchanged across all loan categories but note a decrease in spreads of loan rates over costs of funds for all loan categories--particularly commercial mortgages. Respondents report no change in the average deposit rate. Finally, bankers report continued declines in delinquency rates for all loan categories except for residential mortgages, where rates have leveled off.
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Third District--Philadelphia
Aggregate business activity in the Third District continued to rise at a modest pace during this current Beige Book period (beginning with the first partial week of October). Reports from most sectors changed little. However, existing home sales resumed a moderate pace of growth (albeit from low levels), and manufacturing activity slowed to just a slight pace of growth. Sectors that continued to expand at a modest pace included residential construction, general retail sales, tourism, staffing services, and commercial real estate leasing. Commercial real estate construction continued to expand only slightly. The broad general services sector continued to grow at a moderate rate, and auto dealers continued to report strong sales activity. Loan volumes at Third District banks grew at a modest pace across most categories, and credit quality continued to improve. Contacts reported little change to the slight overall increases in wages, home prices, and general price levels--similar to the last Beige Book period.
Despite a slower pace of growth in some sectors, contacts overall maintained an outlook for moderate growth--similar to the last Beige Book. Contacts in most sectors continued to express confidence in the underlying economy. In particular, manufacturers and service-sector firms expressed strong confidence in the U.S. economy and in global conditions. In regard to hiring and capital expenditure plans, firms continued to expand cautiously, as they face ongoing uncertainty from federal fiscal debates and implementation of the Affordable Care Act.
Manufacturing
Third District manufacturers have reported continued increases in orders and shipments at a slight pace of growth overall since the last Beige Book. One-third of all firms reported increases--about the same as before. However, one-fourth of the firms reported decreases--somewhat higher than before. The makers of food products, paper products, fabricated metals, and instruments have reported gains since the last Beige Book. Reports of decreases came from the makers of lumber and wood products, chemicals, primary metals, and industrial machinery as well as the makers of stone, clay, and glass products. Some reports reflect seasonal trends. Firms across several sectors noted a reduction in activity due to the government shutdown. One contact reported: "We definitely noticed a quieter period during the first two weeks of October." Another said that "the debt ceiling debate is having a chilling effect on demand." Despite disruptions from the shutdown, one large industrial supplier reported that conditions have been improving steadily since a trough in July.
Significantly more firms (over half) reported increases in their total workforce compared with the firms that reported increases one year ago (one-third). Also, the average rate of capacity utilization reported by firms was slightly higher this year. Optimism that business conditions will improve over the next six months remained high although not quite as high as during the prior Beige Book period. While over half of the firms continued to anticipate increases in activity, some firms expected decreases in activity, where there had been none before. One contact reported that "clear fiscal policy can help spur more growth, while fiscal dysfunction will most likely derail economic activity. I do not know what to expect for early 2014." Though still positive overall, contacts have reported somewhat lower expectations of hiring and capital spending plans since the last Beige Book.
Retail
Third District retailers have continued to report modest growth overall since the last Beige Book. Contacts cited some negative impacts from the government shutdown and cautioned that year-over-year comparisons might be overly strong due to last year's impacts from Hurricane Sandy. Retailers reported hopeful, but very uncertain, expectations for their all-important 2013 holiday season. Shifting from the longest shopping season last year to the shortest shopping season this year has prompted considerable jockeying by traditional and online retailers over the timing and scope of their promotional offerings. More stores plan to open on Thanksgiving Day than ever before; some Black Friday deals are being offered earlier. Retailers may gain more clarity after Black Friday and Cyber Monday results are tallied, but a complete picture may require sales results for November, December, and January.
Auto dealers have reported continued strong sales since the last Beige Book period. Pennsylvania dealers reported some softness during the government shutdown. New Jersey dealers reported stronger sales activity but cautioned that year-over-year comparisons for October through year-end will be affected by last year's storm impacts--first as sales lagged during the storm and its immediate aftermath, then soared as replacement vehicles were purchased. Dealers reported that they remain bullish on sales for "at least the next twelve months."
Finance
Overall, Third District financial firms continued to report modest increases in total loan volume. Most loan categories appeared to grow somewhat; however, contacts reported essentially no change in commercial real estate loan volumes. Demand remained strong for financing of multifamily housing projects. Several contacts noted that consumers are increasing their use of home equity lines rather than refinancing to do home improvements. Contacts reported that the low interest rate environment has been helpful for businesses generally and that borrowers' financial statements are looking better. However, small businesses remained "reluctant to borrow." Banking contacts continued to express concerns about aggressive competition on rates and terms, suggesting that credit standards have continued to ease slightly. Overall, most bankers remained optimistic, albeit for continued slow, steady growth.
Real Estate and Construction
Third District homebuilders have reported little change in their modest pace of activity since the last Beige Book. One builder reported greater interest in the last few weeks after weaker activity at the outset; his competitors had struggled early as well. With recent small drops in gas prices and interest rates and the rise in stocks, he wondered where the buyers were. Another builder reported that the government shutdown and general malaise seemed to be contributing to the soft demand. Another builder reported that contractors remain reluctant to invest in new capacity and to hire workers requiring training. Instead, contractors are "stealing" skilled labor from each other. According to residential real estate brokers, sales of existing homes resumed double-digit growth rates (year over year) in most of the Third District's major metropolitan areas. Reported increases ranged from 17 percent in October for the Lehigh Valley to 27 percent in the Harrisburg area. Contacts for the Philadelphia metropolitan statistical area and southern New Jersey also reported growth in excess of 20 percent. The inventory of homes for sale continued to fall in all markets.
Nonresidential real estate contacts indicated little change in the slight growth rate of construction and the modest pace of overall leasing activity. Demand remains strongest for new construction of industrial buildings, hospitals, schools, and other institutions. Multifamily buildings for apartments and condos also remain in greater demand. Leasing agents, management companies, and commercial market analysts remained optimistic for steady progress in various sectors and locations within the Third District.
Services
Third District service-sector firms continued to report a moderate pace of growth overall; staffing firms and tourism maintained a more modest pace. Tourism along the Delaware and New Jersey shores is seasonably slow. Storm-impacted areas of the Jersey shore continued to experience somewhat lighter traffic than normal but most parts of the Jersey shore as well as Delaware beaches experienced normal activity. Tourism is expected to be back to normal next year, except for those few areas that lost the greatest number of homes during the storm.
Other service firms reported modest to moderate growth rates. Contacts described growth during the recent Beige Book period as "steady" and "nothing exciting," with no significant impact from the government shutdown. The steady recovery in the residential housing sector was cited by contacts from a variety of service sectors as underpinning their own steady gains. Staffing firms also reported steady growth in demand for temp placements, especially in manufacturing, distribution, and health care. Overall, service-sector firms remain confident that current trends will continue with a possibility for a slightly faster pace of growth.
Prices and Wages
Overall, Third District contacts reported no change to the steady, slight pace of price level increases, similar to the previous Beige Book. Manufacturing firms reported that prices paid and prices received moved higher again. Auto dealers and general retailers reported little change in pricing, and most builders reported holding prices steady. One builder offered price incentives in October that drove additional sales. Many contacts reported coping with extremely tight margins. Generally, real estate contacts continued to report rising prices for lower-priced homes, while higher-priced homes are aligned to local market conditions. Very few contacts are seeing wage pressures, other than for a few highly skilled occupations.
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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 dipped slightly, while nonresidential builders saw an overall pick up in business. Reports on retail purchases during October were mixed. New-motor-vehicle sales posted moderate gains on a year-over-year basis. Wet-gas production in the Marcellus and Utica shales rose sharply between the second and third quarters of 2013. The rate of decline in coal production is slowing. Freight volume remains above year-ago levels. Applications for business and consumer credit rose slightly.
Hiring was sluggish across most industry sectors, though we did see a pickup in construction. Staffing-firm representatives reported that the number of job openings and placements increased slightly, with vacancies found primarily in healthcare and manufacturing. Wage pressures remain contained. Input and finished goods prices saw little change, apart from increases in residential construction materials and steel.
Manufacturing
Reports from District factories showed that demand was steady to growing at a robust pace during the past six weeks. Companies seeing the strongest activity were suppliers to the aerospace, housing, motor-vehicle, and oil and gas industries. A few contacts noted that they are starting to see improvements in European markets. Defense contractors are still coping with uncertainty, due primarily to government fiscal issues. Compared to a year ago, manufacturing production levels are mainly higher. Looking forward, most of our respondents expect little change in demand other than normal seasonal variation, though several manufacturers cited the regulatory environment and the dampening effect it could have on confidence. Steel producers and service centers reported that shipping volume is below expectations due in part to customers keeping their inventories at low levels. Most of our respondents remain concerned about the quantity of steel imports, though a few noted that they are beginning to see a decline in the amount being imported. Steel producers do not expect market conditions to change appreciably in the next few months apart from seasonal variation. District auto production was strong during October, with production numbers showing sizeable increases on a month-over-month and year-over-year basis.
Capacity utilization rates have risen during the past few months for some of our contacts, but almost all reported sufficient capacity to absorb additional demand spikes. Only one contact reported that he is considering expanding capacity. Capital expenditures are in line with budgeted amounts for the fiscal year. Outlays are being allocated primarily for productivity enhancements and information-technology upgrades. Several manufacturers indicated that they are taking a more conservative stance toward upcoming capital budgets until there is a higher degree of certainty about the economy. Growth in raw material and finished goods prices was generally flat. We heard a few reports about rising steel prices, which manufacturers successfully passed through to their customers. Factories expanded payrolls at a sluggish pace.
Real Estate
Sales of new single-family homes declined slightly during the past six weeks, which builders attributed to seasonal factors and a lowering of consumer confidence. Multifamily construction remains strong. New-home contracts were found mainly in the move-up price-point categories. The first-time home-buyer category remains very weak. Selling prices of new homes continued on a steady upward trend due to rising costs (labor and materials) and low inventory in desirable areas. One builder noted that he has seen three price increases in the past year. Builders are confident that demand for new homes will persist, and sales should pick up after the first of the year.
Nonresidential builders reported an overall pick up in business. Smaller projects are filling the pipeline at this time, while very large projects are few in number. With respect to the latter, uncertainty about the strength of the economy and fiscal issues are keeping investors from moving forward. Most of our contacts indicated that they are comfortable with the number of inquiries they receive and their backlogs. However, several builders emphasized that clients are only closing on projects that are viewed as crucial to their businesses. The strongest activity was in manufacturing, distribution, shale gas, commercial development, and multifamily/affordable housing. Our contacts are cautiously optimistic about near-term prospects but are expecting slow growth at best.
Prices for residential construction materials--lumber and drywall--have increased substantially in the past year, but the rate of increase is slowing. General contractors reported moderate hiring in their apartment management divisions, while the hiring of field and back-office personnel was more limited. Many of our contacts noted increases in health-insurance premiums. Builders cited a scarcity of high-skilled trade workers. As a result, there is upward pressure on wages, and subcontractors are demanding and getting higher rates.
Consumer Spending
Reports on retail purchases during October were mixed. Retailers who saw flat or lower sales relative to September attributed it in part to a weakening in consumer confidence. A full-service food retailer noted a proliferation of dollar stores, which are attracting a rising share of his lower-income customers. Stores seeing increased sales credited a larger product selection and wider use of promotions. Most of our contacts said that year-over-year sales were higher. Products in greater demand included core goods and cold-weather apparel. One of our contacts expects that electronics purchases will pick up once the holiday shopping season gets under way. Projections for the fourth quarter call for flat to moderately higher sales relative to the same time period last year. Inventories were described as being in good shape. Vendor and shelf prices held steady. Some retailers expect to increase capital spending in 2014, mainly for improving e-commerce and distribution systems. Temporary hiring for the holiday shopping season is expected to be flat compared to 2012, though one chain reported that it plans to hire about 10 percent more holiday workers this year. Another retailer reported that it is very difficult to hire the number of temporary workers needed for a regional distribution center.
Year-to-date sales through October of new motor vehicles showed a moderate increase when compared to the same time period in 2012. On a month-over-month basis, purchases of new vehicles were slightly lower during October versus September. Although buyers continue to prefer smaller, fuel-efficient vehicles, there was a pickup in sales of crossovers and SUVs. New-vehicle inventories were characterized as very good to a little high. Aggregate unit volume projections for 2013 were mixed. In some regions of the District, our contacts believe that volume will be 10 percent to 12 percent higher year-over-year. In other regions, such as those that are dependent on the coal industry for income, dealers are projecting little change from a year ago. Used-vehicle purchases showed a large increase from September to October. Employment levels rose slightly across dealerships.
Banking
Demand for business credit grew slightly during the past six weeks. No loan category or industry is performing significantly better than others, although many bankers noted that commercial-real-estate lending has picked up. Downward pressure on commercial-loan pricing was described as moderate to strong. Consumer credit was little changed. Home-equity products and auto lending drew the highest demand. A large regional banker observed that credit-card usage is falling below expectations. Most contacts reported a slowdown in residential mortgage activity, which they attributed to seasonal factors and a rise in interest rates. The shift from refinancings to new-purchase applications continued. For the most part, delinquency rates were stable or declining. No changes to loan-application standards were reported. Core deposits by businesses and consumers grew. On balance, banking payrolls were flat.
Energy
Aggregate coal output across the District remains below year-ago levels. A large production decline in eastern Kentucky is being partially offset by modest increases in Ohio, Pennsylvania, and northern West Virginia. Going forward, little change in output is projected. Spot prices for steam and metallurgical coal have declined since our last report. There has been little change in the number of drilling rigs across the District since the beginning of August. However, production from the wet-gas regions of the Marcellus and Utica shales has grown significantly in the third quarter of 2013, when compared to the second quarter. Higher production was attributed to the completion of pipeline connections and the startup of gas- processing plants. We heard one report about plans to construct six additional wet-gas processing plants in the state of West Virginia. Well-head prices for natural gas remain at low levels, with some volatility seen in oil prices. Coal operators and oil and gas producers reported that capital outlays were at targeted levels. Some oil and gas companies plan to increase spending in the first quarter of 2014 for land acquisition and drilling. Production-equipment and material costs were stable. Payrolls and wages held steady.
Freight Transportation
Freight executives reported that the slowing in the rate of revenue growth that began early in the third quarter has continued. However, year-to-date shipping volume is higher when compared to the same period in 2012. The industry outlook is favorable, with volume expected to grow at a slow, but steady pace. Operating costs were stable. A few contacts noted that they have successfully negotiated rate increases, although increases fell below desired levels. Capital outlays for new tractors were somewhat higher than planned for the current fiscal year due to capacity expansion or OEM price incentives. The industry has been actively hiring for replacement and to a lesser degree, adding capacity.
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Fifth District--Richmond
The District economy expanded moderately in recent weeks. The manufacturing sector strengthened, with a notable increase in shipments and new orders. Retail sales also picked up since our last report, driven by big-ticket sales. Auto sales remained solid. At non-retail services firms, reports were mixed. Tourism varied, with reduced or cancelled government bookings dragging down an otherwise positive report. Consumer lending activity weakened, while commercial lending improved. Residential real estate markets slowed, with little change in new construction. Commercial real estate markets were stable with most of the new construction centered in multi-family housing. Commercial leasing demand was relatively unchanged since our last report. Farming yields varied, with a record high corn harvest. Natural gas production continued to increase, while coal declined. In District labor markets, both permanent and temporary employment improved slightly. Average wages rose more quickly. In manufacturing, price increases moderated for both inputs and outputs. Retail and non-retail services prices also increased at a slower pace.
Manufacturing
Manufacturing strengthened since our last report. Shipments and new orders had a sizable increase according to our survey respondents. A lumber contact located in North Carolina stated that inventories of raw materials and finished goods are being managed at correct levels and that 2013 appears to be headed for a good profit year. He further expects continued improvement in new home building. A manufacturer of airflow measurement devices stated that his sales volume was up two to three percent year to date, despite short-term volatility. A fabric manufacturing company in North Carolina also reported a recent upturn in business, but noted that costs had increased. According to the latest manufacturing survey, prices of raw materials and finished goods rose more slowly compared to last month.
Ports
Port activity continued to be robust. Larger ports saw strong container traffic; an official at a major District port noted that exports of containerized grain have been growing every quarter and that housing-related imports such as flooring were up year over year. Coal exports rose during the last month at one port, but were nearly flat for the year so far, while declining elsewhere. Food and beverage imports were strong, and both imports and exports of products such as apparel, toys, and electronics grew "at a good clip." In the last several weeks, import and export traffic of autos and auto parts remained strong overall. According to our contact at a mid-sized port, container traffic was steady.
Retail
Retail sales were moderately stronger at most establishments in recent weeks, particularly for big-ticket items such as furniture and appliances. However, executives at a few department stores reported little change in sales or foot traffic. A department store executive in West Virginia remarked that he was "being squeezed" by internet competitors. Compared to a year ago, retailers generally expected little growth in holiday sales and sales of gift cards. In contrast, a manager at a chain discounter commented that current sales were lackluster, but lay-away at the store was very busy. Most retail contacts said their holiday inventory levels were about the same as a year ago. Merchants were split on whether they would have more promotions and discounting than last year. Auto sales remained solid, although a few dealers noted some slowing. Average retail prices rose more slowly since our last report.
Services
Reports from non-retail services firms were mixed. Telecommunications firms reported growth, with a North Carolina source commenting in particular on growth in server farms. A financial services executive commented that his clients were cautiously moving forward with investments, but that they remained hesitant. An executive at a national trucking firm reported that business was consistent with no changes in pricing or capital expenditures. However, construction-related businesses, such as HVAC, reported flat revenues in recent weeks and several restaurant executives indicated that sales were down. Prices in the service sector rose at a slower pace.
Tourism reports also varied, with some hoteliers reporting cancellation of large government bookings. An executive at a resort and conference hotel in central Virginia remarked that he can no longer count on group clients booking multi-year contracts for regular conferences because of the firms' budget uncertainty over healthcare costs. In contrast, a resort executive in western Virginia reported that colder weather expectations have raised ski bookings compared to recent years, and weather conditions have allowed snow-making at Thanksgiving. The strength in bookings has allowed the resort to raise some rates for the first time in several years. A contact on the outer banks of North Carolina also reported strong house rentals and hotel bookings for Thanksgiving; several hotels there offered Black Friday specials.
Finance
Consumer borrowing weakened slightly throughout the district since our last report. Several sources indicated that residential mortgage lending has declined in response to higher rates and tighter restrictions from the Qualified Mortgage rule. Further, a banker stated that consumers are reluctant to apply due to their perception that loans are becoming more difficult to obtain. Competition among bankers has risen, with lenders offering incentives such as including closing costs. Also, the consensus felt that the credit qua