UPDATE: The Fed's Beige Book is out.
Regional Federal Reserve banks report "modest or moderate" economic growth, and the manufacturing outlook remained generally optimistic. Furthermore, all districts that reported on home prices saw price increases.
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Below is the full text:
Reports from the twelve Federal Reserve Districts indicated that economic activity has expanded since the previous Beige Book report, with all twelve Districts characterizing the pace of growth as either modest or moderate. Since the previous Beige Book, activity in the New York and Philadelphia Districts rebounded from the immediate impacts of Hurricane Sandy. Growth in the Boston, Richmond, and Atlanta Districts appears to have increased slightly, while the St. Louis District reports some slowing.
All twelve districts reported some growth in consumer spending. Overall, holiday sales were reported as being modestly higher than in 2011, though sales were below expectations for contacts in many of the Districts. Auto sales were reported as steady or stronger in ten Districts. Citing concerns that consumers will spend cautiously due to ongoing fiscal uncertainty, retail contacts and auto dealers reported a slightly dimmer, though positive, outlook for future sales. Tourism activity was reported to have increased across much of the nation due to strong business and international travel, early snowfall in some ski areas, and a rebound in areas disrupted by Hurricane Sandy.
Activity among nonfinancial service sectors improved overall. Firms within the six Districts reporting on transportation services generally noted increased volumes. Manufacturing was mixed overall since the previous Beige Book; six Districts reported an expansion of activity and three reported a decrease. Among Districts reporting on their firms' near-term expectations, the manufacturing outlook remained generally optimistic; however, capital spending plans were less uniformly positive.
Since the previous Beige Book, real estate activity has expanded or held steady in eleven Districts for existing home sales and leasing; eight Districts for residential construction; eleven Districts for nonresidential sales and leasing; and nine Districts for nonresidential construction. Overall loan demand was steady in five Districts, rose in four, and fell in one. Credit standards were largely unchanged, except in two Districts where there were some signs of loosening. Six Districts reported improving credit quality and/or falling delinquency rates.
Although rain partially eased drought conditions for some agricultural regions in three Districts, reports of agricultural activity remained mixed. Districts reported that energy and mining sector activity was steady at high levels for most energy-related products but significantly weaker in coal production and coal-related investments.
Trends in wages, prices, and employment conditions were relatively unchanged in the Federal Reserve Districts. Input price pressures were reported to be steady overall with mixed reports for specific commodity prices in various Districts. Employment conditions were also little changed since the last report. However, hiring plans were more cautious for firms doing business in Europe or in the defense sector. Wage pressures were stable in all twelve Districts, though several Districts cited greater pressures for firms that reported difficulties finding qualified workers with specific skills.
Consumer Spending and Tourism
Since the previous Beige Book, consumer spending increased to some degree in all twelve Districts. Across the nation, holiday sales grew modestly compared with last year but came in below expectations in the New York, Cleveland, Atlanta, Chicago, and San Francisco Districts. Boston reported continued strong demand for clothing, shoes, and furniture, and San Francisco reported robust online sales. A major retail chain in New York indicated that sales picked up in early January. Retail sales were flat in Richmond except for gains in food and auto sales. Expectations for future sales were positive but mild, particularly in Philadelphia, Kansas City, and Dallas where contacts cited the impact of fiscal cliff uncertainty on consumer spending.
Reports of auto sales were steady to stronger in ten Districts. Richmond, Atlanta, and San Francisco noted strong sales. New York and Dallas cited mixed sales that were generally positive, while auto sales in Kansas City slowed but remained higher than a year ago. Some dealers in the Chicago and Kansas City Districts reported high levels of inventory. Contacts in Philadelphia, Cleveland, Kansas City, and Dallas expect consumers to react to ongoing fiscal uncertainty, thus dimming a positive outlook for future sales. Chicago auto dealers were more upbeat, expecting stronger new car sales due to pent-up consumer demand, easing credit conditions, and rising used vehicle prices.
Tourism held steady or grew in all but one of eight reporting Districts. Coastal activity had fallen in the immediate aftermath of Hurricane Sandy throughout most of the New York and Philadelphia Districts but has rebounded in all but the hardest hit areas. Boston, Atlanta, and San Francisco reported strong tourism in their Districts, with Boston and Atlanta citing business and international travel as strong contributors. Winter tourism activity in the Minneapolis District was strong in areas with snow, while Richmond reported normal winter activity in its District.
Nonfinancial Services
Overall, nonfinancial services have grown modestly since the previous Beige Book. Businesses in the New York and Philadelphia Districts recovered from the disruption of Hurricane Sandy. The Boston, Minneapolis, and San Francisco Districts reported positive growth among various service sectors, while the Richmond District reported stable to stronger demand for service firms. Boston reported strong demand for some health-care IT services and drug impact research, while San Francisco noted relatively weak demand for health-care services. Staffing firms in the Dallas District reported steady to slightly softened demand. Respondents remained optimistic about growth over the near-term in the Boston, New York, Philadelphia, Minneapolis, and Dallas Districts.
Transportation services were generally positive among the six Districts that reported. Freight transport shipping volume improved in the Cleveland District due to rising demand from the retail sector and areas affected by Hurricane Sandy. Atlanta reported increases in trucking tonnage and total railroad carloads, but low river levels caused delays in Mississippi River traffic. Reports from transportation services in the Dallas District were mixed, and most firms expect weak growth in the near-term. Trucking firms in the Richmond District reported a flattening in revenues; however, the District's port activity was boosted by ships diverted by Hurricane Sandy.
Manufacturing
Reports of manufacturing activity were mixed overall, with six Districts growing since the last Beige Book, three Distracts contracting, and two Districts reporting little or no change. Firms in the Boston and Chicago Districts reported continued expansion of activity at modest and moderate rates of growth, respectively. Overall activity once again appeared to expand in the San Francisco District, although it was mixed across sectors. Gains in the aerospace and chemical sectors contributed to growth in the Boston and San Francisco Districts, as well as in the Dallas District. Manufacturing in the Chicago District grew with contributions from the auto and housing-related sectors. Manufacturing continued to expand, but at a more modest pace, in the Richmond District. Several firms cited falling export demand, especially from Europe.
In contrast to slight declines in the past Beige Book, firms in the Philadelphia and Minneapolis Districts reported slightly increased manufacturing activity. As in other Districts, product flowing into supply channels for auto production and housing construction contributed to Philadelphia's gains. Prior trends continued as firms in the New York District experienced little or no growth, except for the revenues of firms in the New York City area that recovered after Hurricane Sandy disruptions. Reports continued to be mixed among sectors in the Dallas District.
Manufacturing activity within the Cleveland and Atlanta Districts, and reported plans in the St. Louis District, declined somewhat--a trend reversal from the prior Beige Book. Contributing to the declines were steel and auto producers in Cleveland and makers of HVAC equipment, electric components, food, and automobile parts in St. Louis. Despite production gains in electrical equipment, appliances, and components, more pronounced contractions within the broad nondurable goods sector led to a continuation of declining activity in the Kansas City District.
Manufacturing firms' expectations of future activity were generally optimistic in the New York, Philadelphia, Atlanta, Minneapolis, and Kansas City Districts; the level of optimism has significantly increased in the Philadelphia and Atlanta Districts since the previous Beige Book. Contacts in the Chicago District expect vehicle production to expand in 2013, while reports of activity from manufacturers in the St. Louis District have been negative on net. Boston District firms reported that capital spending was slow, except for select growth sectors. Capital spending was on track in the Cleveland District and was slowly increasing in the Chicago District. Looking ahead, Philadelphia District firms have significantly increased their capital spending plans, while the outlook in the Minneapolis District was reported as flat. In the Cleveland District, more contacts plan to reduce outlays than expand capacity.
Real Estate and Construction
Existing residential real estate activity expanded in all Districts that reported; growth rates were described as moderate or strong in nine Districts. Contacts in the Boston District attributed their strong sales growth to low interest rates, affordable prices, and rising rents. All Districts reporting on price levels saw increases; New York and Chicago reported only very minor increases. The five Districts that reported on housing inventories all reported falling levels. New residential construction (including repairs) expanded in all but one District of those Districts that reported. Contacts in the Kansas City District reported that increased lumber and drywall costs limited construction, causing a slight decline this period. Hurricane Sandy disrupted construction activity initially in New York, but this has since led to increased work for subcontractors on repairs and reconstruction.
Though a little weaker than residential real estate, reports on sales and leasing of nonresidential real estate are still mostly positive--described as modest on average. The Boston District reported a drop in leasing beyond normal seasonal trends; contacts cited fiscal cliff uncertainty as a factor. Minneapolis and Kansas City reported increased demand and tightening commercial real estate markets. Philadelphia, St. Louis, and Dallas all reported more modest increases in nonresidential real estate activity. Nonresidential construction is weaker than residential, with only slight to modest growth. The Boston District reported that demand for commercial real estate loans appears to be softening and that the pipeline for new construction projects has diminished significantly since the last report. Dallas reported that construction was expected to pick up in the commercial real estate sector in 2013.
Banking and Finance
Overall, loan demand was largely unchanged in the Philadelphia, Cleveland, Richmond, Kansas City, and San Francisco Districts, with most of these Districts reporting a continuation of slight to moderate growth in total volume. The New York, Atlanta, Chicago, and Dallas Districts reported stronger demand than previously, while the St. Louis District reported a slight decline. Some increased lending in Philadelphia, Chicago, and Dallas was driven by businesses taking out loans for special year-end purposes such as tax planning and dividend payments. Cleveland, Atlanta, Chicago, Dallas, and San Francisco all reported strong auto lending. Demand for residential mortgages improved in Cleveland, Atlanta, Chicago, Kansas City, Dallas, and San Francisco. Commercial real estate lending was cited as a particular bright spot by New York, Cleveland, Kansas City, and Dallas. However, lenders in San Francisco remained reluctant to lend to real estate investors outside of the multifamily residential sector. San Francisco also reported a slight slowdown in IPO, venture capital, and private equity activity in that District's technology sector.
Banks in the New York, Philadelphia, Cleveland, Chicago, Kansas City, and San Francisco Districts reported improvements in asset quality. Lenders were described as competing aggressively for highly qualified borrowers in Philadelphia, Richmond, Atlanta, and San Francisco. In Atlanta, this stiff competition may be leading to loosening credit standards, as there was some indication that banks were more willing to increase their tolerance for risk. Chicago banks also reported some loosening of standards. On the other hand, lending standards remained largely unchanged in New York, Cleveland, and Kansas City.
Agriculture and Natural Resources
Reports of agricultural activity were mixed, although rain and mild temperatures delivered some relief from drought conditions to parts of the Richmond, Atlanta, and Chicago Districts. Low water levels along the Mississippi River also hampered transport for some contacts in the Chicago and Kansas City Districts. Despite the drought, some contacts in these Districts reported that farm income remained high with adequate crop insurance and historically high prices. Producers in the Kansas City and Dallas Districts expect ongoing dry conditions to hurt the winter wheat crop.
Activity in the energy sector had mixed reports. Production of oil and natural gas held steady at high--sometimes record--levels in the Cleveland, Richmond, Minneapolis, and Dallas Districts. San Francisco reported that activity expanded to historic levels. Contacts in the Cleveland District reported that shale gas activity grew at a robust pace. In contrast, coal production has declined in the Cleveland, Richmond, Chicago, St. Louis, and Kansas City Districts since the previous Beige Book. Firms in the Atlanta District continue to plan investments, ranging from reserve development to increased refining and petrochemical operations to new pipeline infrastructure.
Employment, Wages, and Prices
Labor market conditions remained mostly unchanged in all Districts. The Boston, Richmond, Atlanta, Chicago, Kansas City, and San Francisco Districts all reported delayed hiring, often in defense manufacturing, due to fiscal cliff uncertainties. Companies in the Chicago District with trade or investment exposures to Europe reduced their hiring plans as well. Chicago reported that manufacturers are choosing to cut hours instead of reducing head count in expectation of production rebounds in 2013. Atlanta and Kansas City cited health-care policy changes and costs as another cause for minimal hiring. On the other hand, the New York, Atlanta, Minneapolis, and Dallas Districts saw the labor market firming modestly. Finally, contacts in several Districts reported difficulties finding qualified workers in some specialized fields, such as skilled manufacturing, energy, and IT.
For those Districts that reported, wage pressures have been stable since the previous Beige Book and were most frequently described as contained or subdued. The San Francisco District reported modest wage pressures that were held down by an abundance of workers. The Richmond, Chicago, and Minneapolis Districts characterized wage growth as moderate. Specifically, business contacts in the Minneapolis District expected to increase wages 2 to 3 percent in 2013, while oil drilling companies in North Dakota and Montana expected higher increases. Several Districts reported wage pressures in sectors experiencing labor shortages, such as energy and IT. The New York and Chicago Districts reported higher year-end bonuses ahead of anticipated tax increases in 2013.
Overall, input price pressures appear to be stable. The Boston, Philadelphia, Cleveland, Richmond, Minneapolis, Dallas, and San Francisco Districts reported steady input prices, while Chicago reported decreasing raw materials prices. The New York, Atlanta, and Kansas City Districts characterized input prices as slightly increasing; price pressures in these Districts were passed through to consumers somewhat in the form of higher finished goods prices. However, Chicago noted that businesses were unable to fully pass on meat and milk price increases to consumers. The Philadelphia, Cleveland, Chicago, Kansas City, and San Francisco Districts all cited rising prices for construction-related materials. Specifically, a Philadelphia builder noted that over the past 90 days these rising prices added about 3 percent to the cost of a new home.
First District--Boston
Economic activity in the First District continues to grow modestly, according to business contacts. Most retailers and the tourism industry cite year-over-year increases in demand. Aside from some firms with industry-specific or customer-specific issues, First District manufacturers also report growth in sales from a year ago. Similarly, consulting and advertising firms are ahead of a year earlier, although a couple of companies with fast growth over the last few years have recently seen business level off. Commercial real estate contacts are somewhat downbeat; office leasing is slow and demand for commercial real estate loans and pipelines for commercial construction activity are weaker than in recent reports. Residential real estate markets continue to recover, with both sales and prices in November above year-earlier levels. In all sectors, most respondents are holding their selling prices level. Contacts say their hiring depends on demand growth; as a result, most firms are doing little to no hiring, but some firms are expanding headcounts substantially. Notwithstanding ongoing concerns with uncertainty, contacts generally expect continued modest growth in 2013.
Retail and Tourism
One contact reports a small single-digit year-over-year decrease in December sales while the others cite increases ranging from near zero to 7 percent. Demand remains strong for clothing, shoes, and furniture. Responding retail firms expect to hold their selling prices steady based on an absence of price increases at the wholesale level. These contacts anticipate that 2013 will be characterized by low single-digit growth in sales.
The tourism industry ended 2012:Q4 on a high note, establishing new records for hotel room occupancy rates and revenues. Strong domestic and international corporate business travel and international leisure travel account for much of this performance. Restaurants saw less spending on corporate entertaining and end-of-year holiday events. Advance hotel booking data indicate that the strong trend in business travel will continue, leading to an expectation that occupancy rates will hold level in 2013 compared to the high benchmark established in 2012.
Manufacturing and Related Services
Manufacturing in New England continues to expand at a modest pace according to First District contacts. Of 11 responding firms, seven report higher sales in the fourth quarter than in the same period a year earlier, although in some cases the gains are quite modest. Two contacts in the semiconductor industry continue to report a cyclical downturn in their business. A contact in aerospace says that sales of parts for new airplanes are extremely strong but depressed conditions in the aftermarket have spread from the United States to Europe. A contact in the chemical industry says that while sales in pounds fell, the pricing picture improved so much that sales in dollars are up. Sales of frozen fish continue to be weak. The "fiscal cliff" was an explicit problem for a computer firm that sells almost exclusively to Defense Department customers who are worried about sequestration.
Only five of the 11 respondents report significant hiring. Firms with rapidly growing sales are hiring, but firms in slow-growth industries are not. A biotech firm with 3,500 U.S. employees plans to add another 1,000 over the coming year, about half domestically. The computer supplier with customers dependent on defense spending cut its staffing by 10 percent to 15 percent over the period from June to September. A contact in the chemical industry reports both good and bad news about the labor market. On one hand, he says that for the first time since the crisis began, workers are voluntarily leaving to take new jobs. The bad news is that he is having great difficulty filling low-skill jobs. He says that drug test fails are much more common than in the past; in addition, a large number of workers quit almost immediately after taking the job. The contact speculates that both of these hiring problems may result from behaviors developed during extended periods of unemployment.
As with employment, capital spending is generally slow except for firms in growth industries, with four firms reporting increases and four reporting decreases in spending. One diversified manufacturer of parts for the aerospace and auto industries reports that business units within the firm failed to spend their planned capex allocations in 2012.
The outlook continues to be uncertain for most of our contacts. Only one firm, the defense supplier, cites the fiscal cliff as a serious problem and even they expect some resolution in the new year.
Selected Business Services
Consulting and advertising contacts in the First District report generally positive results for the fourth quarter. Several contacts report modest growth, while two contacts--whose firms have experienced rapid growth over the past two years--experienced a leveling off. Marketing and advertising contacts report a slight uptick during the fourth quarter and are confident that business conditions have finally stabilized after the recession, which hit them with a lag. Two contacts with exposure to health care note robust demand for services related to health-care IT implementation and drug-impacts research. At the same time, firms focused on the pharmaceutical industry have experienced slow growth, although one contact expects that pharmaceuticals will start to emerge from its rough spell in 2013. Economic consulting remains strong because of high levels of complex high-stakes litigation; management and strategy consulting contacts report flat business conditions as clients uncertain about fiscal policy and the macroeconomy remain reluctant to invest in consulting services.
Contacts report little to no cost increases and are keeping their prices relatively unchanged. One exception is an advertising firm where health insurance costs rose 12 percent in 2012. Some contacts report no hiring, consistent with a lack of demand growth, while others report net hiring in the low single digits. Plans for future hiring are modest, with contacts generally expecting zero to low single-digit workforce increases in 2013.
Most contacts expect growth to pick up in 2013, with the exception of a government contractor, who is too uncertain about the future of fiscal policy to offer any forecast. No one expects another recession and overall they express a sense of cautious optimism.
Commercial Real Estate
Across most of the First District, leasing activity in the final weeks of 2012 is described as very light, driven by a combination of seasonal factors and uncertainty stemming from fiscal cliff negotiations. However, a Portland contact notes an uptick in leasing activity in that city in December, especially in the warehouse sector, although office fundamentals remain flat amid slow employment growth. Boston's warehouse market improved as well, while the city's office vacancy rate remains high--also attributed to slow employment growth--and the trend toward office downsizing persists. In Hartford, the fate of large downtown properties that experienced foreclosure in 2012 remains uncertain; a key question is whether current owners will reinvest in the properties or resell them as is. Demand for commercial real estate loans in the region appears to be softening, while the pipeline of new construction projects in Boston has diminished significantly since the last report.
Most contacts in the region are cautiously optimistic that commercial real estate fundamentals will improve in 2013. However, growth expectations remain very modest and some contacts note downside risks to growth from pending fiscal contraction and ongoing political uncertainty, even taking into account the recently-enacted federal tax deal.
Residential Real Estate
Across the First District, contacts report strong year-over-year growth in sales for November in both single-family home and condominium markets. Similar to previous reports, contacts attribute continued growth in sales to low interest rates, affordable prices, and rising rents. Contacts say that buyers have become more confident about purchasing a home as economic conditions continue to improve. As buyer activity increased, inventory levels fell throughout the region. Contacts argue that declining inventory levels have now translated into higher prices in most areas. The median sale price of homes rose year-over-year across the First District, with some states experiencing significant increases.
In terms of outlooks for the coming year, contacts continue to feel positive about improvements in home values and strong sales. Significant year-over-year growth in sales is expected for the most of 2013, although a warm winter last year coupled with a potentially harsher winter this year may soften year-over-year growth in the coming months. In Massachusetts and the Greater Boston area, contacts express concern that dwindling inventory levels will discourage buyers and even potentially deter some sellers who would like to purchase a replacement home before listing their current one; at the same time, they express worry about prices appreciating too quickly, but say they are not concerned with ongoing moderate price appreciation. Notwithstanding these potential concerns, contacts across the region are generally very optimistic about the strength of the housing market in 2013.
Second District--New York
Economic activity in the Second District has shown signs of rebounding since the last report, as widespread disruptions from Superstorm Sandy largely dissipated. On balance, the labor market firmed, with manufacturers reporting flat employment but non-manufacturing contacts indicating some pickup in hiring. Manufacturers and other firms report more widespread price hikes than in recent months, while retail prices were steady to up moderately. Retailers report that holiday-season sales were steady to somewhat higher than this time last year but slightly below plan. Auto sales in upstate New York were mixed but generally strong in November and December. Tourism activity slumped in November, in the aftermath of Sandy, but rebounded somewhat in New York City in December. Both residential and commercial real estate markets were generally steady since the last report. Finally, bankers report a pickup in demand for commercial mortgages but steady demand on other types of loans; they also report no change in credit standards, narrowing loan spreads, and widespread decreases in delinquency rates.
Consumer Spending
Holiday season sales were up modestly from last year but came in slightly below plan. A trade association survey of retailers across New York State indicates that sales were disappointing in the days leading up to Christmas as well as in the days after. A major retail chain indicates that sales were below plan in November and December but picked up fairly dramatically in early January. Retail contacts in upstate New York report that sales were flat to up compared to a year earlier. Retailers attribute the weaker than expected holiday sales to a combination of online shopping, mild weather, fiscal cliff concerns, and, in some parts of the region, slow insurance payouts to those affected by Sandy. Retail prices were reported to be steady or up moderately.
Buffalo-area auto dealers indicate that vehicle sales picked up in November but were expected to be flat to slightly lower than a year earlier in December. However, Rochester-area dealers report strong sales for both months to end 2012. Tourism activity slumped in the immediate aftermath of Sandy. Even hotels in the Albany area were reportedly affected by the storm, as widespread meeting and conference cancellations pushed down hotel occupancy rates in November. In New York City, Broadway theaters report that attendance and revenues rebounded after a deep post-Sandy slump in the first half of November. Still, December attendance was down 5 to10 percent from a year earlier, while revenues were little changed. Finally, consumer confidence in the region weakened at year end. The Conference Board's survey of residents of the Middle Atlantic states (NY, NJ, Pa) showed confidence falling to its lowest level in more than a year, while Siena College's survey of New York State residents indicated a modest decline.
Construction and Real Estate
Residential real estate markets in the District were generally steady since the last report, with the storm having little discernible effect on the overall market. New York City's rental market appears to have lost some momentum during the final two months of 2012, as rents in Manhattan and Brooklyn retreated and were up only slightly from a year earlier. The inventory of available rental apartments, however, remained low in late 2012. Apartment sales activity in New York City was robust in the fourth quarter--particularly in Manhattan. A major appraisal firm attributes some of the high sales volume to looming tax changes and notes that there has been a flood of appraisal requests for tax-related financial planning. Prices are reported to be flat to up slightly. In contrast, an overhang of inventory has kept prices from rising in northern New Jersey and Long Island. Sandy disrupted construction activity in late 2012, though a contact in the homebuilding industry notes that construction sub-contractors are getting a great deal of work from storm-related repairs and reconstruction during a typically slow season.
Office markets were relatively stable in the final months of 2012. A commercial real estate contact reports that the recovery from Sandy in Lower Manhattan has been slow, as a number of buildings in the flood zone remained out of service at year end. More broadly, leasing and sales activity across Manhattan were sluggish in November but picked up in December. Vacancy rates have been steady, while asking rents have edged up, led by brisk gains in Midtown South. Strong demand from the new media and advertising sectors and some pickup from legal services have offset weak demand from the financial sector. Elsewhere in the region, vacancy rates were little changed in the fourth quarter, though asking rents fell noticeably in northern New Jersey.
Other Business Activity
Contacts in the manufacturing sector continue to report little or no growth in activity though they remain mildly optimistic about the near-term outlook. Non-manufacturing contacts report some improvement in business conditions and have grown increasingly optimistic about prospects for 2013. New York City area firms--both manufacturing firms and non-manufacturing firms--say that Sandy adversely affected revenues in November but that business was seen to be back on track in December.
On balance, labor market conditions firmed in late 2012. While business contacts in the manufacturing sector report little or no change in employment, contacts in other sectors note some pickup in hiring. A major New York City employment agency specializing in office jobs said that while it is difficult to assess the labor market during the holiday season some continued softness in labor market conditions is apparent. In particular, financial sector hiring has remained sluggish, but year-end bonuses are expected to be up moderately from a year ago. Much of the bonus pay typically distributed in January was reportedly paid out in December in advance of higher tax rates.
Financial Developments
Small- to medium-sized banks report no change in demand for all loan types except commercial mortgages, where loan demand increased. Bankers report little change in demand for refinancing. The vast majority of respondents continue to report that credit standards were unchanged across all categories. Respondents indicate a decrease in spreads of loan rates over the costs of funds for all loan categories--particularly in residential mortgages, where nearly three in five bankers report lower spreads. Respondents also indicate a decrease in average deposit rates, on balance. Finally, bankers note declining delinquency rates in all loan categories--most notably in commercial mortgages, where well over half of those surveyed report lower delinquencies.
Third District--Philadelphia
Aggregate business activity in the Third District has resumed the modest pace of growth that was evident prior to the disruption by Hurricane Sandy during the previous Beige Book period. In particular, general retail sales, general services, and commercial real estate leasing recovered from temporarily mild growth rates to resume their previously modest growth rates. Sales of new and used autos accelerated to a moderate rate of growth, and residential real estate sales maintained a strong year-over-year growth rate (from a relatively low base). Mild rates of growth are once again evident in manufacturing, staffing services, transportation services, and construction after many sectors suffered storm-related disruptions. Lending volumes at Third District banks also continued to experience slight growth, and credit quality has continued to improve. Overall, beach-going tourist areas are experiencing a typical slow season; however, some storm-damaged areas have lost significant business while some areas that escaped the damage are doing well. General price levels, as well as wages and home prices, were reported to have increased slightly overall. This remains similar to the last Beige Book period, except for home prices, which had remained flat overall.
The overall outlook for at least modest growth is considerably more optimistic relative to the views expressed in the last Beige Book. Contacts reported underlying strength in many sectors and expressed relief that part of the fiscal cliff dilemma has been resolved. Contacts from virtually all sectors reported greater expectations of future growth than during our last survey period. Plans for future hiring were also significantly more expansive. Most contacts continued to express concerns over the impact from the recent payroll tax increase and the remaining potential budget cuts that might reduce demand.
Manufacturing
Since the last Beige Book, Third District manufacturers have reported that orders and shipments have recovered to a pace of slight growth. The mild pace can be partially attributed to seasonal trends. Comments from contacts focused primarily on small upticks, new product demand, and emerging markets, rather than on disappointing orders. Makers of food products, lumber and wood products, primary metals, fabricated metal products, and instruments have reported gains since the last Beige Book. Lower activity was reported by makers of industrial machinery and electronic equipment.
Optimism among Third District manufacturers that business conditions will improve during the next six months has rebounded strongly since the last Beige Book and is evident across nearly all sectors. Firms have also significantly raised their overall expectations of future hiring and their plans for capital spending since the last Beige Book.
Retail
Third District retail sales recovered to a modest pace of growth for the holiday shopping season after the disruptions of Hurricane Sandy, according to retail contacts. Sales reports were mixed for mid-market department stores and some home furnishing stores, which reported moderate early holiday sales gains followed by a lull, with slight declines from the prior year. High-end department stores, family apparel stores, and outlet stores reported modest or moderate year-over-year sales throughout the holiday period. Some substantial mall tenants posted strong double-digit sales growth. Until final sales are tallied, retail contacts relied on other early indicators to suggest that the final days of the holiday shopping season had grown modestly, or better. Traditional mall retailers continued to draw shoppers with promotions, while outlet stores used fewer promotions than in prior years. Shopper surveys revealed concern over the consumers' future paychecks from the pending fiscal cliff negotiations.
Auto sales finished the year at a moderate pace of growth--combining the sector's slower pre-storm pace with a bump up for replacement of cars damaged by the storm. In particular, New Jersey dealers reported strong double-digit December sales, capping a third consecutive year of sales growth. The outlook among dealers remains positive; however, prospects for 2013 are not as strong as they were for 2012. "Consumers will feel a pinch" from the payroll tax increase and continued uncertainty about possible budget cuts.
Finance
Overall, loan volumes have continued to grow at a slight pace across Third District financial firms since the previous Beige Book. A flurry of year-end business lending kept banks busy facilitating tax-oriented business decisions involving sales and liquidations, mergers and acquisitions, accelerated depreciation, and dividend payouts. Home mortgage refinancing rates continued to remain high. In describing their competition as very aggressive, lenders expressed awareness of some potential portfolio risk, even while the credit quality of their borrowers continued to improve. Generally, financial institutions are expecting growth to continue, if not improve.
Real Estate and Construction
Residential builders reported one final surge of contract activity in November and then a downswing in December to conclude with slight year-over-year growth for the period. Despite facing erratic swings in demand through the year, our contacts reported very strong year-over-year growth for the entire year, which is more indicative of their own gains in market share than of the sector overall. Residential brokers reported robust year-over-year sales growth in November, with steady year-end momentum. As with new home construction, existing home sales are growing from a low base. Builders and, to a greater extent, brokers are optimistic that recent growth will be sustained in 2013. As with other sectors, contacts expressed concern that the fiscal cliff negotiations had been extended into their important first quarter.
Nonresidential real estate contacts reported renewed modest growth in overall leasing activity and continued slight growth in construction. Leasing activity finished the year with sustained double-digit growth. Notably, in the fourth quarter, contacts began "to see a re-emergence of leasing demand in lagging submarkets" (in the Greater Philadelphia metro area), including southern New Jersey. Stronger employment growth of professional services is credited with much of the demand; however, that demand is partially offset, as existing firms are consolidating and adjusting to more efficient overall office spaces with smaller square footage per person. New construction of large industrial/warehouse space is planned in 2013 in the Harrisburg–Lehigh Valley corridor on the heels of similar spaces built this year; no such construction is anticipated in the southern New Jersey market area. New apartment/condominium projects continue to emerge throughout the Greater Philadelphia region, especially in Center City. Nonresidential real estate contacts retain an outlook of slow, steady growth.
Services
Third District service-sector firms have resumed a more modest pace of growth since the last Beige Book, according to contacts in various sectors. Tourist areas along the Delaware and New Jersey shores are in various stages of recovery from Hurricane Sandy. Atlantic City casinos reported significantly lower revenues in November (as much as $55 million) compared with 2011. Businesses and rental housing that serve the central and northern Jersey Shore communities continued to lose some of the money they would have earned in the low season. Southern New Jersey and Delaware beach communities are largely intact and operating normally. A Delaware beach hotel owner reported a strong December finish to the year, which was partly due to an extra holiday weekend. District staffing firms reported a mild pace of growth at year's end – an improvement after the storm disruptions. Staffing contacts expect moderate growth in 2013 but are watching their clients' reactions to the serial fiscal cliff decisions. Defense-related firms received no relief from the uncertainty of budget cuts that has held their business plans in stasis for the past year. Overall, service-sector firms expressed more confidence in their expectations for growth in the near future.
Prices and Wages
Overall, price levels continued to increase slightly, similar to the previous Beige Book. Cost factors among manufacturing firms held steady, while the prices they received rose a little. Tighter auto inventories generate a price environment that favors auto dealers over their customers. Homebuilders noted that rising commodity prices had added about 3 percent to the cost of a new home in the past 90 days. In addition, roofing and siding contractors have lost crews to the Jersey Shore repairs. Real estate contacts continued to report that house prices are firming up and that houses in some markets are receiving multiple offers. Rents are rising in most segments of the Philadelphia central business district market and for industrial space along the corridor from Carlisle, PA, to the Lehigh Valley. In other segments and geographies, rents are flat or still falling. Contacts from all sectors continued to report that wages rose only a little, if at all. After a good year, two homebuilders reported issuing the first pay raises to their staffs in several years. Contacts did report strong growth in unemployment compensation and workers' compensation costs.
Fourth District--Cleveland
Business activity in the Fourth District expanded at a modest pace during the past six weeks. Many of our contacts reported that their outlook for the new year is uncertain due to unresolved fiscal policy matters. Manufacturing orders and production were mainly flat or down slightly. Residential and nonresidential construction activity rose, with particular strength noted in the multi-family segment. On balance, retailers described the holiday shopping season as solid. Sales of new and used motor vehicles increased on a year-over-year basis. Shale gas activity continued at a robust pace, though coal production trended lower. The slowdown in freight transport volume seen in September and October has abated. Demand for business credit flattened out, whereas credit use by consumers picked up.
Hiring was sluggish across industry sectors. Staffing-firm representatives saw little change in the number of job openings and placements during the past six weeks. Vacancies were found primarily in manufacturing and healthcare. Wage pressures are contained. Input prices were stable, apart from increases in construction materials.
Manufacturing
Reports from District factories indicated that new orders and production were flat or down slightly during the past six weeks. Companies seeing increases were largely suppliers to the motor vehicle and energy industries. Compared to a year ago, production activity was mixed. Steel producers and service centers described shipping volume as lower relative to levels seen in the third quarter. Many of our contacts expect a slight weakening in business activity during the next few months due to seasonal factors and uncertainty surrounding the outcome of fiscal policy issues. Auto production at District plants showed a moderate decline during November on a month-over-month basis. Relative to prior year levels, production was largely higher, especially for foreign nameplates.
Inventories are being reduced to become more aligned with demand. Manufacturers noted that capacity utilization has fallen in recent weeks; however, rates were within or slightly below their normal range. Capital spending was largely on track for 2012. About one-third of our contacts plan on cutting back capital outlays during this year, and few producers anticipate expanding capacity. Raw material prices were either flat or trended lower, while finished goods prices held steady. On balance, manufacturing payrolls were little changed. Less than half of our contacts expect to hire new workers during 2013. Wage pressures are contained, and rising health insurance premiums remain a challenge.
Real Estate
Home builders reported that the upturn in sales of new single-family homes continued into December. Although a seasonal slowdown is expected, builders expressed confidence that sales will pick up again in the spring. Contracts were found mainly in the mid- to higher-price-point categories. The number of single and multi-family housing starts in December was significantly above year-ago levels. List prices of new homes are increasing, which was attributed to shrinking inventories and rising construction costs. Builders have cut back on discounting. Tight lending standards are still seen as restraining the effect of low interest rates for builders and home buyers. Multi-family developments are expected to be the driving force behind new housing construction during the next one to two years.
Nonresidential contractors reported that business activity grew across market segments and was better than a year ago. Nonetheless, margins are still tight. Although inquiries are down, which is typical for this time of year, builders are satisfied with their backlogs going into 2013. Project financing is available, but it is very time consuming to close a deal. As a result, some developers are turning away from banks and looking more to private lenders. Our contacts are optimistic about near-term activity due to customers wanting to complete must-do projects, such as maintenance or production consolidation. However, there is a heightened level of uncertainly about the medium to long term. A general contractor reported that his customers are postponing the design phase of some of their projects. Other builders expect a slowing in health care construction, as providers evaluate the implementation of recently enacted laws.
Residential and nonresidential builders reported higher prices for drywall and lumber, due to rising demand and a declining supply base. Contractors anticipate widespread price increases for building materials during the first quarter of 2013. General contractors and subcontractors expect to increase their payrolls at a modest pace this year. There is concern about the availability of highly skilled trade workers and back-office personnel, and the potential impact a shortage of either could have on wage pressures.
Consumer Spending
Reports on the holiday shopping season were generally solid. Most retailers were encouraged by results during the Thanksgiving weekend, and a majority said that sales during this holiday season were above those of a year ago. However, some contacts reported that sales figures fell below expectations for the entire season. Increased volume was seen particularly in electronics and apparel. Sales for the first quarter of the new year are expected to trend higher relative to prior-year levels. Vendor and shelf prices held steady. Capital spending remains on target. A majority of our contacts reported that they plan to increase outlays slightly during 2013, particularly for warehousing, store improvements, and e-commerce. Little new hiring is anticipated, except for staffing new stores.
Year-to-date sales of new motor vehicles showed a moderate increase during November compared to the same time period a year ago. Dealers reported that purchases of fuel-efficient cars, including hybrids and compact SUVs, are doing well. New-vehicle inventories were described as adequate to strong. A seasonal slowdown in sales is expected during January and February. Several dealers cited uncertainty over the resolution of fiscal policy issues as a factor that may affect auto sales in upcoming months. Year-to-date sales of used vehicles increased slightly during November, though inventories are still tight. Leasing continued to trend slightly higher, which should help to replenish the used-vehicle inventory by mid-2013. One dealer noted that the balance between leasing and traditional financing has returned to normal. Some of our contacts reported that their employment level is lower than prior to the recession, and most do not expect to increase payrolls during the next 6 to 12 months.
Banking
Demand for business credit was steady or down slightly since our last report. Some contacts cited a rise in the number of applications for commercial real estate loans and refinancings, but on balance, demand was little changed across sectors and product categories. Several bankers noted that their loan-to-deposit ratio was much lower than desired. On the consumer side, reports indicated an increase in drawdowns on home equity lines of credit and rising credit card receivables, which were attributed to holiday shopping. A few bankers saw an increase in auto loans. Activity was strong in the residential mortgage market, with a large majority of applicants looking to refinance. Delinquency rates held steady or declined across consumer and commercial loan categories. Core deposits grew, with an ongoing transition from time-deposit to transaction accounts. Little change in banking payrolls is expected in the near term.
Energy
Conventional oil and natural gas production was stable during the past couple of months. Shale gas activity continued at a robust pace: in West Virginia, well output at the end of 2011 was up 138 percent from the prior year, and during the first six months of 2012, well output across Pennsylvania rose by 42 percent compared to the previous 6 months. In eastern Ohio, 187 wells have been drilled in the Utica shale in the past year, with 44 currently producing. Coal production for 2013 is expected to be flat relative to 2012 levels. Demand for thermal coal increased slightly due to colder weather and a slowdown in switching from coal to gas by electric utilities. Demand for metallurgical coal in the U.S. held steady, but declined from offshore customers, particularly those in Europe. Falling prices for metallurgical coal have leveled off, while steam-coal prices were mixed. Capital expenditures by conventional drillers and coal producers are expected to decline during the first six months of 2013. Production equipment and material prices were flat across most categories. Apart from shale gas companies, little hiring is anticipated during the next 6 to 12 months.
Freight Transportation
Reports on freight transport indicate that shipping volume has improved since the start of November after an unexpected drop-off during the prior two months. Some contacts attributed the boost to rising demand coming from the retail sector and areas affected by Hurricane Sandy. Freight executives were fairly positive in their outlook for 2013, with the caveat that a resolution is reached on issues involving fiscal policy. Costs associated with truck maintenance held steady, while diesel fuel prices fell. Reports on capital spending were mixed. Some freight haulers said that 2012 expenditures reached targeted levels. Others reported a postponement in purchasing equipment for replacement and expansion due to a sluggish economy and supply issues related to Class 8 trucks. Spending in 2013 is expected to be similar to 2012 levels, and it will be mainly for replacement. Due to uncertainty about the economy, hiring plans for 2013 are tentative. Wage pressures were contained.
Fifth District--Richmond
District economic activity generally grew at a modest pace in recent weeks. District manufacturing growth slowed, and retail sales flattened, with the exception of food and vehicle sales. Non-retail services providers reported stable to stronger demand, and tourism activity was at normal winter levels. Commercial and consumer lending varied by location, while the environment remained competitive. Residential real estate activity continued to improve; reports on commercial real estate activity, however, were mixed. Agricultural conditions remained favorable. Oil and natural gas production held steady at high levels during the past six weeks, but coal production fell. Labor market conditions weakened somewhat since our last report. Manufacturers' input prices were little changed, while finished goods prices rose at a slower rate, and the pace of wage growth remained moderate. Services providers' prices rose slightly faster and non-retail wage growth edged up. Retail price increases slowed, and wages fell.
Manufacturing
District manufacturing continued to expand, but at a more modest pace since our last report. A furniture manufacturer said that his business had improved through gains in market share and new product introductions, and that the improvement should continue in 2013. A spokesperson for the technology industry reported that 2012 was expected to be flat, but instead grew by ten to twelve percent. Another contact stated that, "Manufacturing is hanging in there," noting that niche markets were doing best, but only if they were not dependent on international demand. A producer of lumber products commented that sales volumes and orders dropped, in part because of Hurricane Sandy's impact on their customer base in the northeast. An electrical components manufacturer reported that business was "terrible," adding that his only sales were to replace ruined equipment from Hurricane Sandy, and that export orders to Europe had dropped off. According to our latest survey, raw materials prices were relatively flat, while finished goods prices rose at a slightly slower pace.
Ports
The typical seasonal surge in import volumes shifted as a result of two major events. The first was the threat of an East Coast port strike that has loomed since the September 2012 expiration of the master contract between the International Longshoremen's Association and the U.S. Maritime Alliance. A number of shippers used alternative West Coast and Canadian ports ahead of the peak season to minimize disruptions to their businesses. Secondly, Hurricane Sandy caused diversions to Fifth District ports, boosting an already solid peak season. In addition, bulk fuel shipments that were diverted to the Northeast created "a pinch in supply" for companies located further south. Exports of resins for plastics, grains, forestry products and metal scrap were especially strong, with imports being led by beverages and retail goods. Both exports and imports of auto-related products were robust.
Retail
Retail sales flattened, with the exception of food and vehicle sales, according to most merchants contacted since our last report. Several blamed the lackluster sales on the federal government's failure to resolve its fiscal issues. Most retailers responding to a special poll indicated that they planned an equal amount of holiday discounting as a year ago. A West Virginia department store manager reported that sales were a little soft ahead of Christmas, while other retailers noted little change. In contrast, many grocers noted an uptick in revenues. Although big-ticket sales were weak overall, car sales rose by double-digit percentages in recent weeks. Federal fiscal indecision also pushed sales of heavy trucks, construction equipment, and buses at the end of 2012, ahead of the possible expiration of bonus depreciation. According to survey respondents, retail price growth slowed during the past month.
Services
Services firms reported stable to stronger demand since our last report. An executive at a national freight trucking firm indicated that revenues flattened in the District, while another trucking company reported that demand slowed slightly, although that company was able to improve its margins. Demand strengthened at telecommunications and engineering firms, and a contact in Washington, D.C. remarked that law firms see regulatory practice as a growth industry. During the week of Christmas and New Year's Day, the CDC reported that the flu had become widespread across the District. An executive at a North Carolina healthcare facility commented that the "flu season hit early and hard," more than doubling the average number of cases for that time of year. Non-retail services prices rose slightly faster in recent weeks, according to survey respondents.
Tourism activity was at normal winter levels in recent weeks, and rate changes were modest. In addition, a D.C. contact commented that restaurant bookings were brisk for holiday meals and events. An executive at a Virginia resort area said that his rentals were filled up for the week from Christmas through New Year's Day. A source on the outer banks of North Carolina reported somewhat less tourism activity, compared to a year ago because of lingering road problems caused by Hurricane Sandy.
Finance
Demand for both consumer and commercial loans varied across the District. A North Carolina lender noted that mortgages for new purchases of homes declined, in part because of economic uncertainty. However, a second North Carolina lender said new financing is outpacing refinancing at his bank. According to another North Carolina banker, the home mortgage business is improving and he indicated that refinancing has strengthened in his region; in addition, a number of lenders stated that the competition among lenders for refinancing business has been aggressive. Finally, a banking contact with several locations in the District reported that demand for consumer loans and mortgages had not changed much. Bankers in Maryland and West Virginia reported that foreclosures have slowed. A West Virginia banker said that while overall credit quality has been very good, residential mortgage delinquencies have crept up slightly, and that demand for commercial credit had been steady at a relative high rate in recent weeks. Another West Virginia banker remarked that his region's commercial and industrial loan demand had slowed because economic progress has been "lumpy." A banker in North Carolina reported that loan demand from businesses had remained weak despite lower borrowing rates, owing in part to economic uncertainty.
Real Estate
Residential real estate activity continued to improve since our last report. A contact in South Carolina said that the real estate market was dynamic in the Charleston area and that demand and pricing were stronger than they had been in a long time. A Realtor in the Washington, D.C. area expects a strong market through early 2013, as the combination of record low inventory and low interest rates encourages new listings. A contact in West Virginia told us that home sales in his area have improved considerably and that prices were flat for the first time since the drop in values two years ago. Another source saw improvement in the "move up" market but little to no activity in the speculative market. He also remarked that the start-up market for housing remained flat and that the effect of student loans on credit scores was a cloud over the mortgage market.
Reports were mixed on commercial real estate and construction markets in the District. While a few contacts reported modest improvement in activity since our last report, others noted flat activity or modest declines. A developer in the Carolinas said that absorption rates in the office sector tightened in the downtown Charlotte area, but vacancies in suburban areas remained elevated. In contrast, a real estate representative in Virginia indicated that office park absorption rates in the Roanoke suburbs were good, with ninety percent occupancy rates, which he attributed to new medical facilities. However, he noted that vacancies in the downtown area were considerably higher. Most sources also mentioned tightening of available office space, especially among Class A properties, due to lack of new construction. A Charlotte Realtor stated that leasing rates in the industrial sector continued to decline this year and noted little new development in the retail sector. Moreover, several realtors reported that rental rates were soft, noting that it was a "tenant's market." However, all contacts were in agreement that concessions were decreasing.
Agriculture and Natural Resources
Agricultural conditions remained favorable. Oil and natural gas production remained at high levels during the past six weeks. December was relatively mild across most of the District, with warmer than normal temperatures and significant precipitation. Small grain conditions improved with the added moisture, as did pastures and hayfields.
Although conventional oil and natural gas production held steady at high levels, the rig count fell in West Virginia. Cushioning the fall, many companies continued to drill in order to get wells in place before permits expired. In contrast, coal production fell last year due to lower demand from domestic utilities and offshore customers, idling many mines. One coal producer attributed the depressed coal market to stricter regulations coupled with lower natural gas prices, as well as a weaker economy both in the United States and in Europe.
Labor Markets
Conditions in labor markets weakened since our last report. There were several reports of soft demand for workers in part because businesses were reluctant to hire in the politically uncertain climate. Retail employment dropped sharply in recent weeks, and several service sector contacts indicated that hiring decisions were in a holding pattern. Exceptions were to fill vacated positions and to ease nursing shortages, and a Washington contact remarked that restaurants were payi