The Federal Reserve says the economy continued to grow across most of the US, according to its Beige Book released on Wednesday.
The Beige Book is a compilation of anecdotes on the economies in the Fed's 12 districts.
This document has been prepared ahead of the Federal Open Markets Committee's December 13-14 meeting, when it is likely to vote for the only interest-rate hike of 2016. The Cleveland Fed prepared this edition.
Minutes of the pre-election meeting in November showed that the Fed thought it would be appropriate to raise rates "relatively soon." The minutes, however, did not account for the postelection surge in Treasury yields and inflation expectations. Meanwhile, traders are almost certain of the Fed's next move, pricing in a 100% chance of a hike in December, according to Bloomberg.
Much was said in the Beige Book about the presidential election. Some contacts said business owners attributed softening auto sales and hiring to uncertainty surrounding the election. Most districts said demand for new vehicles fell, with shoppers opting for used cars instead. And on real estate, the Fed's contacts said commercial construction grew in most districts.
The downside of a strong US dollar was among the issues that the Fed's contacts brought up. Some wondered whether tourism would remain strong if the greenback continued to rally against other major currencies.
The Fed also announced that beginning next year, the Beige Book will provide more consistent summaries and have a new design. For example, every district will include concise highlights in 50 words or less before diving into detailed anecdotes.
Here's the full text:
Reports from the twelve Federal Reserve Districts indicate that the economy continued to expand across most regions from early October through mid-November. Activity in the Boston, Minneapolis, and San Francisco Districts grew at a moderate pace, while Atlanta, Chicago, St. Louis, and Dallas cited modest growth. Philadelphia, Cleveland, and Kansas City cited a slight pace of growth. Richmond characterized economic activity as mixed, and New York said activity has remained flat since the last report. Outlooks were mainly positive, with six Districts expecting moderate growth.
Demand for manufactured products was mixed during the current reporting period, with the strong dollar being cited as a headwind to more robust demand in a few Districts. Modest to moderate increases in capital investment are expected in several other Districts. Business service firms saw rising activity, especially for high-tech and information technology services. Reports from ground freight carriers were mixed, while port cargo increased. A majority of Districts reported higher retail sales, especially for apparel and furniture. New motor vehicle sales declined in most Districts, with a few Districts noting a shift in demand toward used vehicles. Tourism was mostly positive relative to year-ago levels. Residential real estate activity improved across most Districts. Single-family construction starts were higher in a majority of Districts, while multifamily construction reports were mixed. Activity in nonresidential real estate expanded in many Districts. Banking conditions were largely stable, with some improvement seen in loan demand. Farmers across reporting Districts were generally satisfied with this year's harvests. However, low commodity prices continue to weigh on farm income. Investment in oil and gas drilling increased slightly, while reports on coal production were mixed. A tightening in labor market conditions was reported by seven Districts, with modest employment growth on balance. Districts noted slight upward pressure on overall prices.
Manufacturing
Demand for manufactured products was mixed during the current reporting period. Boston, New York, Atlanta, Chicago, and St. Louis reported modest or moderate growth, while Richmond noted that factory activity declined. The remaining Districts said that production was mixed or grew slightly. Gains in activity among chemical firms were reported in Boston, Philadelphia, and Dallas. The auto industry was a source of strength in Cleveland, Richmond, Chicago, and St. Louis. Machinery manufacturing rose in Philadelphia, St. Louis, and Kansas City, but it declined in Chicago and Dallas. Aerospace-related manufacturers saw improving activity in Chicago, St. Louis, and Kansas City, while their counterparts in San Francisco saw orders decline. Philadelphia and Dallas noted weakening in fabricated metal products manufacturing, while producers in St. Louis are expanding capacity. The electronics industry expanded in Kansas City and San Francisco, while firms in Philadelphia noted weaker activity. The strong dollar remains a key concern for exporters in the Boston, Dallas, and San Francisco Districts. In contrast, Kansas City reported that export orders continued to expand. Modest to moderate increases in capital investment are expected in the Philadelphia, Richmond, St. Louis, Minneapolis, and Kansas City Districts, with several companies announcing facility expansion plans in St. Louis and Minneapolis. The overall outlook by manufacturers in New York, Philadelphia, Atlanta, St. Louis, Kansas, and Dallas is positive, with most expecting growth in new orders and production during the next several months.
Nonfinancial Services
Most Districts experienced growth in nonfinancial services since the previous reporting period. New York was an exception, with reports of flat to declining activity among service-sector firms. Nevertheless, New York service contacts remained positive about the near-term outlook. High-tech and information technology services expanded in Richmond, St. Louis, Kansas City, Dallas, and San Francisco. Most healthcare contacts anticipated future growth; however, San Francisco expressed concerns about potential changes to the Affordable Care Act.
Reports on transportation services were mixed. Kansas City reported a moderate decline in activity, while Atlanta reported little change and Dallas reported mixed cargo volumes. On the other hand, Cleveland, Richmond, St. Louis, and San Francisco experienced varying degrees of expansion. Atlanta and San Francisco noted continued strength in e-commerce shipments, while Cleveland contacts noted that Internet retailers are transitioning to on-demand delivery service providers for shipping as opposed to traditional ground carriers. Atlanta reported growth in port cargo shipments and a decline in trucking activity. Richmond noted stronger port traffic in recent weeks, and a national trucking firm in that District reported downward rate pressures because of excess capacity. Dallas noted steady truck and seaport cargo volumes.
Consumer Spending and Tourism
The Boston, Minneapolis, and San Francisco Districts reported that retail sales expanded at a moderate pace on balance. Retailers in New York, Chicago, St. Louis, and Kansas City reported that sales were mixed to slightly higher, while their counterparts in Philadelphia, Richmond, and Atlanta characterized sales as unchanged. Weakening sales were seen in Cleveland and Dallas. Apparel sales were doing well in Boston, Philadelphia, Minneapolis, and San Francisco, while contacts in Cleveland and Dallas suggested that the unusually warm weather may have hurt apparel sales. Boston, Cleveland, and Chicago saw an increase in furniture purchases. Cleveland and San Francisco noted declining sales at brick-and-mortar stores, a situation which they attributed to a consumer shift toward online purchasing. Contacts in Cleveland and Atlanta noted that sellers have little control over product pricing. Retailers in Boston, Cleveland, Atlanta, and Kansas City expect modest positive sales growth during the rest of the year and remain optimistic for the holiday season. Dallas suggested that retail demand may not increase in the near term, driven partially by low sales in border cities because of the strong value of the dollar.
Motor vehicle sales declined slightly in most reporting Districts during the period. Kansas City saw sales decline well below year-earlier levels. In contrast, new vehicle sales in Chicago were characterized as strong, a circumstance which dealers attributed in part to aggressive incentives. Philadelphia indicated that light vehicle sales were plateauing at high levels, while Cleveland reported modest growth in motor vehicle sales but noted that this was driven by the used vehicle market. The New York and St. Louis Districts also noticed a shift in demand toward used vehicles. Richmond and St. Louis contacts suggested that softening vehicle sales might be attributed to uncertainty surrounding the presidential election, while contacts in Dallas point to energy-related weaknesses as a factor in the sales decline. Respondents in St. Louis and Kansas City expected a modest pickup in vehicle sales during the next several months, while contacts in Dallas were less confident for future growth.
Tourism was mostly positive relative to year-earlier levels: Boston, Minneapolis, and San Francisco experienced strong growth, while Philadelphia and Kansas City reported modest growth in activity. Respondents in Boston noticed continued strong international travel, although some contacts expressed uncertainty about the trend's continuing in 2017 if the dollar remains strong. New York reported that attendance at Broadway theaters slumped in October; however, revenues have increased and are on par with those of a year earlier.
Real Estate and Construction
Residential real estate activity improved across Districts. Reports about existing- and new-home sales were mixed, but most Districts noted a slight to modest increase during the period. Residential construction was up in the Cleveland, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, and Dallas Districts. Home prices grew in many Districts, including Boston, Philadelphia, Cleveland, Atlanta, St. Louis, Kansas City, and San Francisco. Philadelphia reported that the strength of the single-family market is in high-end housing. In contrast, Kansas City reported that sales of low- and medium-priced homes continued to outpace sales of higher-priced homes. Dallas reported that the sales of lower-priced homes remained solid. Home inventories were generally reported to be low or declining and restraining sales growth. Boston, Philadelphia, Cleveland, Richmond, and Minneapolis reported low or decreasing inventories. Reports on inventory levels varied in Atlanta, while inventories held steady in Kansas City.
Commercial construction activity moved higher in the New York, Cleveland, Richmond, Atlanta, St. Louis, Kansas City, and San Francisco Districts. In contrast, Minneapolis noted a slowing in commercial construction. The Boston, Richmond, Minneapolis, and San Francisco Districts reported increases in leasing activity, while Philadelphia noted a lull in nonresidential leasing growth compared with the prior period. Dallas reported leasing activity as mostly unchanged. Commercial sales activity continued to be robust in Minneapolis and grew modestly in Kansas City. Ongoing multifamily construction has been steady at a fairly high level in New York. Multifamily construction varied in the Atlanta District and slowed somewhat in Richmond, Minneapolis, and San Francisco.
Banking and Finance
District reports indicated that the demand for credit varied widely. On the commercial side, New York, Philadelphia, and St. Louis experienced strong demand for commercial and industrial loans, while C&I lending was slower in Dallas. Commercial real estate lending was strong in the New York, Philadelphia, and Cleveland Districts. In Atlanta, some small businesses had trouble obtaining credit, and St. Louis reported slightly lower credit worthiness for agricultural customers only. Residential mortgage activity was steady in New York and Kansas City; higher in Philadelphia, Richmond, Chicago, and Dallas; and strong in Cleveland and St. Louis. Auto lending was unchanged in St. Louis, up in Philadelphia and Dallas, and strong in Cleveland and Chicago. Credit quality was unchanged across most Districts, though improvements were seen in New York, Philadelphia, and Chicago. Credit standards tightened in select loan categories in the Boston, New York, and Philadelphia Districts, but they loosened slightly in Richmond, where contacts reported facing competition that used more aggressive loan structures.
Agriculture and Natural Resources
Although agricultural conditions varied widely, farmers across reporting Districts were generally satisfied with this year's harvests. However, low commodity prices continue to weigh on farm income. Atlanta, Chicago, Minneapolis, and Dallas reported strong yields of corn and soybeans. Cotton harvests were above year-ago levels in Atlanta, St. Louis, and Dallas. The Richmond District reported that the biggest impact on international trade was in the poultry industry, with the loss of four million to five million birds killed by Hurricane Matthew and related floods. San Francisco noted that the strong dollar continued to hold back exports of agricultural products, particularly apples and pears. Contacts in St. Louis, Minneapolis, Kansas City, and Dallas said that farm incomes are flat or lower compared to those of a year ago. There were scattered reports about issues surrounding loan repayment and crop financing for 2017.
The energy sector continued to improve slowly across many of the reporting Districts. Cleveland, Minneapolis, Kansas City, and Dallas saw a slight increase in oil and gas drilling. Contacts in Dallas re-affirmed that oil and gas activity will pick up gradually in 2017. However, these expectations have moderated in light of recent revisions to the global oil demand and supply outlooks. An oversupply of crude oil and gasoline continued in the Atlanta District, a situation which perpetuated a high demand for inventory storage. Coal production increased slightly in the Cleveland and Richmond Districts, but declined in St. Louis. The Minneapolis District noted that shipments of iron ore on the Great Lakes in September were more than 5 percent below levels of a year earlier. Contacts in Minneapolis and Atlanta reported expansion of renewable energy projects, particularly solar and wind.
Employment, Wages, and Prices
Employment continued to expand during the period. The Richmond, Chicago, St. Louis, and San Francisco Districts all reported moderate increases, while Boston and Minneapolis saw employment rise at a modest pace. Overall, employment increased slightly in Philadelphia, was little changed in Cleveland, and held steady or increased in Dallas. Manufacturing employment reports were mixed, with four Districts reporting flat or declining payrolls and two Districts reporting increases in manufacturing employment. The Boston, Philadelphia, and Cleveland Districts noted increases in retail employment or hours, while the Richmond District noted decreases. Most Districts saw increases in staffing activity. Boston reported fairly strong activity, with most staffing firms' revenues increasing 10 percent to 25 percent year-over-year. Staffing firms in Cleveland attributed a modest decline in the number of job openings and placements to uncertainty stemming from the presidential election.
As in the past four Beige Books, wage growth was characterized generally as modest, on balance, by district contacts. The St. Louis, Minneapolis, and San Francisco Districts all reported moderate wage growth. Wage growth was modest in six of the twelve Districts: Boston, New York, Philadelphia, Atlanta, Kansas City, and Dallas. In the Richmond District, wages increased slightly. Cleveland reported that wage pressures were more evident for select occupations, while Dallas noted that wage pressures were more widespread. Seven districts--Boston, New York, Philadelphia, Atlanta, Chicago, St. Louis, and Dallas--noted that labor markets were tightening. Staffing services reported rising wages or difficulty filling positions without wage increases in a majority of the Districts.
Overall, there was slight price growth during the period. The Philadelphia, Chicago, St. Louis, and Minneapolis Districts reported modest price increases, while most of the remaining Districts reported slight or limited price increases. The retail and services sectors reported slight to modest price increases, while agricultural product prices have stabilized at low levels. Contacts in the Philadelphia, Cleveland, Atlanta, St. Louis, and Minneapolis Districts reported increases in the cost of building materials, and contacts in the Atlanta and Dallas Districts noted downward pressure on freight transportation prices.
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First District--Boston
Most First District businesses contacted in early November reported ongoing moderate growth in sales or revenues. Retailers cited year-over-year sales results ranging from very small declines to mid-single-digit increases. Manufacturing respondents reported increased sales from a year ago. Staffing firms noted fairly strong year-over-year revenue increases in recent months. In commercial real estate, leasing activity was flat or up modestly in most First District markets. Residential real estate contacts continued to cite rising prices, but closed sales were up in some states and down in others. Most respondents indicated they were raising wages modestly to recruit and retain workers. Prices were said to have increased only slightly.
Retail and Tourism
Retail contacts consulted this round reported year-over-year sales results -- both overall and on a same-store basis through -- October and mid-November ranging from flat or very low single-digit decreases to increases in the mid-single digits. Prices remained flat or rose 1 percent to 2 percent. Respondents said they expect that the current fiscal year will end with modest positive sales growth and that this positive growth will continue in 2017. All categories of apparel, furniture, and home furnishings sold well. Contacted retailers said they plan to hire more workers, raise wages for some or all positions to attract new hires, and raise wages for some or all categories to retain existing workers. Two contacts noted that the need to pay higher wages would cut into their operating profits and one of them indicated that competitive pressures prevent them from raising retail prices in order to absorb higher labor costs.
A Boston-based tourism contact reported that their latest data (through September) showed continued strong business and leisure travel. Inbound air travel to Logan International Airport was up 6 percent year-over-year through 2016:Q3; international visitors were up 19 percent over the same period. The number of travelers from Asia increased 34 percent at least in part because of new airline service to Boston in 2016. Self-reported data indicate that one-third of this increase in visitors from Asia reflects business travel and two-thirds leisure travel. Occupancy rates in Boston-area hotels were flat in September, but average September room rates were up 5 percent from a year earlier, bringing the average room rate to a high not seen since 2012. Attendance at local area attractions and museums in September was up 6 percent year-over-year. Contacts expressed some uncertainty about whether the strong international travel numbers will continue in 2017, especially for leisure travelers, if the U.S. dollar remains strong against other major currencies.
Manufacturing and Related Services
All nine manufacturing respondents in this Beige Book round reported increased sales from a year earlier. A furniture manufacturer reported strong sales for the first time after several years in which the long-term viability of the firm was in question. Three contacts said that the strong dollar and weak commodity prices have slowed sales; two of these indicated that the strong dollar had weakened sales in Europe. A manufacturer of specialty chemicals reports that his plants are running "24/7."
There appears to be little upward pricing pressure right now. All contacts reported that prices were steady or down. A milk producer said that milk prices were down 10 or more percent versus a year ago.
Despite seeing stronger sales, only two contacts reported major hiring. One, a specialty chemical manufacturer, said that finding hourly workers was exceedingly difficult. This contact said that only one out of every three or four hourly hires works out; the problem is absenteeism, with many workers unable or unwilling to work five days in a row. Another respondent said that eight out of ten potential hourly hires either cannot pass a drug test or cannot pass a simple math test. Several of our contacts said they had trouble finding engineers. Two contacts reported lower headcount due to "attrition" or new systems.
One contact reported significant revisions to capital expenditure plans since we last talked 12 weeks ago; they said that they will more than double spending on new plant and equipment as a result of the successful introduction of a new product. The contact noted that the bar for investment is higher than before the recession: before the recession, an investment project needed to make sense even if sales fell 5 percent but now the rule is that it must make sense even if sales fall 25 percent.
Staffing Services
Business activity in the New England staffing services industry has been fairly strong in the past couple of months: year-over-year revenues increased between 10 percent and 25 percent for all but one responding firm. Labor demand continued to increase and labor supply continued to tighten in the fall. Legal, marketing, and medical assistant positions were particularly hard to fill. One contact cited the "often negligible" difference between public benefits that potential job candidates receive and earnings from a minimum wage job as a possible explanation of the tightening labor supply. Bill and pay rates have stayed flat or risen: most staffing firms are not getting pushback in response to increasing pay rates. One contact pointed out that his clients recognize that it has become more costly to recruit and secure qualified and experienced candidates. Most of the staffing firms plan to increase in size in 2017, citing the need for specific skills to grow the company, overworked staff, and expected increases in revenue. All firms plan to increase wages for their employees over the next year. Looking forward, staffing contacts were optimistic about how their companies will fare in the coming months; however, they recognize that the new administration introduces some uncertainty. Two contacts expressed optimism concerning the new political climate, predicting tax cuts.
Commercial Real Estate
Commercial leasing activity was flat or up modestly across the First District. In the Portland area, office leasing activity was flat at a slow-to-modest pace, but vacancy rates remained very low. Office leasing was also flat in greater Hartford. However, Connecticut continued to see fairly robust activity in the industrial property market, including sales, construction, and leasing. In Rhode Island, commercial leasing activity was up modestly from the third quarter, the office vacancy rate was down significantly from a year earlier, and asking rents for office space were on the rise. A contact noted that despite these improved fundamentals, office rents in downtown Providence remain too low to justify new office construction. In Boston, office leasing volume was flat and one contact said the rate of growth of high-tech firms was slowing. However, Boston's office vacancy rate continued to decline slowly, thanks to the paucity of new construction in recent years. Contacts reported that lending terms for construction loans continued to tighten. While some investors reportedly are nervous that property prices in prime commercial real estate markets such as Boston are poised to decline moving forward, the most sought- after properties in the Boston area continued to trade at record prices.
The outlook among contacts was cautiously optimistic, on balance, and most agreed that it was too soon to predict the impact on commercial real estate markets of the incoming Trump administration. Nonetheless, contacts in Boston and Hartford expect tepid economic growth moving forward based on local conditions, and a Providence contact cited space constraints as a barrier to economic growth. All contacts expected borrowing costs for commercial real estate to increase and price appreciation to slow or turn negative as a result. However, contacts opined that investors' equity positions are strong enough to weather moderate price declines.
Residential Real Estate
As in recent months, residential real estate markets in the First District showed healthy buyer activity with increasing strains on inventory. Closed sales for single-family homes and condos were mixed, with moderate year-over-year increases in some states and moderate decreases in others (five of the six First District states as well as the Boston metro area reported year-over-year changes from September 2015 to September 2016; Maine reported changes from October 2015 to October 2016). Pending sales, however, were up across the board for single-family homes and mostly increasing for condos. A Boston contact noted that buyer demand was "remarkable" while a contact in Rhode Island called 2016 "a banner year for home sales." Despite the mixed results for closed sales, the increasing pending sales numbers indicate a positive outlook going forward. A Massachusetts contact said "buyers in October kept up this summer's momentum into the fall." As usual though, many contacts cited decreasing inventory as a drag on the market. Inventories decreased year-over-year in every reporting region for both single-family homes and condos. Contacts expressed concern that this trend is driving prices up and pricing out first-time home buyers.
Prices also were generally increasing year-over-year. Median sales prices for single-family homes increased in every reporting region. For condos, the same was true in all but two First District states. Buoyed by strong buyer demand and shrinking inventories, prices remained at or near record levels in some areas. Several contacts again characterized the market as a "seller's market," given that sellers are able to price homes at their desired level and still have an abundance of buyers to choose from.
Overall, contacts seemed optimistic about the outlook. Many were wary of low inventory, but maintained that buyers seemed unfazed by the heavy competition and high prices. Several contacts cited low interest rates, low unemployment, and the stable economy as reasons for their optimism.
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Second District--New York
Economic activity in the Second District has remained flat since the last report, while labor markets have remained tight. Contacts continue to report little change in selling prices, as well as in price and wage pressures, though a rising number of service-sector contacts anticipate wage hikes in the months ahead. Manufacturers note a modest pickup in business activity, while service firms continue to report steady to softer activity. Both consumer spending and tourism have remained sluggish since the last report. Residential and commercial real estate markets have been mixed but steady overall. Residential construction has held steady, while office construction has picked up. Banks report strengthening loan demand, continued improvement in delinquency rates, and somewhat tighter credit standards on commercial borrowers.
Consumer Spending
Retail merchandise sales remained soft in October but showed some signs of picking up in early November. Two major retail chains report that sales in the region remained sluggish and below plan in October, though both note a modest pickup in the first half of November. Similarly, retailers in upstate New York note that sales were essentially flat in October but improved somewhat in early November. Prices throughout the district are reported to be steady to up slightly, while discounting has remained about the same. Inventories are described as being in good shape.
Auto dealers in upstate New York report that new vehicle sales have been steady to somewhat weaker in October and into early November, while sales of used vehicles were flat to up modestly. One contact attributes some of the recent weakness to manufacturers having scaled back incentives, noting that production has been scaled back. Inventories of new vehicles are reported to have risen moderately due to slowing sales activity. Retail and wholesale credit conditions remain favorable.
Tourism activity has been mostly steady since the last report. Attendance at Broadway theatres slumped in October and early November and was below comparable 2015 levels; however, revenues have increased and are on par with a year earlier, reflecting higher average ticket prices. After rising in September, consumer confidence in the Middle Atlantic states (NY, NJ, PA) retreated in October, though it remains at reasonably high level.
Construction and Real Estate
The District's housing markets have been mixed since the last report, with the high end continuing to underperform. New York City's rental market has been mostly steady, except at the high end, where the inventory has risen and rents have drifted down. Landlord concessions have grown increasingly prevalent, especially in Manhattan and Brooklyn. In contrast, rental markets in northern New Jersey and across upstate New York have strengthened further: vacancy rates are at or near multi-year lows, while rents continue to climb and are up roughly 4 percent from a year earlier.
New York City's co-op and condo resale market has been mixed. In Manhattan, resale inventories have risen, while prices have declined at the high end of the market but remained steady for more moderately priced units; bidding wars have become noticeably less prevalent. Resale markets in Brooklyn and Queens have been more resilient: prices have continued to edge up, sales activity has been strong, and inventories have declined. Similarly, realtors in parts of upstate New York State report that the home resale market has remained robust; tight inventories have pushed up prices, and sales activity is described as fairly brisk for this time of year.
Commercial real estate markets have been mixed in recent weeks. Since the beginning of October, office availability rates have risen in Manhattan, Long Island, Westchester, and Fairfield counties, while they have held steady in northern New Jersey and across upstate New York. Industrial real estate markets, on the other hand, have strengthened throughout the District, with rents rising rapidly, and availability rates slipping to multi-year lows across New York State, and holding steady at multi-year lows in northern New Jersey.
Permits for single-family construction have risen modestly in New York State but declined in New Jersey; they remain at subdued levels in both states. Ongoing multi-family construction activity has been steady at a fairly high level, though there has been very little new development in recent weeks. Office construction starts have picked up across most of the District.
Other Business Activity
Manufacturing contacts report that business activity and new orders have picked up modestly in recent weeks, while inventories have fallen broadly. Service-sector businesses, on the other hand, continue to report flat to declining business. Still, both manufacturing and service sector contacts generally indicate that they are fairly optimistic about the near term outlook. Business contacts report little change in selling prices. Service firms report that input price pressures remain fairly widespread, while manufacturing contacts report only modest input price pressures.
The labor market has remained tight. A number of business contacts maintain that they are having trouble both finding and retaining skilled workers. One New York City employment agency reports that hiring activity has slowed somewhat, while another indicates that hiring has been fairly strong for this time of year. Both report modest growth in wages and salaries. An upstate New York employment agency reports steady demand for labor and rising wages for some categories of jobs. Retail contacts report that they plan to hire somewhat more holiday-season workers than in 2015. Manufacturers indicate that they have continued to reduce headcounts, on balance, though they plan to increase employment in the months ahead. A growing proportion of service-sector contacts anticipate wage hikes in the months ahead.
Financial Developments
Contacts at small to medium-sized banks in the District report stronger demand for commercial mortgages and commercial & industrial (C&I) loans but little change in demand for consumer loans and residential mortgages. Credit standards were unchanged for consumer loans and residential mortgages, but bankers report some tightening of standards for commercial mortgages and C&I loans. Bankers report narrower spreads of loan rates over cost of funds across all loan categories. The decrease in spreads was most notable for residential mortgages. Respondents also report an increase in the average deposit rate. Finally, bankers report lower delinquency rates for consumer loans and C&I loans, and no change in delinquency rates for other loan categories.
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Third District--Philadelphia
Aggregate business activity in the Third District continued to grow slightly during the current Beige Book period. Most contacts reported slight increases in hiring with some exceptions: Staffing firms indicated modest increases, while manufacturers reported declines. On balance, general price increases picked up to a modest pace over the current period, while home prices continued to grow at a slight pace. Contacts reported that wages continued to rise modestly and generally noted a tightening of the labor market. Overall, firms continued to expect moderate growth over the next six months.
Third District contacts reported moderate growth for lending volumes, and modest growth for general services, staffing services, and tourism. Slight to no change in activity was noted by manufacturers, auto dealers, nonauto retailers, and all residential and nonresidential real estate sectors. The only notable shift in activity was a reported lull in the growth of nonresidential leasing activity from a prior period of slight growth.
Manufacturing
On balance, manufacturers described a slight, ongoing expansion of overall activity, although 60 percent of the contacts reported no change. Contacts reported greater increases in new orders and shipments than during the prior period. In addition, current inventories grew for the first time in over a year. The makers of paper products, chemicals, primary metal products, and industrial machinery and equipment noted overall gains in activity from the prior period, while the makers of lumber, fabricated metals, and electronic equipment noted weaker activity. Firms noted that the ongoing decline in employment continued, albeit slightly, while the average hours worked grew this period, after falling for over half the year. Contacts remained optimistic about growth over the next six months, and expectations for future capital expenditures increased. However, firms expressed somewhat lower expectations for general activity and future employment.
Retail
Overall, nonauto retail contacts continued to report little change in sales during the current Beige Book period. Gardening supplies sold well throughout the late summer/early fall season. Outlets reported that sales were up slightly during the period and noted that apparel sales did unusually well over the Veterans Day weekend. For some stores, the Black Friday sales have already begun with deep discounts now and slightly deeper discounts promised later.
Light vehicle sales in the Third District were broadly described as plateauing at high levels. Sales figures have bounced around a bit from month to month, but year-over-year growth has averaged about 1.0 percent for the first ten months of the year. While dealers' operations have stayed relatively lean, they are beginning to look at cutting back expenses, including personnel.
Finance
Third District financial firms continued to report moderate growth of total loan volumes over the Beige Book period. Volumes within all major lending categories continued to grow, except credit card volumes, which leveled off -- a typical seasonal trend prior to the significant growth expected through the holiday season. Commercial and industrial (C&I) loans and commercial real estate (CRE) loans grew at a slower pace than during the same period one year ago but were two of the fastest growing loan categories recently, along with other consumer lending. Auto loans, mortgages, and home equity loans were up slightly during the period, but volumes in the latter two categories remained slightly below last year's volumes.
On balance, banking contacts continued to report healthy loan portfolios and improving customer credit quality, although a few are starting to see scattered problem loans emerge. Several contacts expressed concerns about a potential overheated housing market, primarily for multifamily development in larger urban areas. In addition, a few banks have tightened credit standards since last period -- primarily for C&I lending and CRE. Overall, banking contacts continued to express cautious optimism for slow, steady growth.
Real Estate and Construction
On balance, homebuilders continued to report little change in activity during the current Beige Book period. While contacts also reported few immediate cost increases, they did note that ongoing incremental cost increases for land, development, materials, labor, and financing have been rising faster than new home values, which creates barriers to delivering affordable new homes. Qualified entry-level buyers are also hard to find, thus the strength of the single-family market is in high-end housing.
Brokers in most major Third District housing markets continued to report slight growth of existing home sales, and sales continue to be constrained by low inventories of available homes. Home prices also continued to rise slightly, although this varies across markets and price categories. A major Philadelphia-area broker revealed no meaningful change in the firm's outlook for home sales in 2017.
Nonresidential real estate contacts, predominately in the Greater Philadelphia area, reported that construction and leasing activity remained steady at healthy levels, which represents a bit of a lull in leasing growth compared with the prior period. However, demand has grown incrementally over many years, such that rents and cranes have risen and contractors remain busy, especially for office space and multifamily housing in urban areas, and warehouse space along the interstate corridors.
Services
On balance, Third District service-sector firms continued to report modest activity. Similarly, contacts also noted continued modest growth in the pace of sales and new orders. Since the prior period, employment indicators have shown improvement, as contacts have reported nearly steady use of full-time workers, increases in part-time hires, and an increase in workweek hours. Expectations for future growth in services remain very positive; however, they have fallen somewhat since the prior Beige Book period.
Tourism contacts generally indicated a continuation of slight to modest growth against high levels from the prior year. Pleasant fall weather helped hotels throughout the District maintain high occupancy rates and boost room rates. Mountain resort areas reported strong bookings for the remainder of the year, while convention bookings are reported as strong for the first quarter of next year. Atlantic City remains a weak spot, as recent casino revenues continued to decline against prior year levels.
Prices and Wages
Price levels rose modestly, on balance, a bit more than during the previous Beige Book period. Most contacts reported greater increases in the prices they received for their goods and services; manufacturers also noted an increase in prices they paid. Looking ahead one year, manufacturers anticipate a 2.0 percent increase in prices received for their own goods and services, and nonmanufacturers expect a 2.8 percent increase. Manufacturers also reported expectations of 2.3 percent annual inflation for consumers, while nonmanufacturers expect 2.0 percent inflation.
On balance, wage pressures continued to be modest, according to banking and staffing contacts, with more pressure for certain skilled positions and for nonskilled labor in certain geographic markets. One staffing firm noted that wage pressures were becoming more broad based. Generally, staffing firms reported that labor markets were tightening, while overall growth of hires remained modest. Staffing contacts noted that they are getting less pressure from their client firms to keep wages down; firms are accepting increases in order to attract talent. Over the next year, most firms expect their own compensation costs per employee (wages plus benefits) to rise 3.0 percent.
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Fourth District--Cleveland
Economic activity grew slightly on balance across the Fourth District since our last report. Production at manufacturing plants was generally stable, though output from motor vehicle assembly plants continued to trend lower. The housing market improved, with higher unit sales and higher prices. Commercial builders reported a strong pick-up in backlogs. Retailers saw weakening same-store sales on a year-over-year basis, while sales of new motor vehicles declined. Commercial and retail credit expanded slowly. The number of drilling rigs operating in the Utica and Marcellus Shales and coal production increased. Freight volume expanded over the period, but it remains at a low level.
Payrolls were little changed on balance since our last report. Job gains in construction and banking were partially offset by losses in manufacturing. Wage pressures were most evident in the construction, retail, and banking sectors, both for low- and high-skilled jobs. Staffing firms reported that the number of job openings and placements declined, a situation they attributed to jitters about the presidential election. Contacts noted an increase in the number of temporary positions. Input costs moved slightly higher, while selling prices were little changed.
Manufacturing
Manufacturing output was little changed over the period. Activity for suppliers to the motor vehicle, construction, and personal consumer products industries remains elevated. Factors tempering output growth for other manufacturing industries include a general malaise in the industrial products market, weakness in the energy sector, and uncertainty about the economic health of offshore markets. Year-to-date production through September at District auto assembly plants fell more than 5 percent when compared to that of the same time period during 2015. A growing number of contacts are expressing concern about a sustained decline in new motor vehicle sales. The steel industry, while benefitting from price increases attributable to recently enacted tariffs, does not see this resolution as sustainable. The strong dollar continues to put downward pressure on steel exports. Manufacturers expect little change in business conditions during the upcoming months.
Although there were scattered reports about a pickup in equipment purchases, overall capital spending continues to decline. Two contacts said that firms are postponing investment decisions until more is known about the tax policies of the incoming president. Input costs rose since our last report primarily because of increasing prices for raw materials and employee health insurance. Competitive pressures kept finished-goods prices stable on balance. Manufacturing payrolls were trimmed slightly over the period. Firms cutting employment cited weak sales and a need to cut costs. Other firms noted that while they are not proactively reducing payrolls, they are not replacing employees who leave voluntarily. Attracting and retaining low-skilled employees remains challenging. Wages held steady.
Real Estate and Construction
Year-to-date unit sales through September of new and existing single-family homes increased about 5 percent compared to those of a year earlier. The average sales price rose almost 4 percent. Real estate agents cited low existing-home inventory as the primary factor driving up prices. First-time buyer contracts moved higher. Homebuilders and real estate agents reported that the presidential election dampened housing market activity over the period. However, they believe the slowing is temporary. One builder pointed to an increase in his finished-home prices as a factor for weakening demand. Year-to-date estimates of single-family construction starts were much higher in Ohio and Kentucky compared to those of a year ago.
Nonresidential contractors reported an elevated level of activity. They believe that a strong rise in backlogs over the period was due to aggressive bidding on their part and by customers' suddenly moving projects out of the pipeline and into the construction phase. That said, several builders believe that market uncertainty is increasing. This uncertainty is driven seemingly by the regulatory environment, presidential election jitters, and, to a lesser extent, a potential rise in interest rates. Demand for construction services was seen across market segments. A majority of general contractors and subcontractors increased billing rates to cover rising labor costs and to increase margins.
Homebuilders and commercial contractors reported modest increases in building material prices, particularly for framing lumber, drywall, and concrete. Hiring continues at an aggressive pace, both for replacement and for newly created positions. The industry continues to experience some wage pressure, especially from high-skilled workers. Subcontractors remain very busy. They are challenged by labor shortages, and, as a result, many are selective when bidding.
Consumer Spending
For the period from mid-September through late October, retailers reported weakening sales on balance when compared to those of the same time period a year ago. Declines were seen in apparel purchases, while sales of personal care products and furniture were higher. Retailers cited the unusually warm autumn weather, uncertainty surrounding the presidential election, and stiff competition from Internet retail options as factors contributing to transaction declines. With the presidential election behind them and the holiday shopping season approaching, retailers are looking for sales to improve. Vendor and shelf prices were stable, except for slight declines in food products and gasoline. A producer of consumer electronics noted that traditional brick-and-mortar retailers are facing a significant challenge from Internet sellers for control of product pricing. Payrolls increased over the period as stores are hiring for the holiday season. The market for distribution workers remains tight, a situation which is driving up wages.
Year-to-date sales through September of new motor vehicles declined almost 2 percent when compared to those of the same time period in 2015. Light trucks and SUVs continue to dominate transactions. In contrast, used motor vehicle transactions have increased more than 3 percent. Seasonal staffing declines at dealerships have been completed for the most part. Our contacts reported that attracting and retaining qualified service technicians and entry-level employees remains difficult. Dealers have been forced to increase wages for both job categories.
Banking
Bankers were generally satisfied with their commercial and retail credit portfolios. Growth was characterized as slow but steady. Credit quality remains strong, and little change was reported in loan-application standards. On the commercial side, the strongest demand was for CRE loans. Several bankers mentioned uncertainty as a headwind to more robust commercial lending. One contact said that although customers have confidence in the sustainability of their businesses, they have less confidence in the political environment. As a result, they are cautious before making an investment. Reports from retail banking indicated that demand was strongest for auto, mortgage, and home equity products. Core deposit balances continued to increase over the period. While banking payrolls increased on net, the rise in payrolls was tempered by mergers and branch cutbacks. A majority of our contacts reported increasing wages over the period, mainly because of competition for qualified workers.
Energy
The number of permits issued and the number of drilling rigs operating in the Marcellus and Utica Shales are trending slowly higher as wellhead prices rise at a slow pace. Nevertheless, upstream activity remains significantly below levels seen a couple of years ago. Coal production and prices continue to move higher as customers respond to their low inventories and improving market (domestic and foreign) conditions. Energy payrolls and wages were stable.
Freight Transportation
Freight volume expanded over the period on balance, but volume was flat compared to that of the same time period a year ago. Some of the increase was attributed to seasonal factors and, to a lesser extent, an uptick in steel shipments. One contact observed that Internet retailers are making greater use of on-demand delivery service providers for shipping versus contracting with traditional ground transportation providers. As a result, it is possible that not all shipments are being captured by conventional metrics. Several contacts noted they have been able to raise shipping rates over the period. Payrolls were flat on balance; hiring is limited to replacement and some seasonal employees. Firms continue to pay cost-of-living increases. Capital spending was primarily for new equipment.
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Fifth District--Richmond
We have received mixed signals on economic activity since the previous Beige Book report. While Hurricane Matthew caused evacuations, flooding, and temporary shut-downs in some coastal areas, most sources reported that areas were rebuilding in recent weeks and activity was returning to normal. Manufacturing continued to decline, albeit more slowly. Revenues rose at a modest pace at most services firms, but retail sales were little changed. Tourism slowed, consistent with normal seasonal patterns, with the exception of hard-hit coastal resorts which ended their season early. In finance, demand increased moderately for new home loans, while demand for commercial loans was unchanged. Residential real estate activity continued to increase at a modest pace, while commercial leasing and construction increased moderately. Despite hurricane-related delays in harvesting, agricultural activity increased slightly. Natural gas extraction was unchanged, while coal production rose slightly.
Labor demand increased moderately across the District and there were more reports of wage increases. According to our most recent surveys, employment rose slightly among manufacturing and non-retail services firms but declined for retailers. Our survey measures of average wages indicated a broadening of wage gains among manufacturers while fewer services firms reported wage increases in recent weeks.
Surveyed manufacturers reported that average input prices continued to edge up overall, and average prices received increased modestly faster. Services price increases remained modest and slowed somewhat compared to our last report, while retail prices also increased at a slightly slower pace. Crop prices remained low. Natural gas prices fell slightly, while coal prices were unchanged.
Manufacturing
Manufacturers reported that activity declined since our previous Beige Book report, albeit more slowly. According to surveyed firms, shipments flattened in recent weeks, while the volume of new orders remained sluggish, and more firms noted decreasing backlogs. Manufacturers reported an uptick in capital spending, particularly on software. New orders fell for textiles, transportation equipment, primary metals, furniture, and medical equipment and supplies. Among the few categories with increasing business activity were automotive inputs and advanced manufacturing products. According to our most recent survey, average input prices continued to edge up, and average prices received increased modestly faster, compared to the previous report.
Ports
Port authorities reported stronger traffic in recent weeks. Notable imports included foods and beverages, furniture, appliances, and other household goods, as well as chemicals, plastics, steel, and iron. Food and beverage exports increased, in addition to chemicals and agricultural commodities such as cotton and forest products. At one port, automotive parts were especially strong. A port official said that flooding in the Carolinas caused by Hurricane Matthew had delayed some agricultural exports. Since the opening of the new Panama Canal locks, some ports reported a decline in vessel calls while container volume increased.
Retail
Retail sales were mostly unchanged since the previous Beige Book, with a few exceptions. A frozen food supplier and an HVAC wholesaler reported increases in revenues. Auto sales declined, which a couple of dealers attributed to election-related uncertainty. Retail prices increased at a slightly slower pace than the mild rise previously reported.
Services
Revenues at services firms rose modestly in recent weeks. Software companies reported increased revenues, while healthcare organizations reported no change in demand. A national trucking firm located in the District reported downward rate pressure as excess capacity persisted in the industry. Price increases remained modest.
Tourism
Tourist activity softened overall in recent weeks, consistent with normal seasonal patterns. In the nation's capital, the seasonal uptick in conventions was strong, while other tourist activity was seasonally lower. A general manager at a West Virginia resort reported that early bookings for December through February were at normal levels. On the outer banks of North Carolina, Hurricane Matthew brought the tourist season to an early finish for some hotels and restaurants due to heavy property damage. Restaurants and some other businesses in a flood area of eastern North Carolina were closed for four to five days following the storm because they were without running water. However, the general manager at an inland hotel reported that all hotels in town were fully booked during the hurricane and remained booked with FEMA personnel several weeks after the storm. Room and rental rates were unchanged.
Finance
Overall loan demand rose slightly since the previous Beige Book. Residential loan demand increased moderately in recent weeks. Lenders in South Carolina and Virginia reported moderate growth in residential mortgage activity, although the Virginian felt that transactions were being limited by low home inventories and limited available lots. In contrast, a banker in West Virginia said that loan demand softened somewhat. Residential refinancing activity remained at low levels, according to several sources. Commercial loan demand was mostly flat in recent weeks. A banker in Maryland said that there was little activity outside of multi-family construction. Lenders' interest rates were unchanged, on balance. The competitive environment stiffened and net interest rate margins were compressed. No changes to credit quality were reported. Credit standards, on the other hand, loosened slightly as some bankers reported seeing competitors using more aggressive loan structures, such as nonrecourse loans. Core deposit growth increased, according to a Virginia banker.
Real Estate
Overall, real estate activity continued to increase at a modest pace. Home sales rose modestly in a few areas, but elsewhere seasonal slowing in buyer traffic was reported. Inventories remained low across the District. A contact in Maryland reported strong markets in both new and existing homes. A Richmond agent noted a slight uptick in the number of sales and sale prices. Realtors in Greensboro, Winston-Salem, and High Point, North Carolina said buyer traffic had slowed, with no change in the number of sales. Builders reported modest increases in new home sales in the past six weeks, and said that new home inventories remained low.
On balance, commercial real estate leasing rose moderately in recent weeks, while vacancy rates varied across submarkets. Across the District, industrial leasing activity rose moderately. A Baltimore agent stated that distribution warehouse leasing was healthy. A Richmond agent said leasing and sales of large industrial spaces increased. Most sources continued to report a sluggish office market; however, commercial agents in Charlotte and Richmond reported decreasing vacancy rates, and strong leasing activity. Rental rates were mostly unchanged. A contact from Columbia reported that construction continued to be very strong across all sectors and a Charlotte source reported "booming" commercial construction. However, multifamily construction slowed somewhat since the previous report. A multi- family builder described activity as being in the "late innings of a double header," with limited interest from lenders.
Agriculture and Natural Resources
Agricultural activity picked up slightly. According to a Virginia farmer, weather conditions in recent weeks were excellent for harvesting. In the Carolinas, some harvests were delayed by Hurricane Matthew. The biggest impact on international trade was in the poultry industry, with the loss of four to five million birds killed by the hurricane and related floods. Crop prices remained low.
Natural gas extraction was unchanged in recent weeks. Meanwhile coal production rose slightly, but remained below year-ago levels. Natural gas prices edged lower, while coal prices were unchanged.
Labor
Labor demand increased at a moderate pace since the previous Beige Book. The demand for contingent labor picked up slightly in the last several weeks, according to a staffing agent in North Carolina. A contact from Virginia added that their staffing firm entered the busy season in recent weeks and was tracking last year's pace. In the District as a whole, demand recently picked up for the permanent placement of skilled tradespeople, construction workers, engineers, scientists, elevator mechanics, accountants, and IT professionals. According to our most recent surveys of business activity, employment rose slightly in manufacturing and non-retail services but declined in retail. Wages were reported as increasing slightly. Staffing services firms in the Carolinas were seeing more wage increases, with one noting that higher turnover led businesses to raise wages. Our survey results indicated that wage gains were spreading in manufacturing, but narrowing in services.
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Sixth District--Atlanta
Reports from Sixth District business contacts described economic conditions as modestly improving since the previous report. On balance, the outlook remains optimistic with the majority of contacts expecting growth to be sustained at or slightly above current rates for the remainder of the year and the early part of 2017.
In general, retail sales across the District were flat since the previous report and sales of vehicles softened from a year ago. Reports from the hospitality sector were positive in the parts of the District not impacted by Hurricane Matthew. Residential real estate contacts noted that existing home sales were flat to down, while new home sales were flat to up from a year ago. Home prices improved modestly from last year. Commercial real estate contacts continued to report that the pace of construction had picked up from a year ago. Manufacturers indicated that levels of new orders and production increased since the previous report. Bankers reported loan activity varied across the region. The District continued to experience a tightening labor market as firms continued to face difficulty finding workers. On balance, nonlabor input costs remained stable and wage growth was modest.
Consumer Spending and Tourism
District retail contacts reported relatively flat sales activity since the previous report. Contacts reported having little to no pricing power. However, the outlook among merchants remains optimistic for the upcoming holiday season. Contacts in the automotive industry reported softer sales in the month of October compared with the same time period last year.
Reports from tourism and hospitality contacts across the District were mixed. Mississippi casino gaming revenues increased year-over-year. Reports from areas in Florida and Georgia directly impacted by Hurricane Matthew indicated that room revenues were negatively impacted. H