The Federal Reserve says the job market is tight, and its outlook is mostly positive, according to the latest Beige Book published on Wednesday.
The release is full of so-called 'anecdata:' anecdotes from the Fed's 12 districts that reflect how the local economies are doing and can add some color to the economic trends that we're already aware of.
According to the Fed, wage growth and employment remained modest.
The Fed is largely expected to raise its benchmark interest rate for the second time in this economic cycle when it meets in December. The labor market's strength is a big reason for that expectation, as well as evidence that inflation is rising.
The document is prepared ahead of the Fed's policy meetings and helps inform the discussions that happen there.
"Consistent with what we have seen with the trends in consumer spending, housing and manufacturing, we expect to see the Fed’s updated Beige Book reveals that the overall and most regional economies expanded at a "modest to moderate" pace," said Wells Fargo's Sam Bullard in a preview.
"Anecdotal evidence over the possibility of stronger wage pressures will be of utmost interest to Fed officials and the market."
Here's the full text:
Reports from the twelve Federal Reserve Districts suggest national economic activity continued to expand during the reporting period from late August to early October. Most Districts indicated a modest or moderate pace of expansion; however, the New York District reported no change in overall activity. Compared with the previous report, the pace of growth improved in the St. Louis, Kansas City, and Dallas Districts. Outlooks were mostly positive, with growth expected to continue at a slight to moderate pace in several Districts.
Labor market conditions remained tight, with modest employment and wage growth noted over the reporting period. Most Districts characterized input costs and/or output prices as fairly flat, but prices increased slightly on net.
Manufacturing activity was mixed, and the strong dollar continued to dampen exports of manufactured goods according to a few District reports. Most regions saw an uptick in retail spending, and outlooks were for modest growth in the months ahead. Reports on auto sales and tourism varied across Districts. Demand for nonfinancial services generally increased, and staffing firms noted steady or higher demand. Port traffic and e-commerce-related activity rose in Districts that commented on it, but reports on other transportation services mostly indicated weakness. Residential construction and real estate activity expanded further, although low home inventories continued to constrain sales in a few Districts. Home price appreciation continued at a modest pace in general, and commercial real estate activity and construction improved since the last report. Demand for business and consumer loans increased, aside from some seasonal slowing, and credit quality remained strong or improved. Agricultural conditions were mixed, as low commodity prices pressured farm revenues despite generally strong crop yields. There were signs of stabilization in the oil and natural gas sector, while reports of coal production were mixed.
Employment, Wages, and Prices
Employment expanded at a modest pace over the reporting period. Reports of hiring were strongest in the Richmond, Chicago, St. Louis, and San Francisco Districts. Layoffs in the manufacturing sector were noted in the New York, Philadelphia, Cleveland, and Richmond Districts. The Dallas District reported that energy-sector layoffs had abated, and manufacturing employment was stable following payroll reductions in recent months. Labor market conditions remained tight across most Districts. While reports of labor shortages varied across skill levels and industries, there were multiple mentions of difficulty hiring in manufacturing, hospitality, health care, truck transportation, and sales. The Richmond, Dallas, and San Francisco Districts noted a lack of construction workers, with some contacts noting these shortages were constraining construction activity.
Wage growth held fairly steady at modest levels, although some Districts reported rising pressure for certain sectors. The Philadelphia District cited more upward wage pressure for some skilled jobs, while the St. Louis and San Francisco Districts said pressure intensified for some entry-level positions. These increases were often driven by a shortage of available workers. The competitive labor market also caused retail and tourism contacts in the Boston District to raise wages and prompted employers in the New York District to be increasingly willing to negotiate compensation, according to an employment agency. Also, some small business owners in the San Francisco District reported the need to reinstate previously dropped health care benefits to attract applicants.
Overall price growth was mild. Most Districts reported flat input costs, although a slight increase was noted by firms in the Kansas City and Dallas Districts, and among manufacturing firms in the Richmond and Minneapolis Districts. Most Districts noted little change in selling prices over the reporting period, although there were scattered reports of price movements in certain sectors. Manufacturers in the Cleveland and Kansas City Districts reported declines in finished goods prices. Retailers in the Richmond and Kansas City Districts said selling prices edged up, while select retail chains in the Cleveland District were incrementally reducing shelf prices. Grocery contacts in the Chicago and Minneapolis Districts reported deflationary pressure on food prices, especially meat and dairy. Restaurants in the Cleveland and Kansas City Districts raised menu prices, and the San Francisco District cited modest increases in prices in the broader hospitality sector.
Manufacturing
Reports on the manufacturing sector were quite varied across Districts. The Boston, Philadelphia, Chicago, Kansas City, and Dallas Districts noted increased factory activity, while activity declined in the Richmond and Atlanta Districts and was steady to weaker in the New York District. The remaining Districts cited flat or mixed activity. Capital expenditures were also mixed. Spending cutbacks accelerated in the Cleveland District, and future spending plans lowered in the Philadelphia District but rose to the highest level in more than a year in the Kansas City District. Outlooks were generally positive, although the strong dollar continued to depress exports of manufactured goods in some Districts.
Looking across the manufacturing sector, transportation manufacturing was a bright spot with strong growth reported in the Chicago and Dallas Districts, and the Cleveland District reported elevated activity for motor vehicle and aerospace suppliers. Growth in fabricated metals manufacturing was also a common trend, seen in the Philadelphia, Kansas City, and San Francisco Districts. For steel, demand fell in the Cleveland District and production weakened in the San Francisco District, where contacts noted that the elevated dollar, strong global production, and weak economic growth held back exports. There were several reports of continued weakness in the oil and gas sector still hurting demand for energy-related machinery and/or metal products in the Boston, Chicago, St. Louis, and Dallas Districts.
Consumer Spending and Tourism
Overall consumer spending was mixed this reporting period. The near-term outlook in the Boston, Philadelphia, Richmond, Atlanta, and St. Louis Districts was for modest growth, while contacts in the Cleveland and Kansas City Districts anticipated mostly flat sales. A majority of reporting Districts noted that retail sales increased this reporting period, although unseasonably warm weather impacted sales of cold-weather apparel in the New York and Cleveland Districts, and the strength of the dollar reduced spending by international customers in the Boston, Atlanta, and Dallas Districts. Reports on automobile sales were mixed. Declining sales were noted by the Kansas City and Dallas Districts, while increased sales were noted by the Atlanta, St. Louis, Minneapolis, and San Francisco Districts. Tourism activity was mixed across the nation according to reporting Districts. The New York and Kansas City Districts mentioned that tourism activity slowed this reporting period, while the Richmond District noted steady activity, and the Atlanta and Chicago Districts said activity increased.
Nonfinancial Services
Demand for nonfinancial services generally expanded since the previous report. However, the New York District cited flat to declining activity, and Philadelphia's report noted that the pace of expansion slowed slightly from the previous period. Activity in healthcare services expanded in reporting Districts, and demand for high-tech or information technology services increased, according to reports from the Minneapolis and Kansas City Districts. Sales at restaurants slowed further in the San Francisco District, and business was flat to down among leisure and hospitality firms, according to the Dallas report. Service providers in the Dallas District noted an optimistic outlook, and professional and high-tech services contacts in the Kansas City District reported favorable capital spending plans.
Staffing services demand grew at about the same pace or improved slightly since the prior report. Demand for staffing services strengthened in the New York and Dallas Districts, particularly in the Dallas-Fort Worth metroplex, and continued to expand at a modest pace in the Philadelphia and Cleveland Districts. A large employment agency in the New York District said hiring was brisk and broad-based, while a staffing firm in the Chicago District reported flat activity.
Demand for transportation services and freight activity declined on net, partly reflecting weak exports, excess capacity, and lower shipments of energy-related products. Transportation service firms cited slight declines in overall activity in the Cleveland, Richmond, Atlanta, Chicago, and Dallas Districts, while activity in the St. Louis District was characterized as mixed. Rail traffic was weak in reporting Districts, and air cargo volumes fell according to the Atlanta District's report. By contrast, transportation firms in the Kansas City District saw moderate growth in sales, and contacts in the Cleveland, Atlanta, and San Francisco Districts reported increases in online retail or e-commerce related activity. Port traffic rose in the Richmond and Atlanta Districts, and evacuations were underway as hurricane Matthew approached, according to Richmond's report.
Construction and Real Estate
Residential real estate activity expanded in most Districts since the prior report, and contacts in a few Districts expressed optimism about future growth. Homes sales fell markedly in the Kansas City District, while slight to moderate gains were reported by most of the other Districts. Demand for lower-priced homes was solid in Districts that commented on it, while sales of higher-priced homes slowed in the New York, Chicago, and Dallas Districts, and in Alaska according to San Francisco's report. Home inventories were generally reported to be low or declining and were restraining sales growth according to the Boston, Philadelphia, and Minneapolis Districts. Home prices continued to rise at a modest pace across much of the country, which contacts in some Districts attributed to tight inventories and labor constraints. Growth in residential construction was generally flat to up during the reporting period, with particular strength noted in the San Francisco District. However, construction activity dipped slightly in the Richmond District partly due to lot shortages.
Reports on multifamily activity varied but were positive on net. Strength in the apartment market was noted by the Dallas District (excluding the Houston metro area), while activity was mixed in the New York District. Growth in multifamily construction was positive in the Boston and Atlanta Districts but was mixed in the Richmond District and slowed further according to New York's report.
Commercial real estate leasing activity generally improved, and outlooks were mostly optimistic, although contacts in a few Districts expressed concern about economic uncertainty surrounding the upcoming presidential elections. Commercial rents were flat to up, and vacancy rates were generally low and/or declined in reporting Districts, except in the Houston metro area where office vacancies increased further. Sales of commercial properties were characterized as robust in the Chicago, Minneapolis, and San Francisco Districts but softened in the greater Boston area. Commercial construction increased on net, with contacts in the Cleveland and Atlanta Districts reporting increased or high backlogs. Shortages of skilled labor remained a constraint on construction activity in some Districts, such as Cleveland and San Francisco.
Banking and Finance
Overall loan demand increased, although there were some scattered reports of seasonal softening in some categories of lending. Reports on residential lending were mixed, ranging from some seasonal slowing to growing. Commercial and industrial lending increased overall, although the Cleveland District noted lending is at a slower pace than desired and the New York District reported steady demand. Competition for borrowers remained strong across a number of reporting Districts. Loan quality remained strong or improved in the Philadelphia, Cleveland, Dallas, and San Francisco Districts, and the New York and San Francisco Districts said delinquency rates remained low or declined since the last report. Credit standards were mostly unchanged this reporting period. Deposits grew slightly across most reporting Districts, although the Kansas City District cited stable deposit levels.
Agriculture and Natural Resources
Agricultural producers faced mixed conditions during the reporting period, as several Districts reported strong production for crops yet noted that low commodity prices continued to put pressure on farm incomes. Thanks to favorable growing conditions, record crops were expected for corn and soybeans in several Districts. The San Francisco District noted that yields of pistachios, almonds, and walnuts were expected to reach record levels this year. Above-average rainfall over the last several weeks slowed fieldwork in the Chicago and Minneapolis Districts, and hampered the cotton crop in some parts of the Dallas District. Contacts said that persistently weak farm income continued to reduce borrower liquidity in the Kansas City District, and farmers in the Dallas District were concerned about their ability to get adequate financing for next year.
Signs of stabilization in the oil and gas sector continued, while coal production was up in the Cleveland and Richmond Districts but down in the St. Louis District. The Cleveland, Minneapolis, Kansas City, and Dallas Districts reported an increase in drilling and/or exploration activity. However, demand for oilfield services remained depressed in most of the Dallas District, despite the rise in the rig count. Energy contacts in the Atlanta District said that the drawdown of crude oil inventories continued. Natural gas extraction in the Richmond District was unchanged over the reporting period. The consensus among energy contacts in the Kansas City and Dallas Districts was continued optimism, with the majority of contacts in the Dallas District saying they expect 2017 to be a better year than 2016.
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First District--Boston
Economic activity continues to increase in the First District, mostly at a modest to moderate pace. Although both retailers and commercial real estate contacts report mixed results in recent weeks and months, revenues or sales for responding manufacturers and in residential real estate markets are more consistently positive. In addition, relative to recent Beige Book reports, a larger fraction of contacts in both manufacturing and retail mention raising wages moderately to retain and attract employees. Retailers and manufacturers say their own prices and those of their suppliers are relatively stable. By contrast, the median sales prices of single-family homes rose year-over-year in all six New England states. Outlooks are positive, although contacts in several sectors cite the upcoming presidential election as a source of near-term uncertainty, delaying some business decisions.
Retail and Tourism
Retail contacts consulted for this round report mixed year-over-year comparable-store sales results. Some saw sales decreases ranging from -1 percent to -11 percent, while others had increases ranging from a modest 1 percent to a more substantial 8 percent. Respondents cite a variety of factors to explain their results: Some firms enjoyed double-digit sales growth last year, leading the 2016 sale results to suffer by comparison. One contact had poor results in stores near the Canadian border because of the strong U.S. dollar but experienced mid-to-upper single digit sales increases in locations where the exchange rate was not a factor. A large chain with locations in much of the northeastern United States cites mixed results on a comparable-store basis, but overall sales growth around 5 percent due to opening new stores in new territories. Inventories are said to be well managed and merchandise prices largely stable. Labor markets in some areas are reportedly more competitive, so contacts are raising wages to attract workers or to slow turnover in these markets. The consensus outlook for 2016 is for moderate comp store sales growth of 1 percent to 3 percent.
Restaurants located in tourist areas and urban locations fared well during the high summer season. In Massachusetts, meal tax collections were up 12 percent year-over-year in August and are up 4.6 percent on an annual basis for 2016 to date. A contact hypothesizes that the region's lack of rain hurt some restaurants in suburban locations this summer, particularly on weekends, as potential diners elected to remain home and cook outside in the clear weather. Many restaurants are not fully staffed and, given the tight profit margins restaurants experience in the best of times, the labor shortage is said to be forcing some restaurants to shelve plans for expansion.
Manufacturing and Related Services
We made contact with only seven manufacturing firms this cycle. Three contacts report excellent business conditions, three report modest growth, and one reports a decline in revenues. A diversified manufacturer of aerospace and construction goods said that he "cannot think of when the domestic economy has been so strong." A semiconductor equipment firm reports strong sales growth related to the introduction of the iPhone 7. A manufacturer of lab equipment says that sales are up 10 percent year-on-year due to strong sales in Japan. A manufacturer of electrical equipment notes that 40 percent of their sales in commercial construction are for renovation as distinct from new buildings, while typically only 10 percent of commercial construction sales are for renovation. Our contact attributes this atypical pattern to the availability of new technology that lowers energy consumption. The only firm reporting lower sales makes parts for industrial equipment and said that weakness in oil and gas is still hurting them, although managers felt that the oil and gas industry had bottomed out. Overall, firms do not report major changes in capital expenditure plans. One firm reports significant capital expenditures on facility consolidation; that is, they are spending money to centralize production and close plants.
Manufacturing respondents cite minimal cost increases recently and few are raising their own prices. Several contacts report that it is difficult to make price increases stick, although in situations where costs have clearly gone up, customers are willing to make concessions.
Most contacts have nothing unusual to report about employment and wages. The semiconductor equipment firm reports a second annual 3 percent across-the-board salary increase; until last year, the previous firm-wide salary increase was in 2007. The diversified manufacturer of aerospace and construction goods says the labor market is tight and they have resorted to marked increases in starting salaries to lure new workers. The manufacturer of industrial parts has a hiring freeze in place due to slow sales and requires special authorization even for replacements of departing workers.
Commercial Real Estate
Commercial real estate activity is mixed in the First District. Contacts in Boston and Portland note that office leasing activity is roughly flat since late summer, whereas the typical seasonal pattern involves an uptick after Labor Day. These contacts speculate that political uncertainty in advance of the national elections may be delaying leasing decisions. However, another Boston contact reports that office vacancy rates and rents improved again slightly in recent weeks. In Providence, leasing activity is at least steady since August, and August saw increased activity over July. Together these patterns suggest that in Providence the autumn increase in activity may have occurred earlier than usual this year. The investment sales market is also described as somewhat softer in greater Boston, yet contacts expect that premier properties will continue to sell at near all-time-high prices. Also in greater Boston, there is robust growth in construction in the multifamily, gaming, and health care sectors, and modest growth in office construction. However, the amount of speculative office construction remains limited and contacts feel that the current office construction pace is, if anything, slower than what is justified by fundamentals. Office construction remains limited in Portland, but planned institutional and retail construction around Maine increased in recent months. Based on regional factors such as stable employment growth, contacts are mostly optimistic concerning the outlook. However, macroeconomic risks such as political uncertainty and slow global growth added some caution to contacts' forecasts.
Residential Real Estate
Continuing trends from earlier this year, residential real estate markets in the First District showed healthy activity through the end of August (five of the six First District states--excluding Maine, for which July data are the most recent--as well as the Boston metro area are reporting data through August 2016). Contacts cite strong buyer demand in the First District. For single family homes, both closed sales and pending sales increased year-over-year in every reporting state. A Boston contact notes that "the market was extremely busy last month, and we did not experience the normal August lull in activity." The market for condominiums also showed year-over-year increases across the board for closed sales. Pending sales data for condos were more tempered, with Rhode Island and New Hampshire seeing small decreases year-over-year. Several contacts suggest that the District's persistently low inventory represents the only significant drag on residential markets. Inventories for both single family homes and condos decreased again from last year in every reporting state, by large percentages in several states. A New Hampshire contact says "there may be lingering worry over the availability of move-in-ready homes to replace what was sold." A Boston contact refers to a greater than 30-percent drop in inventory as "staggering."
Every reporting state experienced a year-over-year increase in median sales prices of single-family homes and all but Rhode Island and Connecticut saw the same for condos. A contact in Massachusetts says that "ongoing buyer demand continues to push median prices up." A Boston contact reports that "surprisingly, this continuation of record-high prices has not caused buyer confidence or activity in our region to diminish." Many, though, say they are wary of buyers being priced out if prices continue to rise.
Overall, contacts are optimistic, given that the market typically begins to moderate in the fall and winter. Many note that activity was unusually high for August. Several cite low interest rates and the impending presidential election as motivation for potential homeowners to buy now.
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Second District--New York
Economic activity in the Second District has been flat since the last report, while labor markets have remained tight. Contacts note little change in selling prices, as well as in price and wage pressures; but a growing number of contacts expect to raise selling prices in the months ahead. Both manufacturers and service-sector contacts indicate that business activity has been steady to somewhat weaker, on balance. Consumer spending has remained sluggish, while tourism activity has been mixed but generally weaker. Residential real estate markets continued to be mixed with further weakening at the high end in both sales and rental markets. In contrast, commercial real estate markets have shown signs of strengthening. Residential construction has been sluggish--especially for single-family homes--but there has been some pickup in office construction and industrial construction has remained brisk. Banks report further strengthening in loan demand and continued improvement in delinquency rates.
Consumer Spending
Retail merchandise sales were mixed but generally sluggish in September. Two major chains report that sales weakened in September and were below plan and down moderately from a year earlier in both New York City and the rest of the District. One contact suggests that unseasonably warm weather has delayed sales of seasonal merchandise. In contrast, retailers in upstate New York characterize sales as generally stable and up modestly from comparable 2015 levels, citing the warm weather as a positive factor. Prices are reported to be little changed, as is the degree of promotion and discounting. Inventories are said to be at satisfactory levels, with some retailers noting that the trend towards more on-line sales has enabled them to hold thinner inventories.
Auto dealers in upstate New York report that new vehicle sales remained soft in September and were down from a year earlier. One contact attributes the weakness to a reduction in manufacturers' incentives and surmises that the market has reached a natural plateau. However, some dealers have seen a pickup in used cars sales, which had been sluggish for most of this year. Inventories of new vehicles are reported to be up a bit, with the slowdown in sales. Retail and wholesale credit conditions generally remain favorable.
Tourism activity has been mixed but generally weaker since the last report. Hotels report that occupancy rates were fairly high in September but that revenues were down sharply from a year earlier. However, attendance at Broadway theatres picked up in September and was up moderately from a year ago; with average ticket prices essentially flat, overall revenues were also up moderately from a year earlier. Consumer confidence in the Middle Atlantic states (NY, NJ, PA) surged in September, reaching its highest level in well over a year.
Construction and Real Estate
The District's housing markets have been mixed since the last report, with continued weakness at the high end. New York City's rental market has remained essentially flat in both Manhattan and the outer boroughs: rents on larger units have edged down further and landlord concessions (e.g., free month's rent, waived fees) have become increasingly widespread; rents on smaller units have been essentially flat in recent months but still up slightly from a year earlier. The rental vacancy rate across the city edged up to a seven-year high. In areas of New Jersey close to New York City, however, rental markets remain fairly robust and rents continue to climb. Rental markets across upstate New York have leveled off overall, as vacancy rates have risen moderately.
New York City's co-op and condo resale market has continued to be stable, overall. Sales activity has declined but remains fairly high, and prices have been steady on balance--rising modestly for smaller apartments but continuing to decline for larger units. Bidding wars have become somewhat less common than earlier in the year. Elsewhere across the District, there have been scattered signs of improvement. Realtors in parts of upstate New York State characterize the housing market as vibrant, with inventories tight, prices rising, and sales activity robust. However, home prices remain generally flat in northern New Jersey, and sales volume has been lackluster, aside from pockets of strength in areas close to New York City.
Commercial real estate markets have shown signs of tightening. Availability rates have declined in northern New Jersey, the Lower Hudson Valley and across most of upstate New York, while rents have risen. In New York City, availability rates have edged up, but this likely reflects a sizable amount of new office space that has come on line.
New multi-family development has slowed further in most of the District, though there continues to be a fair amount of construction in progress--particularly in and around New York City. Single-family construction remains sluggish across the District. Office construction has picked up somewhat in New York City's outer boroughs and continues to be fairly strong in Manhattan as well but has remained sluggish elsewhere. However, there continues to be a good deal of office construction in progress across New York City and a moderate amount in northern New Jersey. Industrial construction has been increasingly robust--particularly in northern New Jersey, where warehouse space is in strong demand.
Other Business Activity
Contacts in both the manufacturing and service sectors report that business activity has been steady to weaker since the last report, and service-sector businesses indicate less optimism about the near-term outlook. Both manufacturing and service-sector contacts continue to report steady to modestly increasing selling prices; however, a growing proportion of contacts in both sectors plan to raise prices in the months ahead. Input price pressures are little changed since the last report.
The labor remains tight and hiring continues to be fairly robust. Service firms report that they are hiring, on net, while manufacturers report that they are reducing staffing levels modestly. Contacts in both service and manufacturing sectors plan to increase headcounts somewhat, on balance, in the months ahead. A major New York City employment agency reports that hiring activity has remained brisk, with strong labor demand coming from a broad array of industry sectors. Most of the job openings, however, require some specific skill sets. This contact also notes that employers, faced with a shortage of skilled job candidates, are increasingly willing to negotiate on compensation. Overall, business contacts indicate moderate wage growth and note that wage pressures have not changed.
Financial Developments
Small to medium sized banks in the District report steady demand for commercial & industrial loans but strengthening demand in all other loan categories. Banks indicate that credit standards remained unchanged across all loan categories. Contacts report narrowing spreads of loan rates over cost of funds across all loan categories--particularly for commercial mortgages. Respondents also note increases in average deposit rates. Bankers report lower delinquency rates across all loan categories except commercial & industrial loans, where little change is indicated. The most widespread declines in delinquencies were on residential mortgages.
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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 continued to report declines. On balance, prices continued to rise slightly over the current period, as did home prices. Contacts reported that wages continued to rise modestly but noted more upward pressure for some skilled positions. Overall, firms continued to expect moderate growth over the next six months.
Third District contacts reported moderate growth for lending volumes; modest growth for general services, staffing services, and tourism; and slight growth for manufacturers and commercial leasing agents. Little or no change in activity was noted by auto dealers, nonauto retailers, residential homebuilders and brokers, and commercial contractors. Since the prior period, two sectors improved a bit, while growth in two sectors slowed, as noted in their respective sections below.
Manufacturing
On balance, contacts reported that overall activity grew slightly--following little growth during the prior Beige Book period. Reports indicated that general activity and new orders increased, while shipments fell. The makers of paper products, fabricated metal products, and industrial machinery and equipment noted overall gains in activity from the prior period, while the makers of lumber, chemicals, primary metals, and electronic equipment noted weaker activity. Firms continued to report overall decreases in the number of employees and average employee work hours. Contacts remained optimistic about growth over the next six months but expressed somewhat lower expectations for general activity and future capital expenditures. Expectations for future employment improved.
Retail
Overall, nonauto retail contacts reported little change in sales during the current Beige Book period, similar to the prior period. Outlets reported that sales were flat to up slightly and noted deeper discounting and promotional spending by retailers, while a mall operator reported a pickup in traffic and apparel sales following a disappointing back-to-school season. Convenience store operators have reported steady growth since the last Beige Book period but a slowdown in growth compared with last year, which they attributed in part to record-high sales and traffic this time last year. Contacts remain cautious but still expect modest growth for overall retail sales through 2016.
Light vehicle sales in the Third District remained at high levels and held mostly steady this period. While sales were flat to slightly down over the year, dealers continued to expect total 2016 sales to be at or above the 2015 level. Contacts in New Jersey also noted high inventories, which could spur sales through model year sell-offs.
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 have grown since the prior period. Commercial and industrial (C&I), credit card, and other consumer loans grew at a faster pace than during the same period one year ago. The strongest growth during the current Beige Book period was for credit card debt, C&I loans, automobile loans, and other consumer lending. Mortgage lending and home equity loans were up slightly during the period but have declined since last year.
On balance, banking contacts continued to report healthy loan portfolios and improving customer credit quality. As before, most contacts indicated that their loan standards were unchanged for most loan categories. A few contacts continued to express concerns about riskier loans by their competitors, particularly for multifamily projects. Many continued to characterize the lending environment as competitive. Contacts noted that while some businesses are making investments, others are choosing to defer capital investments for the time being. Banking contacts remained cautiously optimistic that slow, steady growth would continue.
Real Estate and Construction
Homebuilders reported little change in activity during the current Beige Book period, down from the slight rise reported in the last period. Builders attributed some of the slowdown to a seasonal lull similar to what they experienced last year. Contacts indicated they began to see improvement toward the end of the period and expect activity to pick up in 2017. One banker noted concern over whether multifamily activity in the Philadelphia market is overheating, and one major developer recently backed out of a large Center City project, citing rising construction costs and slowing rent growth.
Brokers in most major Third District housing markets noted that existing home sales activity have improved slightly since the prior period. However, a major Philadelphia-area broker continued to report that a low inventory of homes was constraining sales, particularly homes in the mid-price range. Home prices continued to rise slightly, although this varies across markets and price categories.
Nonresidential real estate contacts, predominately in the Greater Philadelphia area, reported that construction activity remained steady at healthy levels. Leasing activity improved for industrial space, particularly warehouses, but slowed somewhat for suburban office space. Contacts expect continued growth and demand for industrial growth remains very strong.
Services
Third District service-sector firms reported overall modest activity this period--a slight slowdown from the moderate pace reported in the previous Beige Book. Contacts also noted slower growth in the pace of sales and new orders. Since the prior period, employment indicators have shown improvement, as contacts noted increases in full-time workers, decreases in part-time hires, and no change in workweek hours. Reports from staffing firms continued to reflect modest growth, with a central Pennsylvania firm noting more activity in executive hiring. Expectations for future growth in services have improved since the prior Beige Book period, with a higher percentage of service-sector contacts expecting growth over the next six months.
Tourism contacts generally indicated a continuation of modest growth overall. Hotel revenues in the broader Philadelphia market exceeded last year's revenues for the first time this year, following a strong convention calendar through September as well as robust leisure travel. Along the shore, activity has improved since last period because of better weather conditions, and some shore contacts reported that this was a stronger year than last year. Atlantic City casino revenues have improved slightly since last period but still showed little sign of strengthening. A banking contact noted that while remaining casinos are starting to fare better against the competition, revenues have been buoyed by online gaming.
Prices and Wages
Price levels have continued to rise slightly, on balance, since the previous Beige Book period. Similar to the prior period, most contacts reported no significant changes in the prices they paid or received for their goods and services; however, of the firms that reported a change, more firms noted price increases than decreases. Commercial real estate contacts attributed an escalation of construction costs primarily to rising labor costs but indicated no concern about inflation. Some skilled positions are commanding higher wages, but contacts continued to report modest wage pressures, overall.
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Fourth District--Cleveland
On balance, the economy in the Fourth District expanded at a modest pace since our last report. Production at manufacturing plants was generally stable, though output from motor vehicle assembly plants trended lower. The housing market improved, with higher unit sales and higher prices. Commercial builders reported that inquiries and backlogs picked up after some weakening early on in the third quarter. Retailers saw little change in 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 both increased. Freight volume remains at a low level.
Payrolls were little changed on balance over the period. Job gains in construction were partially offset by losses in manufacturing. Wage pressures were most evident in the construction and retail sectors across skill levels. Reports from staffing firms about job openings and placements were mixed, though all contacts noted an increase in the number of temporary positions. On balance, input and finished-goods prices were steady.
Manufacturing
Manufacturing output was little changed over the period. Activity for suppliers to the motor vehicle, aerospace, commercial construction, housing, and personal consumer products industries remains elevated. Factors tempering output growth for other manufacturing industries include lower business fixed investment, the strong dollar, and weakness in the energy sector. Year-to-date production through August at District auto assembly plants fell about 6 percent when compared to that of the same time period during 2015. Declines were weighted more heavily toward cars. One original equipment manufacturer reported that the lack of light truck inventory, not the decline in demand, is the reason behind a year-over-year unit volume drop. A majority of our steel contacts reported that demand fell over the period. Manufacturers expect that business conditions will show a modest improvement in the upcoming months. Contacts anticipating weaker growth attribute the situation to uncertainty and weakness in global markets.
Cutbacks in capital spending that began mid-year have accelerated. Although firms continue to allocate monies for maintenance projects and product development, they are lowering spending for equipment. On balance, input costs and finished-goods prices declined slightly. On the input side, declines were primarily attributed to weakening commodity prices. Some manufacturers reduced finished-goods prices in response to competitive pressures. Others cut prices because of reduced demand. Manufacturing payrolls were trimmed slightly over the period. Firms cutting employment cited weak sales. Wages held steady.
Real Estate and Construction
Year-to-date sales through August of new and existing single-family homes increased about 5 percent compared to those of a year earlier. The average sales price rose 3.5 percent. Builders believe there is pent up demand for homes that is spurred by low interest rates and rising consumer confidence. Year-to-date estimates of single-family construction starts were significantly higher across all regions of the District compared to those of a year ago. New-home contracts were distributed across price-point categories. Entry-level contracts ticked higher. New-home list prices moved higher over the period to cover higher costs for labor and land development and higher prices for building materials. Builders expect that home sales will be on par with or fall slightly below seasonal trends for the balance of the year.
Nonresidential contractors are generally satisfied with their current level of activity. Reports indicated that the number of inquiries and backlogs have increased over the period, after both metrics weakened early in the third quarter. Nonetheless, several builders indicated that their customers are postponing investment decisions until after the presidential election. Although demand for construction services is broad-based, segments with the highest demand were CRE, including office space, and higher education. Billing rates are rising at a slower pace when compared to earlier in the year. Other than some tightening in the multifamily segment, construction financing is readily available. Most contractors expect little change in business conditions in the near term.
Home builders and commercial contractors reported little change in building materials prices, except for lumber, the price of which increased. Construction payrolls are expanding at a faster pace than early on in the third quarter. A sizable number of contacts reported creating new positions since our last report. The industry is experiencing wage pressure across skill levels. Subcontractors remain very busy. They are challenged by labor shortages and, as a result, many are selective when bidding. In order to cover rising labor costs, most subcontractors are increasing their rates.
Consumer Spending
Heading into the Labor Day weekend, retailers reported little change in revenues on net compared to those of the same time period a year ago. Although the retail landscape remains very competitive, recent initiatives aimed at adapting to rapidly changing consumer buying habits are helping boost revenues for some chains. The unseasonably warm weather has impacted cold-weather apparel sales. Products selling particularly well include health-and-wellness and personal items. Restaurateurs reported mainly improving sales in their retail operations. One contact noted that increasing competition from nontraditional sources, such as deli counters at grocery stores, is negatively affecting his customer count. For the period between Labor Day and mid-November, our contacts expect little change in revenues compared to the same time period a year ago. Overall, vendor prices were stable. Select retail chains reported that they are continuing with initiatives to incrementally reduce shelf prices. In contrast, some restaurateurs are raising menu prices. Retail payrolls were stable. The labor market for hourly front line and distribution workers is tight, a situation which is driving up wages.
Year-to-date sales through August of new motor vehicles declined 1.5 percent when compared to those of the same time period in 2015. Light trucks (including SUVs and crossovers) continue to dominate transactions, and leasing accounts for more than 40 percent of all new-motor-vehicle transactions within the District. One dealer noted that banks are starting to tighten credit terms on subprime opportunities because delinquencies are beginning to rise with these customers. Some dealers believe that new-motor-vehicle sales are starting to peak and that the industry will experience a slow downward trend in the upcoming months. In contrast, year-to-date sales of used vehicles rose more than 3 percent compared to those of a year ago. Dealer payrolls and wage levels were stable.
Banking
Bankers were generally satisfied with their commercial and retail credit portfolios. Growth was characterized as steady overall, albeit at a slow pace. On the commercial side, highest demand was for CRE loans. C&I lending remains slower than desired. Customers are seemingly reluctant to invest in plant expansions or equipment. Reports from retail banking indicated that demand was strongest for auto loans and mortgages and, to a lesser extent, credit cards. A majority of bankers said that lending during the third quarter was stronger than that of a year ago. Credit quality remains strong, and little change was reported in loan-application standards. Core deposit balances continued to increase over the period. Banking payrolls were stable on net. The primary factor affecting staffing levels was bank mergers, with four being reported over the period. Wages were stable. Select increases were awarded in an attempt to retain key employees.
Energy
The number of permits issued and the number of drilling rigs operating in the Marcellus and Utica Shales are showing signs of trending higher as wellhead prices rise at a slow pace. Coal production has increased during the past couple of months because of rising demand for electricity attributable to above normal temperatures and reduced customer inventory at coal-fired power plants. As a result, spot and forward prices for domestic thermal coal have increased. Prices for metallurgical coal have also risen, a situation which has been driven largely by production cuts and increased demand. Energy payrolls increased slightly, though much of the increase was seasonal. Wages were steady.
Freight Transportation
Freight volume contracted on a year-over-year basis and remains at a low level. Our contacts attributed this situation to sluggish growth, especially in the industrial sector, and rapid changes in retail distribution. One contact noted that shipment counts industry wide were flat for the first eight months of 2016 except for select carriers who contract with large on line retailers. In the latter case, volume is rising. We heard several reports about overcapacity in the system, and this overcapacity is forcing some haulers to lower shipping rates and to reduce capital budgets. Spending is now primarily for maintenance projects and equipment replacement. On balance, our contacts expect little change in volume during the upcoming months. In general, freight payrolls have declined over the period. Hiring is limited to replacement. Firms continue to pay cost-of-living increases.
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Fifth District--Richmond
Fifth District economic activity rose modestly in recent weeks. Although the manufacturing sector remained soft, the pace of decline slowed. Revenue growth increased more broadly at services firms, and retail sales strengthened. Tourism remained steady at seasonal levels. Household and business loan demand increased slightly on balance. Residential real estate sales were up moderately and commercial activity rose modestly. Agricultural activity also picked up slightly. Natural resource extraction was little changed. Large-scale evacuations were underway along parts of the East Coast in recent days as hurricane Matthew approached.
Since the previous Beige Book, labor markets have tightened moderately. According to our surveys, upward wage pressures broadened considerably in the service sector but subsided slightly in the manufacturing industry. Employment rose in September, according to service sector firms, while employment fell at manufacturing firms. Also in the survey, average manufacturing input prices continued to edge up slightly overall, while average prices received by manufacturers were little changed. Retail prices rose at a steady, mild pace. Services prices continued to rise modestly. Farm input prices were unchanged, while prices received dropped for some commodities. Coal prices ticked up, while natural gas prices declined slightly.
Manufacturing
Manufacturers reported that activity declined since our previous Beige Book report, albeit more slowly. Shipments and new orders softened and backlogs were broadly weaker according to surveyed producers. However, a food producer reported that shipments and new orders were unchanged at a healthy level, and a packaging firm executive reported a slight increase in shipments and new orders. Additionally, his company's capital expenditures had increased. According to our most recent survey, average input prices continued to edge up slightly overall, while average prices received were generally unchanged.
Ports
Port traffic, particularly containers, continued to strengthen since the previous report. One port official noted that car exports have declined and farm and construction machinery imports weakened further. The bankruptcy of a South Korean shipping firm interrupted calls, as some ports refused to work the ships until fees could be paid and alternate locations could be found for empty containers to be stored.
Retail
Retail sales rose for a broader set of merchants. Several large grocers reported flat to higher sales. In addition, a large department store wholesaler and a large pharmacy indicated sales were up. Also, a central Virginia retail representative noted that Halloween spending is expected to be very strong, and retailers are hopeful that the spending growth will carry into Christmas. In contrast, home improvement merchants reported flat to lower sales, and a few car dealers said sales were unchanged or lower, contributing to a shortage of traded-in used cars. Retail prices rose about on par with the previous mild pace.
Services
Revenue growth expanded at services firms. Architects reported strong demand for their services as did an environmental and engineering firm. Demand for healthcare services remained robust, and an uptick is expected in the weeks ahead as the flu season begins. A transportation source reported that truck and railroad services experienced sluggishness due to excess capacity and the strong dollar. One transportation contact commented that a retail inventory overhang needs to be reduced before transportation demand would pick up. Services prices continued to rise modestly.
Tourism
Since the prior Beige Book, tourism remained steady and in line with last year's strong seasonal levels. A general manager at a resort hotel in central North Carolina said that business was stable although more people were waiting until the last minute to book. Hotels in Maryland and South Carolina reported solid early-autumn bookings. Thanksgiving holiday bookings were said to be good on the outer banks of North Carolina. Local events there have helped lengthen the tourist season, resulting in new year-round businesses opening this year. Room and rental rates were reported to be unchanged.
Finance
Loan demand increased slightly, on balance, since our previous report. Residential loan demand was mixed, with some reports of typical seasonal slowdowns. A South Carolina lender said that an increasing share of residential loan demand was coming from new construction. Refinance loan demand softened; a lender in West Virginia believed that demand declined because most people had already refinanced as a result of low interest rates. Business loan demand remained subdued, which some contacts attributed to uncertainty surrounding upcoming elections. Commercial real estate lending rose slightly, but varied by location. Multi-family construction demand picked up, according to a banker in South Carolina. A community banker in West Virginia saw a slight rise in demand for commercial real estate loans, which he attributed to larger banks rebalancing their portfolios. Several sources stated that regulations were reducing commercial lending. Competition among banks remained high and, in some cases, resulted in more aggressive loan structures.
Real Estate
Since our previous report, home sales rose moderately. With only a few exceptions, Realtors reported that increased sales and low inventories combined to push existing sales prices up and average days on the market down. The most active price ranges varied by location. For example, a Richmond, Virginia agent saw the most sales growth coming from homes priced between $150,000 and $325,000 while an agent in Washington, D.C. reported increased sales of homes priced $700,000 to $900,000 and over $1.25 million. Residential construction slowed somewhat, on balance, due in part to lot shortages. Reports on multi-family construction were mixed.
Commercial real estate activity rose modestly in recent weeks. Vacancy rates were generally lower for retail, industrial, and office space. Retail activity picked up, with much of the demand coming from large retailers, strip malls, grocers and grocery-anchored shopping centers, and fast casual restaurants. Demand for larger class A and mixed-use office spaces increased in Virginia Beach. A North Carolina agent said that class B and C properties were being absorbed. A Richmond contact reported increased office demand in the healthcare and energy sectors. Conversely, office leasing was reported as sluggish in Columbia, South Carolina. Industrial leasing activity rose moderately. A contact in South Carolina said investors were looking for new industrial property to buy; he also said rents were increasing. Retail and office rental rates were mostly unchanged.
Agriculture and Natural Resources
Agricultural activity picked up slightly. Weather conditions improved recently, which allowed farmers to begin harvesting corn and peanut crops. The dry summer, however, delayed the maturation of cotton crops, leading to some harvesting delays. According to a South Carolina farmer, the financial loss from last year's flood was suppressing capital investments this year. No changes to input prices were reported. Prices of beef, corn, and soybeans declined.
Natural gas extraction was unchanged in recent weeks, and coal production rose slightly, but remained below year-ago levels. Coal prices ticked up since our previous report, while natural gas prices edged lower.
Labor
Since the previous Beige Book, labor markets have tightened moderately. Employment rose in September, according to service sector firms, while manufacturing firms indicated a decline in employment. Employers continued to report difficulty finding workers across all skill levels. Specifically, construction workers, skilled tradespeople, farm hands, hospitality workers, engineers, managers, and doctors were in short supply. A contact in South Carolina said that construction was being constrained by labor shortages. A construction industry source in Virginia reported a tremendous increase in training programs. Similarly, an executive in Maryland noted increased investment in employees, such as sending them to a local community college to improve or gain skills. Wage pressures continued to increase slightly. A South Carolina contact attributed an increase in turnover in the trades to employees being lured to new jobs with higher wages. An executive in Maryland reported seeing more wage pressure in professional services and in manufacturing. According to our surveys, upward wage pressures broadened considerably in the service sector but subsided slightly in the manufacturing industry.
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Sixth District--Atlanta
Sixth District business contacts described economic conditions as improving at a modest pace from mid-August through September. The outlook among firms remains optimistic with the majority of contacts expecting growth to be sustained at or slightly above current levels for the remainder of the year.
Most district merchants cited that sales growth remained steady since the previous reporting period. However, automobile dealers continued to note softening sales. Hospitality contacts reported that tourism activity had improved since the previous report. Residential real estate contacts indicated that home sales and prices were slightly ahead of last year's levels. Commercial real estate contacts continued to note improving demand and construction activity was up from the prior year. Manufacturers indicated that activity slowed as new orders decreased. Bankers noted improving credit conditions for most of their contacts. Most firms continued to cite labor market tightness, with some reports of wage pressures, but overall input cost pressures were muted.
Consumer Spending and Tourism
District retailers reported relatively flat sales growth compared with the same time period last year. Some contacts noted that international customers were spending less due to the strength of the dollar. Automotive dealers continued to report a slowdown in the momentum of auto sales.
Tourism and hospitality contacts in the District reported a bounce back in bookings since the previous report. The convention segment in Georgia continued to boom as several large conferences were held in Atlanta. Overall, the Zika virus had little impact on visitation to South Florida. Contacts in that region reported a few cancellations of small group meetings; however, large group meetings and convention bookings continued to be solid. The outlook among contacts is positive for the remainder of 2016.
Real Estate and Construction
District residential real estate contacts continued to report slow but steady growth. The majority of builders noted that construction activity was flat to up from the year-ago level. Most builders and brokers said home sales were slightly up relative to the year earlier level. Brokers reported that inventory levels were flat to down from the previous year, while most builders indicated that inventory levels were flat to rising. Both builders and brokers continued to note modest gains in home prices. The majority of builders expect construction activity to hold steady at the current pace or increase slightly over the next three months. Builders' and brokers' home sales expectations moderated a bit in August, with mixed broker outlooks and a sizable portion of builders anticipating a leveling off over the next three months relative to the year earlier level. Contacts mentioned several factors that could be contributing to the expectation that activity will flatten out, including the close of the summer selling season, tight inventory levels at lower price points, and rising home prices.
Commercial real estate contacts continued to report improvement in demand resulting in rent growth and increased absorption, but cautioned that the rate of improvement varied by metropolitan area, submarket, and property type. The majority of commercial contractors indicated that the pace of nonresidential construction activity had increased from one year ago, with many reporting backlogs of one to two years. Many District contacts also indicated that the pace of multifamily construction continued to increase from the year earlier level. Looking ahead, most District commercial real estate contacts expect the pace of overall nonresidential construction activity to rise slightly over the next quarter, while many indicated that they expect the pace of multifamily construction to level off in the coming quarter.
Manufacturing and Transportation