12:42 p.m.
Tuesday, 20 March 2018

Economic activity expanded at a measured pace: Beige book

San Diego, California.- Economic activity expanded at a measured pace in recent weeks, according to reports from contacts in the twelve Federal Reserve Districts". The previous report said economic activity "expanded modestly".

This appears to mean that the economy grew slower overall in this current period - mostly attributable to the effects of Hurricane Sandy, but also caused by mixed reports in some sectors.

Cleveland, Richmond, Atlanta, Chicago, Kansas City, Dallas, and San Francisco grew at a modest pace, while St. Louis and Minneapolis indicated a somewhat stronger increase in activity. In contrast, Boston reported a slower rate of growth. Weaker conditions in New York were attributed to widespread disruptions at the end of October and into November caused by Hurricane Sandy. Philadelphia reported general weakness that was exacerbated by the hurricane. However, in the Boston and Richmond Districts, the storm's effects were mostly limited. Contacts in a number of Districts expressed concern and uncertainty about the federal budget, especially the fiscal cliff.

Among key sectors, consumer spending grew at a moderate pace in most Districts, while manufacturing weakened, on balance. Seven of the twelve Districts reported either slowing or outright contraction in manufacturing, and two others gave mixed reports. In some cases, such as high-tech equipment and steel production, an industry slowed in one District while strengthening in another. Several Districts reported slight gains in residential and commercial real estate. Travel and tourism varied by District; for example, Minneapolis contacts marked levels of activity above a year ago, and tourism fell in the Kansas City District. Non-financial services also differed among Districts, with Philadelphia businesses indicating softer demand, while firms in other Districts reported pockets of robust demand for professional, scientific, and technical services.

In transportation, reports were, again, mixed. In addition, hurricane disruptions slowed freight shipments in some Districts, while simultaneously boosting demand for shipments of emergency supplies. In banking and financial services, higher demand for home mortgage loans and auto loans increased consumer lending in some Districts, although small business loan demand was generally described as weaker to only moderately higher. Credit quality improved on net.

Reports on agricultural conditions were mixed, as drought conditions persisted in several Districts, such as Atlanta, Chicago, and Kansas City; other areas reported solid production and, in some cases, increased investment. In the energy sector, extraction expanded on balance in San Francisco and activity remained at high levels in the Minneapolis and Dallas Districts. However, there were fewer active oil rigs in Kansas City, Dallas, and San Francisco. In addition, coal production fell in the Cleveland and Kansas City Districts. Most Districts reported modest gains in hiring, while wage and price pressures remained mostly subdued. Employment increased in more than half of the twelve Districts. Wage growth was described as modest at best, constrained in part by an abundant labor supply. However, a few Districts reported pockets of strength in wage growth, notably in North Dakota, where oil drilling had pushed up demand for workers, and in the Kansas City District, where wages were rising for specialized workers in transportation, high-tech, and energy.

San Francisco reported stronger wage growth for truck drivers and health-care workers. Price increases, for the most part, remained in line with the modest pace reported in our last assessment. Examples of some exceptions were input prices for construction in Cleveland, Chicago, Minneapolis, Kansas City, and San Francisco. Richmond reported generally slower retail price increases, and in Chicago, retail food prices eased, except for meats. In contrast, Kansas City contacts indicated that retail prices had edged up.

Consumer Spending and Tourism

Consumer spending increased at a moderate pace in most Districts in recent weeks, with mixed reports from Dallas. In New York, sales were ahead of plan prior to Hurricane Sandy, and merchants expect to recoup sales lost during the storm as residents replace destroyed or damaged property. Philadelphia contacts reported slower growth since the last report. Apparel sales picked up in Boston, and Richmond indicated that home and garden stores reported stronger sales ahead of Hurricane Sandy. Durable goods sales varied across Districts. For example, Boston and Chicago noted an improvement in furniture, while sales in that category declined in Cleveland. Chicago reported flattening in electronics sales, whereas San Francisco contacts reported significant sales gains for consumer technology products.

Automobile sales varied by District, with Cleveland, St. Louis, Minneapolis, and San Francisco indicating strength. Sales of both new and used vehicles in the San Francisco District were reported as running well above year-ago levels. Car sales were strong in Atlanta, although a bit less robust than earlier in the year. Richmond car sales were mixed. New York contacts said sales had flattened, and sales held steady in Kansas City. In contrast, auto sales slowed in Philadelphia and new vehicle sales fell at dealerships contacted by Chicago and Dallas. Sales of used vehicles were also mixed. Used car sales remained robust in New York and rose in Cleveland, with Cleveland District inventories remaining tight; in St. Louis, a majority of dealerships noted that used car sales had decreased relative to new car purchases, and in Minneapolis, used car sales softened.

Looking to the holiday sales season, the Districts whose contacts gave an outlook noted mostly upbeat expectations. New York retailers anticipated recovering lost sales during the holiday season, and in Philadelphia, expectations remained bright overall for holiday sales, despite somewhat less optimism among general retailers. Boston contacts indicated that they were positioning their businesses for increased internet sales, and a Richmond retailer commented that he was competing with his suppliers for online sales. While retailers anticipated a good holiday season in Minneapolis, mall contacts reported recent declines in traffic and sales. Contacts in Boston, Cleveland, and Chicago remarked on their uncertain sales expectations because of the potential for tax changes in 2013, as the national budget outlook remained uncertain.

Tourism slowed in some Districts while strengthening in others. New York District tourism was mixed prior to Hurricane Sandy; hotel bookings initially dropped off following the storm, but business bounced back the next week. In addition, late cancellation of the New York marathon likely brought large numbers of visitors to the city in early November. Hurricane Sandy affected areas of the Philadelphia District along the coastlines of Delaware and southern New Jersey, in some cases demolishing houses and devastating businesses.

New Jersey also suffered losses in revenue from the closure of Atlantic City casinos and the cancellation or delay of conventions there; expectations were that most areas along the Jersey shore would be rebuilt and ready for the summer season. Richmond reported seasonally slower autumn bookings, along with scattered cancellations caused by Hurricane Sandy, and in the Kansas City District, tourism spending fell, leading to price reductions by hoteliers. In contrast, travel and tourism remained strong in Atlanta, with international visitors bolstering activity in Florida and District convention bookings picking up. The exception there was at cruise lines, for which bookings continued to fall below expectations. Travel and tourism rose in Minneapolis.

Nonfinancial Services

Reports from nonfinancial services providers differed among Districts. Boston reports were generally weaker than expected for tech services, while New York businesses indicated that the effects of Hurricane Sandy had negatively impacted both workers and customers. In the New York District, prolonged power and communications outages and extreme flooding hurt firms and residents, particularly on Long Island and in northern New Jersey. Slowing demand for nonfinancial services in the Philadelphia District was further hampered by the hurricane. St. Louis reported a net decline, but with expansion in some categories such as business support, telecommunications, casinos, legal, and crisis management services. Dallas noted steady demand overall, and contacts reported robust demand for insurance, audit, and legal services. However, Richmond, Minneapolis, and San Francisco reported net expansion, with examples of growth at engineering, technology, and architectural firms. A number of contacts across Districts expressed uncertainty about business conditions for the months ahead as the firms and their customers waited for the outcome of federal budget negotiations.

Transportation sector activity was generally mixed since the last assessment. Dallas noted that intermodal cargo volumes were down. Declines in rail cargo volumes were led by such products as coal, metals, and forest materials. Atlanta also cited declines in coal shipments, due to softening global demand for metallurgical coal and less demand from domestic utility plants. Cleveland reported fewer freight shipments, which their contacts attributed to hurricane disruptions and weakness in Europe, even as freight demand was boosted by housing, motor vehicles, and retail. Kansas City also noted a pickup in trucking traffic due to emergency food shipments in the wake of Hurricane Sandy. Shippers in that District also reported an increase in their capital expenditures. According to contacts for the Dallas District, domestic airline demand was flat to down, and in the St. Louis District, air transportation firms announced plans to reduce operations.


Conditions in the manufacturing sector were mixed, though on balance, most Districts reported that conditions had weakened since the previous report. The Boston, New York, Philadelphia, Atlanta, Chicago, Minneapolis and Kansas City Districts reported that activity had either slowed or declined somewhat, with most reports leaning toward the latter. Activity was mixed in the Dallas and San Francisco Districts, while reports from the Cleveland, Richmond, and St. Louis Districts were positive. The Boston, Dallas, and San Francisco Districts noted slower growth for information technology equipment, while business activity expanded at high-tech firms in the Kansas City District.

Car and auto parts producers in the Atlanta District said that orders softened slightly. Similarly, auto production in the Cleveland District declined somewhat for domestic nameplates but increased for foreign nameplates. In contrast, heavy equipment and auto industries remained sources of strength in the Chicago and the Kansas City Districts. Demand was flat to down for transportation equipment in the Dallas District, and the Philadelphia District indicated that makers of primary metals, industrial machinery, and electronic equipment reported further declines.

Noteworthy gains in manufacturing related to the aerospace industry were reported in the Richmond and San Francisco Districts, while demand for aviation equipment held steady in Dallas. Steel production was down slightly in Cleveland, while the demand for steel in the San Francisco District improved a bit from low levels. Manufacturing contacts from five of the twelve Districts expressed concern about the outlook for 2013, in part, due to the uncertainty regarding the outcome of the fiscal cliff.

Real Estate and Construction

Overall, markets for single-family homes continued to improve across most Districts with the exception of Boston and Philadelphia. Residential real estate markets in the New York District were mixed but generally firm prior to the storm. Selling prices were steady or rising. Boston, New York, Richmond, Atlanta, Kansas City, and Dallas noted declining or tight inventories. The Cleveland District indicated that the number of single-family housing starts had increased since our last report and from a year ago; most sales contracts were in higher price-point categories. Similarly, Richmond noted more residential work in the high-end home category for the first time in three years, and builders cited significant pent-up demand in the first-time buyer segment. Atlanta indicated that existing home sales were up slightly compared to a year ago and reported that investors were more active in Florida than in the rest of the District. In Chicago, residential construction increased at a slow but steady pace in October and early November, and construction increased for single-family as well as multi-family homes.

St. Louis reported that residential real estate market conditions continued to improve, and Minneapolis indicated that segments of construction and real estate were growing at a double-digit clip. Kansas City characterized residential real estate activity as brisk and noted that a solid rise in home sales had reduced home inventories. Dallas noted that single-family housing activity remained strong, with both new and existing home sales activity increasing. San Francisco reported that home demand continued to strengthen and that home sales continued to grow on a sustained basis in most areas, spurring new home construction.

However, sales growth generally slowed for both the condominium and single-family home markets in the Boston District, and the Philadelphia District noted that October began as a disappointing month for some Realtors, only to be punctuated by Hurricane Sandy.

Construction and commercial real estate activity generally improved across Districts since the last report. Gains, albeit modest in most cases, were reported by Philadelphia, Richmond, Chicago, and Minneapolis. The gains among Cleveland's contacts were tempered by reports in recent weeks of a slowdown in inquiries and a decline in public-sector projects. Kansas City described activity as holding firm and noted that real estate markets remained stronger than a year ago. Demand for office and industrial space continued to increase in Dallas, although contacts at some businesses said they were "holding back on expansions due to uncertainty." Several Districts noted segments of little change in commercial real estate activity. Boston described market fundamentals as flat, and San Francisco depicted market conditions as stable but with pockets of strength for large infrastructure projects such as roads and bridges. Commercial and industrial conditions were mixed in the St. Louis District and throughout most of New York prior to the hurricane. New York added that, while office markets across upstate New York were unaffected by the storm, there were some signs of recent softening.

Banking and Financial Services

Loan demand generally was either mixed or slightly stronger across most Districts in recent weeks. Among those noting mixed results, New York reported that demand for consumer and especially commercial and industrial loans weakened, but commercial and residential mortgage demand was steady. Richmond said that a small commercial banker was encountering a slight improvement in overall loan demand but added that consumer loans were unchanged from "meager" levels and small business loans were virtually non-existent. Chicago noted that small business loan demand experienced modest growth, but a decrease in credit demand occurred among middle-market customers. According to St. Louis contacts, overall lending activity was essentially unchanged over the period. St. Louis added that, while credit standards for commercial and industrial loans were largely unchanged, both the demand for these loans and the number of inquiries ranged from moderately lower to moderately higher. Used car loan demand was weak in the Dallas District, although first mortgage and energy-related lending increased.

San Francisco cited weak-to-moderate business loan demand, but consumer lending expanded further with the help of auto loans and home mortgage refinancing; however, San Francisco noted that lending activity as a whole was unchanged. Most remaining Districts, including Philadelphia, Cleveland, Atlanta, and Kansas City reported moderate increases in total loan demand. In the Philadelphia District, banks reported widespread bank and ATM closings due to Hurricane Sandy.

Credit standards and credit quality were somewhat improved, on net, since the last report. Chicago, St. Louis, and Kansas City noted that credit standards on most types of loans were unchanged, and Dallas cited a loosening of credit standards, which contributed to very competitive loan pricing. Atlanta cited contacts who reported that underwriting standards had become more restrictive and burdensome since its last report, both in terms of credit scores and information requests. With respect to loan quality, New York reported that delinquency rates increased in the consumer and commercial and industrial segments but held steady in the residential and commercial mortgage segments. Philadelphia contacts cited moderate improvement. Cleveland and Richmond noted improvements in delinquency rates across consumer and business loan categories. Richmond added, however, that some contacts were concerned that banks were increasing their risk exposure by making longer-term loans in an effort to get higher yields. Kansas City and San Francisco also mentioned moderate improvement in loan quality.

Agriculture and Natural Resources

Assessments of agricultural activity were mixed. Varying degrees of drought conditions persisted in several Districts, while Hurricane Sandy's agricultural damage was minimal and localized mainly in coastal areas. In the Atlanta District, much of Georgia experienced drought conditions, while Chicago reported that corn and soybean production in their District did not suffer as much from the drought as previously expected. Correspondingly, Minneapolis indicated that their District crop producers remained in mostly good shape, despite this year's drought. Low soil-moisture levels in the Kansas City District hindered winter wheat emergence, raising concerns that persistent drought could strain U.S. crop production, keep crop and feed prices high, and force further livestock herd liquidations. However, Richmond stated that most farmers in Virginia were relieved that Hurricane Sandy brought much needed rain without significant damage to the corn and soybeans still in the fields. San Francisco noted that production activity and sales of most crop and livestock products have been growing at a solid pace, as had investment spending on new production equipment. Moreover, the St. Louis District reported that harvest completion rates were considerably higher than the five-year average there.

Activity in the energy industry was generally mixed since the last report. Coal production was above year-ago levels in the St. Louis District but was lower in the Cleveland and Kansas City Districts. More electricity was being generated from natural gas in Kansas City. In the Atlanta District, Hurricane Sandy's damage to refineries and infrastructure in the Northeast caused southeastern regional refiners to increase production and transportation of oil products to supply affected areas. Minneapolis reported that oil and gas production remained at record levels but noted that exploration activity was flat to down in some areas since our last report. Similarly, extraction activity in the San Francisco District expanded on balance for petroleum and natural gas, although the number of rigs used for natural gas extraction fell as producers shifted their activities toward higher-valued oil formations. The number of active oil rigs also fell in the Kansas City and Dallas Districts. Minneapolis mentioned that iron mines in northern Minnesota remained busy, although production fell slightly compared to recent months.

Employment, Wages, and Prices

Modest improvements in hiring activity were reported by most Districts. Labor markets were generally described as improving modestly by Boston, Atlanta, Chicago, Minneapolis, and Dallas. Staffing firms, according to Boston and Cleveland, experienced improved business conditions. However, Richmond reported that labor markets in general were weaker than in the last report, citing examples of soft demand and an unwillingness of some manufacturers to hire long-term unemployed workers. Contacts for Boston noted that demand for office and clerical assistants and accountants remained weak, and Cleveland reported that hiring across industries was generally sluggish except in autos. Atlanta indicated that employment agencies were seeing a pickup in orders for temporary help. Some large employers, however, announced plans to move toward hiring more part-time, rather than full-time, employees. Chicago reported that a number of firms were putting hiring on hold and had delayed temp-to-perm conversion decisions until next year. With respect to the upcoming holiday season, Cleveland reported that retailers were planning to hire the same number of temporary workers as last year, while Boston and Atlanta noted that some retailers were expecting to hire more help over the holidays. Finally, contacts in a number of Districts reported difficulties finding qualified workers in some specialized occupations.

Wage pressures were generally characterized as "subdued" or "contained" throughout much of the nation, according to the latest District reports. Virtually every District described wage growth as modest at best. Contacts in the Atlanta District attributed flatness in wages to the large number of applicants for newly posted positions. Richmond reported that manufacturing and retail wage growth edged up, but wage growth slowed at non-retail firms. In addition, non-labor costs were increasing in the Chicago District, mostly due to health-care costs. St. Louis cited stable wages but added that non-labor costs in manufacturing were rising. Minneapolis noted pockets of stronger wage growth in some geographical areas, such as North Dakota where oil drilling was pushing up demand for workers. However, even this pressure was easing in recent weeks. Kansas City noted strengthening in wage growth among specialized positions in transportation and high-tech firms. Finally, San Francisco noted that limited hiring and abundant labor supply were holding down wage and compensation increases. However, San Francisco added that a few cases of wage pressures were occurring among truck drivers, health-care workers, and entry level positions in areas with low unemployment.

As with wages, price pressures changed little from the modest pace that was reported in the last assessment. Almost every District described price growth as modest, although examples of higher price growth were occasionally cited. For example, Atlanta noted that, even though overall input price increases had eased, firms were being challenged by higher energy and crop-related input prices and by rising health-care costs. Cleveland, Chicago, Minneapolis, Kansas City, and San Francisco all reported increasing prices of construction-related materials, and Chicago and Minneapolis also cited increases in metals prices. In addition, Kansas City remarked on rising prices in construction materials and manufacturing raw materials in general. Richmond reported increasing raw materials prices and slower increases in finished goods prices. Retail prices in general eased in the Richmond District, and Chicago noted that retail food prices eased, except for meats. According to contacts in the Kansas City District, however, retail prices edged higher. In the Richmond District, the pace of increases in services prices also moved up.


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