Summary of Commentary on Current Economic Conditions by Federal Reserve District
Prepared at the Federal Reserve Bank of Kansas City and based on information collected before February 22, 2016. This document summarizes comments received from businesses and other contacts outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials.
Reports from the twelve Federal Reserve Districts continued to indicate that economic activity expanded in most Districts since the previous Beige Book report. Economic growth increased moderately in Richmond and San Francisco and at a modest pace in Cleveland, Atlanta, Chicago, and Minneapolis. Philadelphia reported a slight increase in economic activity, and St. Louis described conditions as mixed. Most contacts in Boston cited higher sales or revenues than a year-ago but mixed results since the previous month. New York and Dallas described economic activity as flat, and Kansas City noted a modest decline in activity. Across the nation, business contacts were generally optimistic about future economic growth.
Consumer spending increased in the majority of Districts, although Kansas City and Dallas noted some weakness. Auto sales were mixed, but remained at elevated levels in most Districts. Tourism activity strengthened in most reporting Districts.
Nonfinancial services activity grew slightly since the previous report, and demand for staffing services moved higher. Transportation activity was mixed, with weakness in the energy and agriculture sectors and lower export volumes limiting gains.
Overall, manufacturing activity was flat, although conditions varied considerably across Districts. Most Districts noted that weak demand from the energy sector was creating a significant headwind for manufacturers, although contacts in San Francisco mentioned that low energy costs had reduced production costs for steel products. Many Districts reported that the strengthening dollar and weakening global outlook had negatively affected international exports.
Residential real estate sales rose in most Districts since the last report, and home inventories were low in the majority of Districts. Residential construction activity strengthened, as several Districts noted strong growth in multifamily construction. Nonresidential real estate sales also picked up, on net, although sales ranged from flat to strong across all Districts.
In the banking and finance sector, most Districts reported slight to modest increases in loan demand, stable credit quality and unchanged credit standards.
Agricultural economic conditions were flat to down moderately, as low commodity prices and weak global demand continued to put downward pressure on farm income. The energy sector contracted further since the last report due to lower coal production and additional declines in the oil and gas industry.
Labor market conditions continued to improve, with the majority of Districts reporting modest gains. Wage growth varied considerably, from flat to strong, across all Districts, and most Districts reported that consumer prices held steady.
Consumer Spending and Tourism
Consumer spending increased in the majority of Districts since the previous report, but some weakness was cited in the Kansas City and Dallas Districts. Philadelphia, Richmond, Atlanta and San Francisco reported that retail sales rose moderately, retailers in Chicago reported modest gains, and New York District retailers reported sales that were slightly higher than a year ago. Snowstorms temporarily slowed spending in the Philadelphia and Richmond Districts, but sales had bounced back. Retail contacts in the St. Louis District reported flat sales, while contacts in Minneapolis experienced mixed conditions. The Kansas City District reported a modest decline in retail sales since the previous reporting period, while Dallas reported that retail sales had softened. Contacts in Boston, Cleveland and Chicago noted that consumers seemed reluctant to spend, citing reluctance to add debt, financial market volatility, or economic uncertainty as significant factors limiting spending. There were mixed reports about the effects of lower gasoline prices on consumer spending, with contacts in Cleveland, Philadelphia, and St. Louis attributing some increased spending to lower gas prices and contacts from Boston and Chicago expressing disappointment about the extent to which lower gas prices were increasing other spending.
Auto sales generally improved in the latest reporting period, but conditions varied significantly across Districts. Richmond, Chicago, and San Francisco reported strong auto sales, and contacts in New York, Cleveland, and Minneapolis cited improved sales since the last report. Auto sales in the Philadelphia District were flat, and auto dealers in the Atlanta District noted a slow start to 2016. In the Kansas City, St. Louis, and Dallas Districts auto sales declined since the last report, and were below year-ago levels.
Among those Districts reporting on tourism, most reported strengthening tourism activity. After a slow start to the ski season in parts of the country, contacts in the Philadelphia, Richmond, and Minneapolis Districts reported that skier visits had picked up. Lower gas prices contributed to increased visitors at local tourist attractions in the Atlanta District, and the Minneapolis District reported solid activity in the national parks. Tourism contacts in the San Francisco District cited additional gains since the last report and increased hotel profitability. Hospitality contacts in the Atlanta District reported solid advanced bookings for business and convention segments, but convention-related business activity was below expectations in the St. Louis District. Although tourism activity in the New York District was stable since the last reporting period, occupancy rates at New York City hotels remained below year-ago levels. Tourism activity declined moderately in the Kansas City District, although resort areas performed better.
Nonfinancial Services
Overall, nonfinancial services activity expanded slightly. Service sector firms in Philadelphia, St. Louis, and Dallas reported positive growth. Business services continued to expand at a modest pace in San Francisco, and the Kansas City District reported flat sales in professional and high-tech services. Service sector firms in the New York District noted that business had softened, and revenues at services firms in the Richmond District weakened. Strength was noted in the healthcare and social assistance, leisure and hospitality and business support services sectors in the St. Louis District; Minneapolis reported strength in design services and utilities; and Dallas noted strength in real estate and medical services. Demand for healthcare services was unchanged in the St. Louis District, but softened somewhat in the San Francisco District. Demand for staffing services moved generally higher, with staffing services contacts reporting increased activity in Boston, New York, Philadelphia and Cleveland. However, the Chicago and Dallas Districts noted that demand for staffing firms was flat, with the Dallas District noting weakness in the Houston area due to the effects of low oil prices.
Transportation activity varied, with demand weighed down by weakness in the energy and agriculture sectors and lower export volumes. Port contacts in the Richmond and Atlanta Districts noted increased volumes, despite soft export activity and fewer imports of farm machinery in the Richmond District. The trucking industry reported plans to expand services in the St. Louis District. Several Districts noted a decline in rail cargo, including Atlanta, Minneapolis, and Dallas, with Minneapolis attributing this decline to drops in oil and coal freight. Weakness in the energy sector had also led to reduced volumes of barges hauling liquid petroleum in the St. Louis District. Freight volumes contracted further in the Cleveland District, while contacts in the Kansas City District reported a moderate decline in transportation activity.
Manufacturing
Conditions in the manufacturing sector continued to be mixed across Districts since the previous reporting period. Boston, Cleveland, Atlanta, Chicago, St. Louis and San Francisco indicated flat to moderate growth in overall activity, whereas New York, Philadelphia, Richmond, Kansas City and Dallas reported slight to moderate declines.
Manufacturing contacts in Boston, Philadelphia, Cleveland, Chicago, St. Louis, Kansas City, Dallas, and San Francisco reported significant headwinds due to weak demand from the energy sector, although contacts in San Francisco noted that low energy costs had reduced production costs for steel products. Boston, Philadelphia, Cleveland, Dallas, and San Francisco noted that the strengthening dollar and weakening global outlook had negatively affected international exports. Continued sluggishness in the agriculture industry was cited as a headwind for the manufacturing sector in Chicago and Kansas City. Contacts in the auto and aerospace industries in the Cleveland and Chicago Districts reported positive growth, with auto production in Cleveland District assembly plants in 2015 on par with 2014 and near historically-high levels. However, a manufacturer of auto and aerospace parts in Boston noted continued decline of overall activity.
Expectations for future growth in the manufacturing sector were positive over the coming months for Philadelphia, Atlanta, and Kansas City. Boston also reported a positive outlook for the manufacturing sector, with the exception of the auto and aerospace industries. Contacts in Cleveland and Dallas reported mixed outlooks, with concern specifically over chemical producers and contacts who sell strictly to industrial plants, respectively.
Real Estate and Construction
Residential real estate sales were up since the last report across all Districts, with the exception of New York and Kansas City where sales were somewhat weaker in part due to normal seasonal patterns. The Boston, Cleveland, St. Louis, and San Francisco Districts reported strong growth in sales, and contacts in Boston and Cleveland cited relatively mild winter weather as a positive contribution to growth. Low- to moderately-priced homes sold better than higher-priced homes in Cleveland, Kansas City, and Dallas. Condo sales increased across the Boston and Cleveland Districts but slowed somewhat in New York City. New York, Philadelphia, Cleveland, Richmond, Atlanta, St. Louis, Minneapolis, and Kansas City reported low residential real estate inventories, and contacts in the Boston District reported that inventory of both single-family homes and condos were below year-ago levels. Residential real estate prices increased in the Boston, Cleveland, Richmond, Chicago, Kansas City, and Dallas Districts, while New York and Philadelphia reported little or no increase in house prices.
Residential construction generally strengthened since the previous survey period, with only Philadelphia and Kansas City reporting declines. Contacts from the New York District reported sluggish single-family construction but robust multifamily construction. Boston, Richmond, and San Francisco also reported strong growth in multifamily construction, and St. Louis noted an increase in speculative multifamily construction projects.
Districts characterized nonresidential real estate sales and leasing growth as flat to strong. Contacts in Cleveland cited growth in demand from the healthcare and higher education sectors and to a lesser extent the manufacturing, commercial real estate (excluding office buildings) and multifamily housing sectors. Commercial occupancy rates rose in San Francisco, spurring higher lease rates and additional construction projects. Commercial vacancy rates were nearing or below prerecession levels in Minneapolis despite significant new commercial real estate construction, and St. Paul saw more commercial net absorption in the last year than in the previous ten years combined. Similarly, industrial vacancy rates decreased across the Cleveland, St. Louis, and Dallas Districts. Demand for commercial real estate space grew robustly in Chicago across retail, industrial and office segments, but there was concern that the lack of commercial construction and increased demand would lead to space shortages and price bubbles. Commercial leasing activity in Boston was steady, and fundamentals remained strong. Richmond commercial leasing activity increased moderately for the retail market since the previous report, while activity in the office and industrial markets was tepid. Commercial rents increased in Philadelphia, and contacts in Atlanta noted generally improving rents as well as increased absorption.
With respect to nonresidential construction, the New York District reported that availability rates and asking rents held steady for office space, but that new office construction had weakened further. Commercial construction continued to expand at a robust pace in Minneapolis, but industrial construction slowed in the Chicago District.
Banking and Finance
Loan demand increased in most Districts, although New York and Kansas City reported mixed or steady demand and Philadelphia experienced a slight decline. St. Louis reported strong demand for mortgages and commercial and industrial loans, while demand for consumer loans remained unchanged. Banks in the Atlanta District reported healthy pipelines in residential lending and increased mortgage refinancing. New York reported mixed loan demand at small-to-medium-sized banks including weakening demand for consumer loans and residential mortgages but rising demand for commercial loans. While lending grew in most categories in Dallas, contacts indicated that low oil prices continued to suppress demand. Contacts in Chicago noted that concerns about slower global economic growth had led to declines in equity markets, wider spreads for asset-backed securities, and an increase in financial market uncertainty, and in Dallas, financial market and monetary policy uncertainty had created concerns about 2016 growth prospects.
Credit quality was stable for most Districts. Improved loan quality was noted in Philadelphia, Richmond, and San Francisco. However, in the San Francisco District, it was noted that low commodity prices could undermine asset quality in the agricultural sector in the months ahead. In St. Louis, loan delinquencies were unchanged to slightly lower in all loan categories, but creditworthiness of applicants improved.
Credit standards remained the same for most Districts. In Philadelphia, some contacts noted a tightening of standards, especially for energy-related industries. In St. Louis, credit standards were unchanged to somewhat tighter for all loan categories. Loan pricing was competitive in Atlanta and Chicago. Banking contacts in Philadelphia indicated a competitive lending environment. Competition among banks intensified somewhat in recent weeks in the Richmond District. In San Francisco, lender competition for qualified borrowers was vigorous. Cleveland reported consumers increasingly turning to non-bank competitors for auto lending.
Agriculture and Natural Resources
Agricultural economic conditions were flat to moderately down in reporting Districts since the previous report. Low commodity prices and weak global demand continued to put downward pressure on farm income. Minneapolis reported weaker farm incomes and lower prices for all commodities except turkeys. Farmers in the Chicago District were adjusting to the dip in commodity prices by utilizing cheaper seed varieties and selling equipment. Kansas City reported weakening credit conditions and modest declines in farmland values amid tighter profit margins for crop and livestock producers. In the Richmond, Dallas, and San Francisco Districts, agricultural exports slowed alongside the strengthening dollar. In agricultural production, Richmond reported limited activity due to typical seasonal slowdowns, while St. Louis reported an increase in red meat production compared with the previous year. Production conditions in the Dallas District improved from the previous year due to increased soil moisture, and most of the Atlanta District was drought free by mid-February. However, San Francisco farmers and ranchers continued to struggle with persistent drought, despite above-average winter rainfall.
The energy sector contracted further since the last report, with most reporting Districts noting modest to moderate declines in activity. Coal production fell in the Cleveland, Richmond, St. Louis, and Minneapolis Districts. Several Districts reported additional declines in oil and gas drilling rigs including Cleveland, Minneapolis, Kansas City, and Dallas. Weakness in the oil and gas sector led to announced or anticipated capital spending cutbacks in Minneapolis, Kansas City and Dallas. Cleveland and Atlanta reported layoffs in the energy sector, and the Kansas City District expected additional layoffs in the coming months. Energy contacts in Kansas City commented that financial borrowing bases were being reduced, and the Dallas District indicated that the financial positions of many firms continued to deteriorate. Refinery demand along the Gulf Coast remained steady and was doing well in the Cleveland District, and an oil refinery in the Minneapolis District announced plans for large capital upgrades over the next three years.
Employment, Wages, and Prices
Labor market conditions continued to strengthen since the previous reporting period, with the majority of Districts reporting modest growth in the labor market. However, labor conditions were mixed in Atlanta and Dallas, and Atlanta, Dallas, and San Francisco noted decreased employment in the energy sector. Contacts in New York, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, and Kansas City reported difficulty in finding skilled workers including information technology, engineering, specialty healthcare, construction, manufacturing, and transportation employees. Contacts in Cleveland and Richmond noted that low-skilled positions were becoming increasingly difficult to fill, but contacts in Atlanta reported that low- to mid-skilled positions were easier to fill. Retail employment was down slightly in Dallas due to weak sales, while Kansas City contacts reported a shortage of available retail salespeople.
Wages generally increased, as most Districts experienced slight to strong wage growth. However, the Kansas City, Richmond and Atlanta Districts reported flat wage growth. St. Louis noted strong wage growth as fifty-six percent of contacts, the highest in two years, reported that wages were above year-ago levels. Cleveland, Richmond, Atlanta, Chicago, St Louis, Minneapolis, and San Francisco reported positive wage growth among high-skilled workers, especially for occupations in the technology, high-skilled manufacturing, aerospace and defense, financial services, and professional technical sectors. Furthermore, Cleveland, Richmond, Atlanta, Chicago, and Kansas City reported wage growth among low-skill and entry-level positions. A contact in Chicago attributed the rise of entry-level wages in Michigan to an increase in the minimum wage. Staffing firms in the Boston District reported single-digit wage increases, but staffing services contacts in Dallas cited easing wage pressures, especially in Houston. Wage pressures moderated in the service sector in Richmond but continued upward pressure was cited in New York. Wages in the retail sector declined in the Kansas City District but increased in Cleveland.
Overall, prices were generally flat since the previous survey period. Contacts in Chicago noted rising auto costs, and contacts in the San Francisco District experienced increased prices in the pharmaceutical and construction sectors. Despite overall flat prices across the Dallas District, an increasing amount of deflationary pressure was reported. Manufacturers’ finished goods prices held steady in Cleveland but declined in Kansas City. Retailers in Kansas City and Dallas noted a higher-than-average amount of promotional pricing and a decline in selling prices, respectively, but retail contacts in Chicago and San Francisco noted flat prices. Agriculture commodity prices were reported as lower in Boston, Atlanta, Kansas City and San Francisco. Several Districts noted lower oil, fuel and transportation costs. However, a Boston District contact in the semiconductor industry said reduced energy prices were not showing up as much as expected in the prices they paid.
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