U.S. Federal Reserve March Beige Book Summary (Text)
The following is the summary text of the Federal Reserve Board’s Summary of Commentary.
Reports from the twelve Federal Reserve Districts indicated that economic activity generally expanded at a modest to moderate pace since the previous Beige Book. Five Districts reported that economic growth was moderate in January and early February, and five Districts reported that activity expanded at a modest pace. The Boston District said the economy continued to expand slowly, and the Chicago District reported that economic activity grew at a slow pace.
Most Districts reported expansion in consumer spending, although retail sales slowed in several Districts. Automobile sales were strong or solid most Districts, and tourism strengthened in a number of Districts. The demand for services was generally positive across Districts, most notably for technology and logistics firms. Transportation services activity was mixed among Districts, although the majority of contacts were optimistic about future activity. Manufacturing modestly improved in most regions, with several Districts reporting strong demand from the auto, food, and residential construction industries. Residential real estate markets strengthened in nearly all Districts and home prices rose amid falling inventories across much of the country. Commercial real estate activity was mixed or improved slightly in most Districts, and financing for commercial development remained widely available. Overall loan demand was stable or slightly higher across nearly all Districts, and several bankers noted stiff competition for qualified borrowers. Agricultural conditions varied across the country, with some areas continuing to suffer from drought while others reported considerable precipitation and improved soil moisture levels. Districts reporting on energy activity indicated modest expansions in crude oil and natural gas exploration, while mining activity slowed.
Price pressures remained modest, with the exception of increases in prices for certain raw materials and slightly higher retail prices in several Districts. Even with some input costs rising, most District contacts did not plan to increase selling prices. The majority of Districts reported modest improvements in labor market conditions, although hiring plans were limited in several Districts. Wage pressures were mostly limited, but some contacts reported upward pressure for skilled positions in certain industries due to worker shortages.
Consumer Spending and Tourism
Consumer spending expanded in most Districts, but several Districts reported mixed or lower activity among non-auto retailers. Sales strengthened in the Philadelphia and Richmond Districts, and retail sales were higher than a year ago in the Boston, St. Louis, and Minneapolis Districts. San Francisco reported modest growth in sales, Dallas noted flat to slightly higher sales activity, and New York said retail sales were strong in January but slowed in February primarily due to weather. The Chicago District said consumer spending increased at a slower rate, while Cleveland and Atlanta noted mixed sales activity. Kansas City said retail sales decreased since the previous survey period and were expected to remain flat in the months ahead. Many District contacts commented on the expired payroll tax holiday and the Affordable Care Act as having restrained sales growth. Many Districts noted rising gasoline prices and fiscal policy as having a negative effect on consumer sales, and contacts in the Boston, New York, and Minneapolis Districts said severe weather depressed sales somewhat. Contacts in several Districts reported a shift in sales activity from local malls to the Internet and indicated deep discounting among retailers was becoming increasingly common. San Francisco noted somewhat soft sales for traditional retail grocers, whose competition has increased from discount and online retailers.
Most Districts reporting on auto sales noted solid or strong increases in sales, with the exception of mixed activity in the St. Louis District and a seasonal slowdown in the Dallas District. Cleveland auto dealers credited milder-than-normal weather and pent-up demand for the robust sales growth. New automobile sales remained solid in the San Francisco District, driven by demand to replace older vehicles and low financing rates. Chicago and Minneapolis contacts reported an increase in activity for auto service departments due to inclement weather. Auto dealers in the Philadelphia District attributed the strong sales in New Jersey to the continued effect of Hurricane Sandy. The New York District reported wholesale and retail auto credit conditions as positive, with one contact noting increasingly aggressive lenders. Most Districts’ contacts were cautiously optimistic about future auto sales.
Tourism remained solid or advanced further in most Districts, spurred by increased snowfall during the winter ski season. Travel was reported as robust in the New York District, particularly in Manhattan, as well as at hotels in the outer boroughs that are still occupied by displaced residents, utility workers, insurance adjusters, and others due to Hurricane Sandy. A ski resort in Minnesota reported that lift ticket sales and lodging were well ahead of last year, although not close to historical records. Boston and Atlanta noted a strong increase in international visitors, especially from Europe. Philadelphia said tourist activity was solid in the Poconos’ ski resorts, but some revenues were lost when schools cancelled winter break to make up for missed days during Hurricane Sandy. Contacts in the Richmond District mentioned increased activity along the outer banks of North Carolina, and San Francisco reported solid growth of visitor counts and occupancy rates in Hawaii.
Nonfinancial services activity continued to grow at a modest pace since the previous Beige Book. St. Louis and San Francisco reported strong demand for technology, logistics, marketing and legal services. Logistics services were also an area of growth in the Philadelphia District, but growth was modest due to firms’ concerns about possible federal spending cuts. High-tech services increased in the Kansas City District, but growth was lackluster in the Boston District due in part to weak demand from Europe and Japan. Staffing services firms in the Boston and New York Districts saw improved conditions, but activity was mixed in the Dallas District. Boston, New York, Philadelphia, and Kansas City services contacts continued to be optimistic about growth in the coming months and in the second half of 2013.
Transportation services activity was mixed. Shipping volume in the Cleveland District met or exceeded expectations, with increases driven by the energy sector, rerouting of container traffic, and residual effects from Hurricane Sandy. Transportation activity also increased in the Atlanta District, and port contacts continued to invest in infrastructure and equipment improvements. Kansas City transportation services activity was flat compared to the previous survey period. Dallas reported weakened transportation demand, with decreases in intermodal cargo, air cargo, and coal shipments, but contacts noted that petroleum and petroleum-product shipments increased during the survey period. Trucking firms in the Cleveland and Kansas City Districts had trouble finding experienced drivers, and a Cleveland contact said there may be a driver shortage in the summer. Expectations for future transportation activity were generally positive in most Districts.
Manufacturing conditions improved in nearly all Districts, but the increases were generally modest. Boston, New York, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis and San Francisco reported some increases in factory activity, but the majority noted that the pace of recovery was slow. Conditions were mixed in the Philadelphia and Dallas Districts, and manufacturing activity in the Kansas City District weakened. Contacts in the Cleveland, Richmond, Chicago, and Kansas City Districts cited concerns over government regulation and fiscal uncertainty as a reason for slow growth.
Auto production increased in the Cleveland, Chicago, and St. Louis Districts, and a Minneapolis contact noted that production increased faster than expected, spurring plans to renovate their plant. Philadelphia and Dallas reported that food manufacturing activity also exceeded expectations during the current period. Manufacturing related to residential construction was a source of strength for many Districts, including wood product manufacturing in the St. Louis and San Francisco Districts; household goods manufacturing in the Chicago District; cement manufacturing in the Dallas District; and general housing construction product manufacturing in the Philadelphia, Cleveland, and Boston Districts. Primary and fabricated metal manufacturers in the Philadelphia District experienced a slowdown in activity, and a structural steel manufacturer in the Minneapolis District planned to close. Durable manufacturing was weak in the Kansas City District, but non-durables-especially chemical manufacturing-improved. Expectations for future factory activity were generally more optimistic compared with the previous survey. Contacts in the Boston, New York, Philadelphia, Cleveland, Atlanta, St. Louis, Kansas City, and Dallas Districts expected activity to improve over the next few months across a wide variety of industries.
Real Estate and Construction
Residential real estate activity continued to strengthen in most Districts, although the pace of growth varied. Contacts in the Boston, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco Districts noted strong growth in home sales, while New York and Chicago reported slight improvements. A realtor in the Richmond District indicated that low interest rates continued to motivate home buyers, and potential buyers in the Philadelphia District expressed greater confidence, including entry-level purchasers who had been increasingly opting to rent since mid-summer. Contacts in the Cleveland and Atlanta Districts said sales were higher than a year ago. Home construction increased in most Districts, with the exception of the Kansas City District where it was reported as unchanged. Several Districts noted ongoing strength in multifamily construction, although contacts in the Atlanta and Cleveland Districts mentioned continued financing difficulties for builders. Home prices edged higher in the majority of Districts, with lower inventories generally cited as the primary cause. Richmond and Atlanta Realtors observed multiple offers on many homes. Philadelphia real estate contacts continued to report low-end home prices as firm or rising slightly, while high-end home prices were still falling. Inventories declined in nearly all Districts, with Realtors in several Districts concerned about the impact on future sales volume.
Overall commercial real estate conditions were mixed or slightly improved in most Districts. Commercial real estate activity grew modestly in the Philadelphia, Richmond, Atlanta, and St. Louis Districts, and activity in the San Francisco District expanded. Boston and New York reported mixed activity, while the Kansas City and Dallas Districts noted few changes. Although some modest growth was reported in the Chicago District, the level of activity remained weak, and commercial contractors in the Cleveland District noted a slowing in activity, particularly for defense-related projects. Office vacancy rates declined across most of the New York District, and industrial vacancy rates in upstate New York posted their lowest levels in three years. Richmond contacts described the supply of Class A office space as tight, which they attributed to the absence of new construction. Commercial development and leasing activity increased in the San Francisco Bay and Seattle markets, fueled by sustained growth in the technology sector. Commercial construction improved by varying degrees in the Atlanta, Chicago, St. Louis, Minneapolis, and Kansas City Districts. Respondents in the Boston District expressed concerns about overbuilding in Boston’s apartment market and office sector, while Philadelphia contacts noted an increase in energy-related projects and repair work resulting from Hurricane Sandy. Cleveland, Atlanta, and Chicago reported high demand for manufacturing space, with some Chicago manufacturers leasing temporary space to accommodate increased demand. Credit for commercial development and transactions was widely available, although Boston noted a large decline in loan demand and contacts in the Cleveland District said financing difficulties continued.
Banking and Finance
Loan demand was steady or increased across all the Districts that reported. Residential real estate loan demand was strong in the Philadelphia, Cleveland, Richmond, Atlanta and Chicago Districts, mainly driven by refinances due to continued low interest rates. Demand for commercial real estate loans was also strong in the Cleveland, Richmond, and Kansas City Districts. Auto lending increased in the Cleveland and Atlanta Districts, and Philadelphia and Dallas cited growth in energy-related loan demand. San Francisco continued to report a slowdown in venture capital and private equity activity, but contacts noted an increase in the number of private technology companies moving toward an IPO.
Asset quality improved at banks in the Philadelphia, Kansas City and San Francisco Districts. Philadelphia, Richmond, Atlanta and San Francisco lenders reported high competition for qualified borrowers. Borrowing standards were reported to have been loosened in some Districts. Atlanta contacts noted additional loan capacity, but continued to be cautious with loan activity. Cleveland bankers considered cost cutting measures, including layoffs, due to shrinking net interest margins. New York contacts indicated a decrease in loan spreads for all loan categories, particularly residential mortgages, and bankers in the Chicago District said that very few mortgage originations were being kept on their balance sheets and that interest rate swaps were being utilized to hedge against a potential rise in interest rates. Bankers were generally optimistic about future activity in the Philadelphia and Dallas Districts for the near term, but Atlanta bankers expected activity to ease toward the middle of the year.
Agriculture and Natural Resources
Agricultural conditions across the country varied with weather patterns. Persistent drought contributed to poor crop and pasture conditions in the Kansas City and Dallas Districts while recent precipitation improved soil moisture levels in the Atlanta and Chicago Districts. Richmond, St. Louis, and Minneapolis reported that elevated crop prices supported stronger farm incomes. Kansas City and Dallas indicated that drought-related herd reductions pushed cattle supplies to historical lows, and Chicago, Kansas City and Dallas reported weaker agricultural export activity. Richmond, Atlanta, Kansas City, and San Francisco noted additional farmland value gains due to robust demand from both farmers and nonfarm investors. Chicago reported that congestion issues in barge traffic eased on the Mississippi River.
Energy activity remained mixed with modest expansions in crude oil and natural gas exploration but slower mining activity. Drilling activity for crude oil and natural gas expanded further in the Cleveland, Minneapolis, and Kansas City Districts and was steady in the Richmond and Dallas Districts. Future drilling activity was expected to rise in the Cleveland, Kansas City, and Dallas Districts, and Atlanta noted capital spending at Gulf of Mexico ports was expected to increase export capacity for oil refineries. In contrast, coal production fell in the Cleveland, Richmond, St. Louis, and Kansas City Districts, and was expected to decline further with a shift in demand toward low-priced natural gas and stricter environmental regulations. Minneapolis reported a slowdown in metal mining activity, and some facilities planned to further reduce production later in the year. Ethanol production declined in the Minneapolis and Kansas City Districts but edged up in the Chicago District.
Employment, Wages, and Prices
Labor market conditions generally improved, although several Districts reported restrained hiring. Many Districts reported a rise in temporary employees, while staffing contacts in the Boston District noted an increase in the placement of permanent and temporary-to-permanent workers. Auto dealers in the Cleveland and Kansas City Districts mentioned plans to hire more workers, and Dallas noted robust hiring activity for experienced corporate, energy, and intellectual property lawyers. Positions in the manufacturing industry increased in the New York, Richmond, and Chicago Districts, although several Chicago manufacturers expressed plans to either invest in more productive capital or adjust the hours of existing employees prior to hiring new workers. St. Louis noted weakness in healthcare services and information technology positions, and Cleveland reported reduced hiring plans from commercial builders and coal operators. Employers in several Districts cited the unknown effects of the Affordable Care Act as reasons for planned layoffs and reluctance to hire more staff. Wage pressures were minimal in most Districts, but contacts reported some upward pressure for several skilled positions as a result of higher demand. Some Districts indicated a shortage of skilled workers such as engineers, truck drivers, software developers, and technical jobs, and Atlanta noted a lack of compliance specialists due to heavier regulations in the healthcare industry.
The majority of Districts reported that price pressures remained modest, but some input costs continued to rise. Cleveland and San Francisco noted an increase in prices for petroleum-based products such as gasoline, fertilizer and certain plastics, and contacts in the Chicago, Minneapolis, and Dallas Districts commented on increased transportation and fuel costs. Builders in the Philadelphia, Cleveland, Chicago, Kansas City, and San Francisco Districts cited an increase in construction material costs, particularly for lumber, drywall, and steel. Retail prices were steady or slightly rising in most Districts, although Richmond noted some slowing since the last report. Chicago retailers reported modest wholesale price increases for a number of products, with larger increases for meat, fresh produce, and leather. Retail grocers in the San Francisco District reported relatively stable prices overall, but weather-related factors boosted fresh produce prices. Increased food costs pushed up restaurant menu prices in the Kansas City District, and restaurant owners expect these costs to remain elevated. Atlanta service industry contacts noted that stronger sales were likely to put upward pressure on prices over the next year. Plans to increase selling prices were limited among most District contacts.
SOURCE: Federal Reserve Board