U.S. Federal Reserve Dec. Beige Book Summary (Text)

The following is the summary text of the Federal Reserve’s Summary of Commentary on Current Economic Conditions.

For the full report text: www.federalreserve.gov/monetarypolicy/beigebook/default.htm

Reports from the twelve Federal Reserve Districts suggest that national economic activity continued to expand in October and November. A number of Districts also noted that contacts remained optimistic about the outlook for future economic activity. Consumer spending continued to advance in most Districts, and reports on tourism were mostly positive. Employment gains were widespread across Districts, and Districts reporting on business spending generally noted some improvement. Demand for nonfinancial services generally increased. Manufacturing activity strengthened in most Districts. Construction and real estate activity expanded overall, but at a pace that varied by sector and by District. Lending typically held steady or increased. Crop yields were generally good, although overly wet or dry conditions were an issue in some Districts. Most crop prices were lower than last year, but livestock prices were higher. Energy and mining activity was higher on net, though lower oil prices were a concern for the oil industry in the Atlanta and Dallas Districts. Overall price and wage inflation remained subdued.

Consumer Spending and Tourism. Consumer spending continued to trend higher in most Districts in October and November. Some contacts viewed lower gasoline prices as a contributing factor to higher consumer spending, and an early cold spell helped spur sales of winter apparel in several Districts. Both the Richmond and San Francisco Districts pointed to durable goods purchases as a source of strength. Restaurant sales were up in Cleveland and San Francisco but down in Kansas City. Retailers in many Districts were optimistic about the upcoming holiday season. Auto sales were particularly strong in Richmond, Atlanta, Chicago, and San Francisco, and lower gasoline prices boosted sales of SUVs and light trucks in Philadelphia, Cleveland, and Chicago.

Tourism reports were mostly positive for the reporting period. Early-winter weather conditions boosted activity in Richmond and Minneapolis as some ski resorts were able to open early. Richmond and San Francisco reported rising hotel occupancy rates and Philadelphia noted an increase in hotel revenues. Contacts in the Atlanta District noted an increase in the number of domestic and international visitors relative to last year and strong advance bookings for hotels and conferences for the first half of 2015. New York indicated that tourism was generally steady at a high level, with Broadway theater attendance and revenues moderately higher than a year ago. In contrast, tourism activity decreased further in the Kansas City District, but was expected to improve modestly in coming months.

Hiring and Business Spending. Employment gains were widespread across Districts in October and November. Boston reported increased employment in the software and IT sectors, and New York noted that financial firms were hiring more workers. Cleveland indicated that manufacturing, construction, and freight transportation payrolls were increasing, and Richmond cited stronger hiring by service-sector firms. Atlanta reported sizable gains in leisure and hospitality employment. Several Districts noted an increase in temporary staffing as well as an increase in temporary-to-permanent job transitions. Hiring plans increased in New York, Chicago, and St. Louis. With labor market conditions strengthening, contacts in the Kansas City and Dallas Districts noted that firms were having increased difficulty retaining key workers. Various Districts continued to report that firms had difficulties filling positions in IT and engineering, legal and health-care services, management, skilled manufacturing and building trades, and transportation and warehousing. Most Districts reported little change in holiday-related hiring relative to last year, though there were some reports of slightly higher rates of seasonal hiring in New York and Chicago.

Districts reporting on business spending noted some improvement overall. Inventories were generally reported to be in line with sales. Richmond and Chicago noted some precautionary inventory building by retailers and manufacturers as insurance against another harsh winter. Reports on capital expenditures, both current and planned, were generally positive. Boston and Cleveland reported that retailers were investing in IT equipment and software to support e-commerce. Manufacturers in several Districts were expanding capital budgets both to replace existing equipment and to expand capacity. Freight companies in the Cleveland District were holding to plans to gradually replace an aging fleet and expand capacity. St. Louis and Minneapolis noted an increase in planned capital spending by service-sector firms. Cleveland, Richmond, Chicago, and Dallas cited an increase in mergers and acquisitions.

Nonfinancial Services. Demand for nonfinancial services rose in a number of Districts in October and November. Several Districts reported broad-based growth in demand for staffing services. Growth in professional business services fell in Kansas City, but the Richmond District reported gains in accounting business and Dallas experienced expansions in legal and insurance services. Demand for technology services rose in the Boston, St. Louis, Minneapolis, and San Francisco Districts. San Francisco reported strong demand for cloud computing services. Growth in transportation services was uneven across Districts, but Cleveland continued to report strong demand, to the extent that shippers were running into capacity constraints. Various Districts reported increases in shipments of agricultural products, industrial machinery, oil and gas production materials, appliances, apparel, auto parts, e-commerce goods, and steel. Richmond reported increased port activity, especially for imports, but a decline in coal exports.

Manufacturing. Manufacturing activity generally advanced during the reporting period. The automotive and aerospace industries continued to be sources of strength. Steel production increased in Cleveland, Chicago, and San Francisco. Fabricated metal manufacturers in the Chicago and Dallas Districts noted widespread growth in orders. Dallas reported that domestic sales for plastics were strong, while demand for plastics was steady in Richmond and declined in Kansas City. Chemical manufacturers in the Boston District indicated that the falling price of oil relative to natural gas had made U.S. producers less competitive, because foreign chemical producers rely more heavily on oil for feedstock and production. St. Louis, Minneapolis, and Dallas reported that food production was little changed on balance, but production in Kansas City continued to decline. Chicago and Dallas indicated that shipments of construction materials increased. Manufacturers of heavy machinery in the Chicago District cited improvements in sales of construction machinery, but reported ongoing weak demand for agricultural and mining equipment. High-tech manufacturers in Boston, Dallas, and San Francisco noted steady growth in demand. Biotech revenue increased in the San Francisco District.

Construction and Real Estate. Construction and real estate activity expanded overall in October and November, but saw a fair amount of variation across sectors and regions. Residential construction increased on balance across the Districts and multifamily construction remained stronger than single-family construction in a number of Districts. Reports on residential real estate activity were mixed. About half of the Districts reported an increase in home sales. Many Districts indicated that sales in the multifamily sector were stronger than sales in the single-family sector. Home prices were little changed in most Districts, although prices increased in the Richmond, Atlanta, Dallas, and San Francisco Districts. Nonresidential construction rose in most Districts.

Construction of office space was relatively strong in some large urban areas, such as New York City and Philadelphia. Industrial construction was particularly strong in the Cleveland, Chicago, and Dallas Districts. Commercial real estate activity also increased in many Districts, with declining vacancies and rising rents for office space; especially strong activity was noted in the central business districts of some large urban areas. Vacancies for commercial and industrial space also dropped in several Districts.

Banking and Finance. Lending activity improved on net. A few Districts noted aggressive competition on loan pricing and terms or an easing of loan standards. Business lending increased for most types of loans. Boston, New York, and Richmond cited an increase in demand for commercial mortgages, and commercial and industrial lending increased in Philadelphia and St. Louis. San Francisco reported an increase in demand for small business refinance loans and noted private financing activity and venture capital activity were both strong. Chicago also cited stronger loan demand from small businesses for financing equipment and structures. Dallas indicated that real estate lending increased, with strength reported in loans for both single-family and multifamily construction projects. In contrast, Kansas City reported lower demand for agricultural loans, and Chicago noted lower utilization of credit lines for working capital. Consumer lending also increased. Several Districts reported continued strength in demand for auto loans. Richmond, St. Louis, and San Francisco noted an increase in credit card lending. Residential lending increased in a number of Districts, reflecting a mix of new mortgages, refinancings, and home equity lines of credit. Cleveland and Richmond indicated that first-time homebuyers continued to face challenges in qualifying for mortgages, although contacts in Boston were optimistic that the new Qualified Residential Mortgage rule would be helpful in this regard.

Agriculture and Natural Resources. Agricultural conditions were mixed across the Districts. Livestock operations were more profitable than a year ago; but with crop yields generally at above-average to record-high levels, lower crop prices were depressing farm incomes. Harvests were ahead of their normal pace in most Districts reporting on agriculture. However, excess moisture delayed harvests in some Districts, affected the quality of cotton in the Dallas District, and damaged wheat and barley crops in the San Francisco District. In contrast, drought conditions affected the Richmond, Atlanta, and San Francisco Districts, as well as parts of the Dallas District. Dry weather delayed tree harvests in Richmond, even as Christmas orders picked up. Compared with a year ago, prices were lower for corn, soybeans, wheat, and hay, but higher for milk, dairy, poultry, hogs, cattle, and tomatoes. Livestock producers benefited from lower feed costs, and Chicago and Kansas City noted expansions in cattle herds. Richmond and San Francisco reported increased exports of agricultural products, but Dallas reported lower dairy exports.

Natural resource activity was strong overall. Oil and natural gas exploration, drilling, and extraction remained at high levels in the Cleveland, Richmond, Minneapolis, Kansas City, and Dallas Districts, with expansions in drilling activity in Kansas City and Dallas. Atlanta reported that the recent drop in oil prices led firms to reevaluate their operations, though steady production is anticipated for both deepwater and onshore drilling; in the Dallas District, lower oil prices weighed on the outlook for drilling activity. Natural gas prices decreased slightly as inventories grew. Coal production in the Cleveland and St. Louis Districts was up from a year ago. Since the previous report, mining activity increased in the Minneapolis District. Healthy demand for timber was noted by San Francisco, leading to increased shortages of equipment and skilled loggers.

Prices and Wages. Overall price and wage inflation remained subdued in October and November. Price increases for raw materials were generally muted, though there were some exceptions, such as prices for certain agricultural products and building materials. Several Districts cited the decline in the price of oil over the reporting period and its effects on gasoline and diesel fuel prices. However, transportation costs rose in some Districts where capacity constraints were an issue. Chicago and San Francisco reported lower steel prices, but Dallas noted an increase in fabricated metals prices. Pass-through of higher costs to downstream prices remained limited, although Chicago, Minneapolis, and Dallas reported an uptick in the number of firms raising or expecting to raise prices. New York and Cleveland noted an increase among retailers in holiday promotional activity relative to last year, and Philadelphia indicated that retailers would be using promotions to extend the shorter-than-usual holiday shopping season.

A number of Districts reported slight to moderate increases in labor costs during the reporting period. Upward wage pressures continued to be evident for certain types of occupations and for skilled workers. New York, Chicago, and San Francisco reported that employers were adjusting compensation to win well-qualified job candidates or to retain or give raises to high-value, long-term existing employees. In addition, Atlanta noted nascent signs of wage pressures for lower-skilled jobs, whose wages have been flat for several years. Minimum wage increases were said to be a source of higher labor costs in the Boston, Cleveland, and San Francisco Districts. Boston, Chicago, and Dallas noted actual or prospective increases in health insurance costs; in contrast, San Francisco indicated that increases in health insurance premiums for the coming year were low by historical standards. Some of the higher costs associated with health care were reportedly being passed on to employees.

SOURCE: Federal Reserve Board

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