December 3, 2014
Growth in economic activity in the Seventh District remained moderate in October and November. Contacts expressed optimism for the coming year, but noted concerns about weakening foreign growth and the possibility of another severe winter. Consumer and business spending, manufacturing production, and construction and real estate activity all increased moderately. Credit conditions changed little on balance. Cost pressures generally eased over the reporting period. Corn, soybean, wheat, and cattle prices rose, while milk and hog prices decreased.
Consumer Spending
Growth in consumer spending continued at a moderate pace in October and November. Higher consumer confidence and lower gasoline prices led to a more positive outlook for the holiday season among most non-auto retailers. The early arrival of winter weather helped some retailers, while others were concerned that it would dampen sales during the holidays. Auto sales and leasing activity remained strong, supported by low interest rates and extended financing terms. Lower gasoline prices continued to spur demand for trucks and SUVs. Auto dealers also indicated that used vehicle sales were somewhat above expectations and that used car prices, which had been declining recently, had leveled off.
Business Spending
Business spending continued to grow at a moderate rate in October and November. Inventories were at comfortable levels for most manufacturers and retailers, though an early cold spell led to shortages of some winter-related retail items. There were also some reports of manufacturers stockpiling crucial inputs as insurance against another harsh winter. Capital expenditures and spending plans continued to rise, with expenditures primarily going toward replacing IT equipment and building new structures. Merger and acquisition activity also picked up. Actual hiring and hiring plans continued to increase at a moderate pace. Some retailers reported slightly higher seasonal employment levels than last year, while others reported boosting the hours of existing employees in lieu of hiring more seasonal staff. Contacts again noted strong demand for skilled workers, particularly for those in professional and technical occupations and skilled manufacturing and building trades. In addition, a staffing firm reported an increase in demand from small- and medium-sized businesses.
Construction and Real Estate
Construction and real estate activity increased moderately over the reporting period. Residential construction rose in both the single- and multi-family markets. Builders expected that an improving economy and continued low interest rates would help support steady growth in new construction. Home sales picked up more than expected in both urban and suburban markets. Inventories of existing homes for sale also increased, as rising house prices prompted sellers to enter the market. Nonresidential construction expanded at a moderate pace, led by demand for industrial and office buildings. Commercial real estate activity increased broadly, as vacancies ticked down and rents rose. Contacts noted that sales of existing properties with tenants already in place were particularly strong. Leasing of industrial, office, and retail space increased.
Manufacturing
Manufacturing continued to grow at a moderate pace in October and November. Activity in the auto, aerospace, and energy industries remained strong. An automaker reported adding a third shift to meet expected demand for new models. However, some auto suppliers noted a delay in orders while automakers retooled production facilities. Steel production grew steadily. Steel prices decreased and imports increased, due to weaker demand abroad. Most specialty metals manufacturers reported that order books reflected solid demand. While demand for heavy machinery grew slowly in general, there were marked differences across product categories: Sales of construction machinery picked up, but sales of agricultural and mining equipment remained weak. Manufacturers of household appliances and construction building materials reported an increase in shipments, and were encouraged that the improving labor market would continue to translate into stronger housing demand. Utility contacts reported that weather-adjusted load growth was up slightly as the number of residential customers increased.
Banking and Finance
Credit conditions were little changed on balance in October and November. Financial market volatility increased significantly in mid-October, but declined over the remainder of the reporting period. Business loan demand was mixed. Banking contacts noted lower demand from middle-market firms, but an increase in demand from small businesses for financing equipment and structures. Utilization of credit lines for working capital declined across market segments. Consumer loan demand increased, with continued strength in auto lending and an increase in mortgage refinancing driven by lower mortgage rates.
Prices and Costs
Cost pressures generally eased over the reporting period. Energy prices and iron ore and steel prices decreased since the last report. In contrast, several contacts reported transportation cost increases. In addition, with strengthening demand a number of manufacturers were able to raise prices and expect to put through further increases in coming quarters. Retail prices were little changed overall. Wage pressures continued for skilled workers as many contacts indicated shortages of available labor, but wage pressures remained less pronounced for unskilled workers. Non-wage costs changed little on balance, though a number of contacts reported rising health insurance costs, some of which was being passed on to employees. However, several contacts noted that they were re-examining their overall compensation policies because they are worried about losing talent.
Agriculture
The District harvest was behind a normal year's pace even before early snows delayed progress in some parts of the District. Still, yields should set records for the District overall. Corn and soybean prices moved up during the reporting period, driven by the slow harvest, farmers storing much of the crop for later sale, and some shipping delays. Wheat prices rose as well. Milk and hog prices declined from the prior reporting period, but operations remained profitable. Cattle prices moved higher with signs of herd expansion. Weights for hogs and cattle at slaughter were very high, helping boost the supply of meat coming to market.