December 3, 2014
On balance, the Fourth District's economy expanded at a modest pace during the past six weeks. Manufacturers reported that business activity increased at a modest rate. Demand for nonresidential construction strengthened, while the residential market was stable. Consumer spending at retail outlets grew slowly, and year-to-date auto sales posted moderate gains compared to 2013. District coal production is up slightly year-over-year, while shale gas activity remains at a high level. Freight shipments were strong, but capacity constraints are limiting growth. The demand for business credit moved higher, and consumer lending held steady.
Payrolls showed a mild increase, primarily in manufacturing, construction, and freight transportation. Staffing firms reported that the number of job openings and placements has fallen, which they attribute in part to seasonal effects. Because of shortages of certain types of skilled workers, upward pressure on wages is being felt by general building contractors, subcontractors, and freight haulers. Overall, input and finished goods prices were stable. There were scattered reports of rising prices for some metal and agricultural products and building materials. Transportation costs rose.
Manufacturing
District factories reported that demand ranged from stable to showing modest growth since the previous report. Year-to-date results were generally better compared to those in 2013, with several contacts citing organic growth as a contributor. Our contacts are fairly optimistic and expect moderate to strong growth in 2015, though some expressed concern about the strengthening dollar and weakening foreign economies. On balance, steel shipments showed a modest improvement since the last report; total volume (tonnage) for 2014 is expected to be slightly higher compared to the previous year. Manufacturers and steel producers reported that the strongest demand came from the motor vehicle, nonresidential construction, and oil and gas industries. Year-to-date auto production through October at District assembly plants was more than 5 percent higher compared to the same period in 2013.
Most of our contacts reported that capital spending in the current fiscal year is in line with budgeted amounts. Fiscal year 2015 budgets are expected to be higher, with monies being allocated mainly for new equipment and expansion of plant footprints. In general, input costs were stable during the past six weeks, though we heard reports about rising steel, coffee, and sugar prices and significantly higher costs associated with transportation. Finished goods prices held steady. Several contacts noted that it remains difficult to pass through any cost increases. Little change in labor conditions was reported: The pickup in new hiring that began in the middle of the year continued and finding skilled workers remains a challenge. Wage increases in 2015 are projected to range from 2 percent to 4 percent.
Real Estate and Construction
Sales of new and existing single-family homes varied across geographic markets during the past six weeks. Several builders and real estate agents, who experienced slow sales during the summer, reported rising activity in September and October. In total, home sales showed a modest decline in the fourth quarter when compared to the third quarter. A couple of builders noted that they believe the decline is more than a seasonal effect. Reports on year-over-year home sales were mixed. Most builders expect that activity will stay at current levels, though they expressed concern about a potential rise in interest rates, continued strict lending standards, and rising development costs. Multifamily development remains strong. New-home contracts were mainly in the move-up price-point categories. First-time buyers still have difficulty qualifying for mortgages. A majority of builders reported raising prices on homes during the past couple of months in response to increased costs for labor and materials. The upward trend in selling prices of existing homes has flattened out, but the current average price remains higher than the average level for 2013 by a few percent.
Nonresidential builders reported continued strong pipeline activity, and most indicated that the level of activity has increased relative to a year ago. Vacancy rates in existing retail, office, and warehouse space are on the decline. For the most part, general contractors are satisfied with their backlogs going into 2015. Market demand is broad based, although demand from shale-gas producers and for industrial space (manufacturing and distribution) is strongest. There has also been a pickup in requests for commercial space. On the downside, we heard a few reports about private capital being readily available so construction could proceed, but owners are reluctant to move projects into the construction phase because of uncertainty about the economy. Government-sponsored building activity remains relatively weak in some parts of the District. Most builders remain optimistic, but they are concerned about the availability of skilled labor, tight margins, the viability of the subcontractor market, and their own capacity constraints.
General contractors are not overly concerned with rising prices for building materials, but they did note large price increases for concrete and drywall and smaller price increases for steel products. Transportation costs are rising, reflecting capacity constraints among trucking and rail carriers. A majority of general contractors reported that they expect to increase their payrolls in future months in response to rising demand and to expand capacity. Subcontractors are pushing through rate increases at a faster pace than general contractors had anticipated; these increases are needed to cover rising costs, including for labor and to widen margins. As a result, general contractors, who remain under pressure to keep their rates down, are facing additional margin compression.
Consumer Spending
Spending at many retail outlets rose slightly since the last report. Nevertheless, retailers observed that even though lower gasoline prices are helping to boost spending, consumers are more interested in buying motor vehicles and experiences, such as vacations, rather than merchandise. On balance, same store revenues were flat relative to a year ago. Cold weather apparel is in demand and restaurateurs reported rising sales, especially in their take-out business. The outlook for the holiday shopping season is for revenues to be slightly higher than last year. Vendor and shelf prices held steady. Restaurant operators noted that they are raising their prices for menu items that use animal products. Retailers are running more promotions than usual to entice consumers back into their stores. Capital budgets for the 2015 fiscal year will be maintained at current-year levels or reduced. Monies are being moved from brick and mortar to ecommerce. Excluding temporary seasonal hiring, retail payrolls were stable. Reports indicated higher labor costs due to minimum wage increases and more competition for hourly employees, which was attributed to the improving economy.
New motor vehicle sales increased from September to October. Unit volume year-to-date was more than 5 percent higher compared to the same time period in 2013. Strong sales of SUVs and trucks continued; this strength was attributed to lower gas prices and strength in the construction industry. Some dealer inventory is high at this time because recent recalls have prevented certain models from being sold to the public. Demand for service technicians is up because of the recalls. Dealers project unit volume for all of 2014 will be 5 percent to 10 percent higher than in 2013, with sales being highly dependent on dealer and manufacturer incentives and the availability of leasing. Used-car purchases showed a moderate increase since the last report, and used-car prices are starting to decline.
Banking
Bankers reported that demand for business credit was showing modest to moderate growth during the past six weeks. While demand was described as broad based, it was strongest for commercial real estate development, multifamily housing, and mergers and acquisitions. We heard several reports of large regional and national banks establishing a presence in smaller markets traditionally served by community banks. On net, consumer credit demand was roughly stable. The number of applications for auto loans remains strong, while households are making marginally greater use of credit cards and home equity products. Though the pricing environment remains competitive, interest rates were mainly steady for business and consumer credit and for residential mortgages. Delinquency rates are improving across loan categories. No changes were made to loan-application standards since the last report. Deposits were described as strong and growing. Little change in payrolls is expected in the near term.
Energy
Year-to-date coal production across the District is slightly above prior-year levels. Output is projected to increase in Pennsylvania and northern West Virginia with no material change expected in eastern Kentucky and Ohio. The downward trend in spot prices for thermal and metallurgical coal is showing signs of flattening out. Activity in the Marcellus and Utica shale formations remains at a high level. We heard several reports indicating that although there is some financial belt-tightening by exploration and production companies, drilling programs should continue in most regions even though medium-term projections for oil and gas prices are at low levels. One industry executive reported that some investment will shift away from Pennsylvania to Ohio and West Virginia because the latter two states are rich in wet gas, which commands a price premium. On balance, energy-related equipment and materials prices were unchanged since the last report. Energy payrolls held steady.
Freight Transportation
Freight volume was little changed since the last report. Although shipments remain strong, capacity constraints are limiting the industry's growth. Demand is strongest from the agriculture, industrial machinery, and oil and gas industries. Little change in equipment pricing was noted. Due to lower diesel fuel prices and favorable pricing, carriers' bottom lines are either stable or improving. Our contacts' outlooks are positive, though any expected increase in activity through year's end is being attributed to typical seasonal swings. Capital spending in 2015 is projected to be on a par with the current year. Monies are being allocated to replace aging equipment (including auxiliary power units) and adding capacity, but the rate of increase is slow. Hiring is both for replacement and for adding capacity. Industry executives identified three sources of rising labor costs: wages (reflecting a driver shortage), healthcare (related to compliance with the Affordable Care Act), and regulatory compliance (related to hours-of-service rules).