Beige Book: National Summary
June 3, 2015
Prepared at the Federal Reserve Bank of Dallas based on information collected on or before May 22, 2015. 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 suggest overall economic activity expanded during the reporting period from early April to late May. Activity in the Richmond, Chicago, Minneapolis, and San Francisco Districts was characterized as growing at a moderate pace, while the New York, Philadelphia, and St. Louis Districts cited modest growth. Contacts in the Boston District reported mixed conditions, and the Cleveland and Kansas City Districts indicated a slight pace of expansion. Compared to the previous report, the pace of growth slowed slightly in the Dallas District but held steady in the Atlanta District. Outlooks among respondents were generally optimistic, with growth expected to continue at a modest to moderate pace in several districts.
Manufacturing activity generally held steady or increased over the reporting period, except for in the Dallas District where it was slightly weaker and in the Kansas City District where it fell markedly. Strength was seen in transportation equipment manufacturing, while continued weakness was reported in primary and fabricated metals products and energy-related industries. Most districts reported an uptick in retail spending, and outlooks were positive, with retailers expecting continued sales growth in 2015. Overall vehicle sales rose, particularly for trucks and SUVs which auto dealers in some districts attributed to lower gasoline prices. Travel and tourism expanded across most reporting districts, except for the New York and Kansas City Districts.
Demand for nonfinancial services increased, and staffing firms reported steady or higher activity. Port activity was strong in the Richmond, Atlanta, and Dallas Districts, but reports on other freight and transportation services activity were mixed. Most districts said residential and commercial real estate activity and construction improved since the last report. Home prices continued rising and low home inventories continued to constrain sales activity in some areas of the country. Overall loan demand increased, with particular strength noted in the New York District. Credit quality and delinquency rates were stable or improved. Credit standards were mostly unchanged, except for scattered reports of easing in the Philadelphia, St. Louis, Atlanta, and San Francisco Districts.
The agricultural sector improved as significant rainfall alleviated the dry spell or improved growing conditions in several districts. However, drought conditions persisted in the San Francisco District and the outbreak of the avian flu severely impacted poultry producers in the Chicago and Minneapolis Districts. Oil and natural gas activity continued to decline in most districts, except for Cleveland where the rig count leveled off. Coal production was flat to down.
Employment levels were up slightly over the reporting period, with some reports of layoffs. Wages rose slightly. Prices were stable or ticked up, although manufacturers in some districts cited lower input prices.
Manufacturing
Manufacturing was mostly flat to up over the reporting period, except for in the Dallas District where it was steady to slightly weaker and in the Kansas City District where it declined sharply. Growth was moderate in the Boston, Atlanta, Chicago, and St. Louis Districts. The Philadelphia District reported slight growth, while factory activity was mostly flat in the New York, Cleveland, Richmond, San Francisco, and Minneapolis Districts.
Growth rates varied across industries. Demand for transportation equipment manufacturing was strong in the Cleveland and Chicago Districts, and machinery manufacturers reported solid gains in the Philadelphia District and were expanding operations in the St. Louis District. Demand for high-tech products softened in the Dallas District, but sales of semi-conductors picked up in the San Francisco District. Manufacturers of construction materials and/or machinery continued to see strengthening demand in the Cleveland and Chicago Districts, but unusually wet weather caused demand to flatten in the Dallas District. Demand increased for rubber and plastics products in the Philadelphia and Richmond Districts, and contacts in the biotech and pharmaceutical industries in the San Francisco District reported strong growth and record levels of activity in mergers and acquisitions. Reports of weaker activity for primary and/or fabricated metals manufacturing came from the Philadelphia, Richmond, St. Louis, Kansas City, and Dallas Districts. Reports on the steel industry were mixed; the Cleveland and San Francisco Districts reported some continued weakness, in part due to a strong dollar, while some contacts in the Richmond and Chicago Districts said steel shipments and/or capacity utilization picked up over the reporting period. The impact of the strong dollar was felt in other industries as well, with the Boston, Cleveland, Chicago, Minneapolis, and Dallas District noting its negative impact on export sales or capital investment in segments with significant overseas exposure.
The downturn in the oil and gas industry tempered manufacturing growth in over half the districts, particularly for industries dependent on the energy sector. These districts were Boston, Philadelphia, Cleveland, Chicago, Minneapolis, Kansas City and Dallas. The Kansas City District reported that manufacturing production fell most sharply in the district's energy-producing states like Oklahoma and New Mexico. The Dallas District noted that oilfield machinery sales remained weak and were down significantly from a year ago, and the Philadelphia District said businesses involved in natural gas and pipeline work noted negative impacts from decreased drilling activity and lowered capital expenditures. Contacts in the Boston District said the slowdown in oil and gas investment has been much bigger and faster than anticipated.
Cleveland and San Francisco District contacts generally increased their capital spending budgets over the reporting period, while contacts in the Minneapolis and Kansas City Districts noted declines and Boston and Philadelphia District contacts said capital expenditures were steady. Overall outlooks among manufacturers were generally positive, with some exceptions in the Cleveland, Kansas City, and Dallas Districts.
Consumer Spending and Tourism
Consumer spending increased across the districts since the prior report, except in the Richmond District, where retail sales were unchanged, and in the New York District, where retail sales fell slightly. Retailers in the New York District and mall retailers in the Philadelphia District said April sales were down year over year and attributed some of the weakness to the Easter holiday falling earlier this year. The Boston, Cleveland, and Kansas City Districts observed stronger sales on a year-over-year basis. A few districts noted weak demand for apparel, including Boston, Philadelphia and Chicago. The Chicago and San Francisco Districts reported strong sales in the entertainment and gaming sector. Contacts in the Cleveland and San Francisco Districts said low gasoline prices provided a tailwind for consumer spending, while contacts in the Atlanta District said this had yet to materialize. Inventory levels were mostly reported as satisfactory. A contact in the New York District said delays at West Coast ports have subsided while contacts in the Cleveland, Atlanta, and Dallas Districts said they were still being negatively impacted by residual effects of the strike. Outlooks among retailers were mostly positive, expecting continued growth throughout 2015.
Auto sales were up across the districts, except for in New York where they were flat on net and in Cleveland where they declined slightly. Sales growth was strongest in the Richmond, Chicago, and San Francisco Districts. Lower gasoline prices continued to spur a shift from cars to light trucks or SUVs in the Cleveland, Atlanta, and Chicago Districts, and auto dealers in the St. Louis and San Francisco Districts also noted stronger growth in trucks and SUVs relative to other models. A Philadelphia District contact said auto dealers were in a slower growth mode as a result of strong sales in 2014, and noted that current sales volumes were approaching record highs. Auto inventories rose in the Kansas City and Richmond Districts, and in the Chicago District inventories were elevated for car dealerships due to increased demand for SUVs and trucks. Outlooks were generally optimistic for further auto sales growth in 2015.
Tourism and travel improved in several districts but showed signs of continued slowing in the New York District and moved down in Kansas City. Hotel occupancy was up in the Boston, Richmond, and San Francisco Districts, and was strong in the Atlanta District. In the New York District, Manhattan hotels and Broadway theatres reported lower revenues. Restaurant sales increased in the Boston, Philadelphia, and San Francisco Districts but remained weak in the Kansas City District, although contacts there anticipate growth in coming months. Strong summer hotel and resort bookings were noted in the Philadelphia, Richmond, Atlanta, and Minneapolis Districts.
Nonfinancial Services
Demand for nonfinancial services, such as information technology, healthcare, and professional and business services generally expanded since the previous report. The Kansas City and San Francisco Districts noted moderate growth in demand for information technology services, while mixed business conditions were reported by software and IT services contacts in the Boston District. Revenues at engineering and architectural services firms increased, according to Richmond's report. Activity in healthcare services was strong according to reports from the Richmond and San Francisco Districts, and a few San Francisco District contacts noted that the Affordable Care Act was a source of continued growth. The Richmond and Dallas Districts noted continued strength in accounting services. The Dallas District report cited mixed demand for legal services, while activity at legal firms in the San Francisco District remained weak and contacts said that many new graduates were underemployed or working in other fields. Service providers in the Boston, Philadelphia, and Dallas Districts have an optimistic outlook and professional and high-tech services contacts in the Kansas City District reported solid capital spending plans.
Staffing services demand generally grew at a stable or improved pace since the prior report. Demand for staffing services ticked up in the Cleveland and Dallas Districts, and grew at steady pace in the Philadelphia and Chicago Districts. A recruiting firm in the Minneapolis District said demand expanded at a faster clip compared with the past few years, and a staffing contact in the Richmond District said employers were making hiring decisions more quickly. In contrast, an employment agency in the New York District said hiring activity slowed slightly from the brisk pace seen in March, and reports from staffing agencies in the Boston District were mixed, ranging from strong growth in demand to continued weakness.
Reports on transportation services and freight activity were mixed. Transportation firms saw stronger activity in the Kansas City District. Demand for air travel was stable in the Dallas District. Port activity remained strong in the Richmond, Atlanta, and Dallas Districts, and ports continued to get diverted traffic from the West Coast, according to Richmond's report. Rail traffic held steady or declined in reporting districts. Demand for trucking services was characterized as brisk in the New York District, while slight increases relative to the last report were noted in Richmond. Trucking activity expanded year over year in the Atlanta District, but fell in the Philadelphia District. Trucking firms in the Dallas District saw mixed demand. Reports on freight volumes were mixed in the Cleveland District, and contacts seeing softer demand cited the slowdown in the steel and energy industries as a source of the weakness. Air freight volumes declined in the Dallas District, while intermodal transportation and transport of seasonal goods increased, according to Cleveland's report.
Construction and Real Estate
Residential real estate activity and construction expanded in most districts since the prior report, and outlooks were largely positive. Homes sales rose strongly in the Minneapolis District on a year-over-year basis, while more modest to moderate gains were reported by all of the remaining districts, except for Philadelphia where builders reported mixed conditions for new home sales and brokers noted slightly slower existing-home sales in April on a year-over-year basis.
Sales of low- and medium-priced homes outpaced sales of higher-priced homes in the Kansas City District. Contacts in the Cleveland District said most new-home contracts were in the move-up price points, while the Dallas District noted declining sales in Houston for mid-priced new homes. Tight inventories were restraining sales growth in the Boston and New York Districts, although pending sales were up in the Boston District, suggesting that closings would rise in coming months. Home prices rose across much of the country, which contacts in some districts attributed to low inventories relative to demand.
Residential construction was flat to up during the reporting period, although a few districts reported a slower pace of homebuilding activity due to financing and capacity constraints and severe weather. Residential construction activity increased slightly in the Chicago District, where contacts expressed concern that the current strong pace of apartment construction was unsustainable. Homebuilding was flat in the Minneapolis and Kansas City Districts. Rainfall delayed lot deliveries and new home starts in the Dallas District, and several builders in the Cleveland District commented that there is desire to build more speculative homes, but capacity and financing constraints have made it difficult to increase inventory.
Apartment demand was strong in the Dallas District, and held steady in the Richmond District. Tight inventories and strong sales continued to push up prices, except for at the high end of the Manhattan market, according to New York's report. Condo sales rose in the Richmond District, but declined in the Boston District. Rents and prices increased in districts that commented on them, and one San Francisco District contact said that high apartment prices have led young buyers to consider single-family homes. Strength in multifamily construction was reported in the Cleveland, Atlanta, and San Francisco Districts, and the Richmond District continued to experience steady apartment building activity.
Commercial real estate leasing and construction activity improved in most districts, and outlooks were optimistic. The New York District reported a strengthening industrial market and steady office and retail leasing demand. In the Boston District, demand for office space held steady at a decent to solid pace, except for in Hartford where demand was slow. The Dallas District continued to see active industrial, retail, and office leasing activity, with the exception of the Houston office market. Both commercial real estate development and leasing activity increased across the San Francisco District, mostly fueled by growth in the technology industry. Contacts in the St. Louis District noted a tight office market for Class A space, and continued commercial and industrial construction. Commercial building increased in the Chicago District driven by demand for industrial and office space, and new hotel and office development in downtown Chicago was compelling retailers to relocate. The Cleveland and Atlanta Districts noted increased construction backlogs, and shortages of skilled labor remained a constraint on construction activity in some districts, such as Boston, Cleveland, and San Francisco.
Banking and Finance
Lending activity increased during the reporting period. Several districts, including Philadelphia, Richmond, Atlanta, St. Louis, and San Francisco reported modest to moderate increases in loan volumes. The New York District noted a strong, broad-based pick up in loan demand since the previous report; however, the Dallas District reported slower overall growth. Commercial and industrial loan demand improved in the Philadelphia, Cleveland, St. Louis, and San Francisco Districts, though it was characterized as stable in the Richmond and Kansas City Districts. Business lending expanded at a slower pace in the Dallas District, and the Chicago District saw an uptick in loan demand from small and large businesses, but weaker middle-market lending activity, particularly from the oil and gas industry. Commercial real estate financing held steady in the Kansas City District, while exhibiting continued strong growth in the New York, Cleveland, Chicago, and Dallas Districts.
On the consumer lending side, several districts noted increased demand for auto loans, including Philadelphia, Cleveland, Atlanta, St. Louis, and Dallas. Demand for credit cards fell in the St. Louis District, but grew strongly according to Philadelphia's report.
Reports on mortgage lending were mixed. Residential real estate lending rose in the San Francisco District, where one contact reported increased hiring of loan originators, processors, and underwriters to meet growing mortgage demand. The Richmond, Chicago, St. Louis, Kansas City, and Dallas Districts reported an uptick in residential mortgage loans, and contacts in the Cleveland District said the increase in residential mortgage demand was largely for new home purchases. Refinancing activity was unchanged in the New York District; however, it weakened in the Richmond and Chicago Districts. Home equity loan demand rose in the Cleveland District, but was characterized as low in the Chicago District.
Credit conditions generally remained stable or improved. Widespread declines in delinquency rates were seen in the New York and St. Louis Districts, and delinquencies edged down in the Cleveland District from already low levels. Most bankers in the Philadelphia and Kansas City Districts expressed continued confidence in the quality of their loan portfolios. The Dallas District reported that default rates and charge-offs were at all-time lows, and consumer credit quality improved slightly in the Chicago District.
Credit standards remained largely unchanged, with a few exceptions. The Philadelphia and St. Louis Districts noted slight easing of credit standards for mortgages and C&I loans, respectively. Competition among some lenders led to looser credit standards in the Atlanta District, and contacts in the San Francisco District commented that some financial institutions were relaxing lending standards or looking for new revenue sources in part due to downward pressure on net interest margins.
Agriculture and Natural Resources
Agricultural conditions improved for most reporting districts, except for in San Francisco where drought conditions persisted. Significant rainfall alleviated drought conditions and/or improved growing conditions in much of the Atlanta, Minneapolis, Kansas City, and Dallas Districts. Overly wet areas in the Richmond and St. Louis Districts dried enough for planting to move ahead, while in the Dallas District wet field conditions prevented some producers in South Texas from planting crops in time. Crop planting was underway across the reporting districts and progressing at an above-average pace in the Chicago, St. Louis, and Minneapolis Districts, and for soybeans in the Atlanta District. Contacts across several districts reported that crop prices for cotton, wheat, corn, and soybeans remained low and in some cases moved lower over the reporting period, while cattle prices remained historically high. The St. Louis, Minneapolis, and Kansas City Districts said farm income declined. The Chicago District said poultry flocks were hit hard by avian flu, and the Minneapolis District noted that the outbreak was expected to cost Minnesota producers more than $300 million.
Reports indicated that oil and natural gas drilling activity continued to decline in the Atlanta, Minneapolis, Kansas City, Dallas, and San Francisco Districts, while the Cleveland District said the number of rigs operating in the Marcellus and Utica shale regions leveled out in April after sharp declines in the first quarter. A survey of energy services firms in the Minneapolis District showed that 75 percent of respondents had lower revenues than a year ago and half had lower capital expenditures, and contacts in the Dallas District also noted a drop in capital expenditures this year. The Kansas City District reported continued layoffs at regional oil and gas firms, but contacts said that if a further rebound in oil prices occurs and holds, drilling could ramp back up later this year. Coal production declined in the Richmond and St. Louis Districts but was little changed in the Cleveland District. The Cleveland District noted declines in coal prices over the reporting period while coal prices were reported as flat in the Richmond District.
Employment, Wages, and Prices
Employment levels were up slightly across districts over the reporting period. Reports of hiring came from a variety of industries, and the Boston, Richmond, Atlanta, and St. Louis Districts noted employment gains in manufacturing. Some instances of layoffs were mentioned by the St. Louis, Minneapolis, and Dallas Districts. The Richmond District cited employment declines in West Virginia's coal and gas industries and the Minneapolis District said online job openings in the energy-producing area of North Dakota were down significantly from a year ago. Reports of labor shortages spanned several districts including Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, and Kansas City. An ongoing and widespread shortage of truck drivers was noted in the New York, Cleveland, and Kansas City Districts. Firms in the Cleveland, Atlanta, Chicago, and Minneapolis Districts reported difficulty retaining employees. The New York District said a sizeable proportion of service-sector firms plan to expand employment in the months ahead.
Slight growth in wages was reported by most districts. A tight market for skilled construction labor in the Boston, Dallas, and San Francisco Districts pushed up wages for workers there, and staffing services firms in Boston, New York, and Dallas noted rising wages. The Richmond, Kansas City, and San Francisco Districts noted higher wages in the restaurant and/or hospitality industries. Some contacts in the IT sector in the San Francisco District reported rapid wage gains, and their counterparts in Boston noted rising wages as well. Employers in the Atlanta District were monitoring how recent minimum pay announcements from a number of employers would affect local labor markets. Contacts across various industries in the Chicago District reported a willingness to raise wages when necessary to attract and retain workers, and a notable share of reporting firms in the Minneapolis District also said they were increasing starting pay for most job categories to attract new hires.
Districts reported stable or slightly increased prices overall during the reporting period. Several districts--Boston, Philadelphia, Cleveland, and Kansas City--noted softer input prices in the manufacturing sector, while the Richmond District reported that manufacturing prices paid accelerated slightly, and manufacturers in the New York and Dallas Districts said input prices were stable. The New York District reported upward pressure on input costs among service sector firms, and there were reports of increased transportation costs and/or fuel prices in the Cleveland, Minneapolis, Kansas City, and Dallas Districts. Selling prices rose among service-sector firms in the Philadelphia and San Francisco Districts, among manufacturers and retailers in the Richmond District, and among retailers and restaurants in the Kansas City District. Manufacturers in the Cleveland District were reluctant to pass through lower input prices to customers. Selling prices were stable in the New York and St. Louis Districts and among retailers in the Cleveland and Chicago Districts. Low oil prices and the strong dollar reduced input and transportation costs for agricultural producers in the San Francisco District, putting downward pressure on prices in that sector.