June 1, 2016
Growth in economic activity in the Seventh District slowed to a modest pace in April and early May, tempering contacts' optimism about growth over the next 6 to 12 months. Business spending and manufacturing production grew at a modest pace, while consumer spending grew at a moderate pace. Construction and real estate activity edged up and financial conditions improved marginally. Price and wage pressures tightened some, but remained mild overall. Corn and soybean prices rose, improving farmers' earnings prospects.
Consumer Spending
Growth in consumer spending picked up to a moderate pace over the reporting period. Contacts in Michigan indicated that sales were the best they had seen in over a year. Retailers reported stronger sales in the apparel, lawn and garden, furniture, and hospitality sectors, and weaker sales in the jewelry, toys, and electronics sectors. Sales of new and used light vehicles remained robust and strengthened further in recent weeks, helped by more generous incentives. Leasing activity was especially strong. Average overall transaction prices moved higher as the vehicle mix continued to shift toward larger, more expensive vehicles, and because of greater demand for high-tech options.
Business Spending
Growth in business spending slowed to a modest pace in April and early May. Retail inventories were generally at desirable levels, with many contacts reporting boosting stocks in anticipation of strong summer sales. Used car inventories were low, despite a large number of vehicles coming off leases. Manufacturing inventories also were generally at desirable levels, though steel service center inventories were slightly lower than normal. The pace of current capital expenditures slowed to a more modest rate as did expectations for future spending. Outlays were primarily for replacing IT and industrial equipment. There continued to be reports of capacity expansion, though there was no increase in the number of such reports. The pace of hiring also slowed to a more modest rate, as did expectations for the future hiring. That said, many contacts indicated that the labor market continues to tighten. Demand continued to be strongest for skilled workers, particularly for many professional and technical occupations, sales, and skilled manufacturing and building trades. Staffing firms again reported flat growth in billable hours and difficulty filling orders at the wages employers are willing to pay. In contrast, an online recruiting firm reported healthy growth in customers. Demand for electricity and transportation services was little changed.
Construction and Real Estate
Construction and real estate activity edged up over the reporting period. Residential construction rose slightly, with growth concentrated in the single-family and suburban markets. Home sales increased across most locations and markets, most notably in urban areas and in the market for existing homes. Sales were particularly strong for homes under $250,000. Residential rents and home prices rose moderately, though one contact reported that an increase in supply held prices flat for homes over $500,000. Demand for nonresidential construction was little changed overall, but one contact did note an increase in industrial construction. Commercial real estate activity rose modestly, with contacts reporting gains in both the for-sale and for-lease markets, particularly in urban areas. Activity was distributed across segments, but was particularly strong for retail. Rents edged up, vacancy rates decreased somewhat, and the availability of sublease space was little changed.
Manufacturing
Growth in manufacturing production slowed to a modest pace in April and early May. Activity remained strong in autos and aerospace, but was weaker in most other industries. Growth in steel demand picked up as service centers began investing in inventories again after a year and a half of trying to pare back stocks. Specialty metals manufacturers reported little change in new orders on balance, with increases in demand from autos and aerospace but declines in orders from the oil and gas industry. Heavy machinery manufacturers reported weak growth overall, with poor results in the rental and petroleum segments offsetting stronger demand from construction. A heavy trucks manufacturer reported declining orders. Manufacturers of construction materials continued to indicate slow but steady increases in sales (in line with the improvements in the housing market), while manufacturers of display and stocking equipment for retailers reported little change in demand on balance.
Banking and Finance
On balance, financial conditions improved marginally over the reporting period. Financial markets participants noted that market volatility decreased, high yield debt issuance rebounded, and upgrades outpaced downgrades for credit ratings of U.S. public financial firms. Business loan demand was little changed on balance. Contacts continued to highlight strength in commercial real estate lending, particularly in the office and healthcare segments. In addition, one contact reported a slight increase in utilization of working capital lines of credit. Loan pricing remains competitive. Contacts reported that deposit growth is outpacing loan demand growth, putting pressure on margins. Consumer loan demand was also little changed across all types of loans, with one contact characterizing conditions as "very calm." Contacts again reported an increase in the length of auto loans. Consumer credit quality was steady.
Prices and Costs
Cost pressures again tightened some in April and early May, but remained mild overall. Most energy and metals prices increased (steel in particular), but the level remained low. Retail prices increased slightly, while firms upstream reported little change in prices on balance. Wage pressures picked up some, but contacts were more likely to report higher wages for select jobs than across-the-board increases. Growth in non-wage labor costs was steady.
Agriculture
Contacts expect the growing season to get off to a decent start in most of the District, even though wet, cool weather meant that both the planting and emergence of corn and soybeans were behind the pace of last spring. Corn and soybean prices rose during the reporting period, but soybean prices rose more, which may cause farmers to plant more soybeans at the expense of corn. At current prices, contacts believe that farms can cover this year's costs for soybean production but not for corn. Many farmers took advantage of the price rally and boosted their working capital by selling old crops and locking in prices on new crops. Milk and dairy product prices moved lower, as production remained strong. Cattle prices were down as well. Hog prices increased however, helped by solid demand from China, and there was one report of new construction of hog facilities.