May 31, 2017
Summary of Economic Activity
Aggregate business activity expanded at a moderate pace in the Fourth District during the reporting period. Labor markets continued to strengthen, with wage pressure coming from both low- and high-skilled workers. Upward pressure on input prices was prevalent in the construction and manufacturing sectors. Firms facing higher input prices frequently reported that they were able to raise selling prices and billing rates. Consumer spending at brick-and-mortar establishments rose slightly, while new motor vehicle sales strengthened. Manufacturing activity grew slightly, with a marked improvement for heavy equipment producers. Freight volume continued to expand. After slowing early in the first quarter, sales of new and existing single-family homes picked up. Activity in the commercial real estate market remains elevated. Credit portfolios grew slightly on balance.
Employment and Wages
Payrolls grew across a broad range of industries, with continuing wage pressures in some skilled occupations and at the lower end of the pay scale. Staffing firms noted an increase in the number of job openings and placements during the past two months, a situation which they attributed to an improving business climate. Because of difficulties in attracting and retaining employees, companies are placing a greater emphasis on expanding benefits and work-life-balance initiatives, while at the same time increasing wages and salaries. Banking contacts noted significant wage pressure for IT staff and compliance personnel. High turnover remains an issue in the freight transportation industry. In order to retain drivers, one firm increased driver pay by 3 cents per mile, equating to a 7.5 percent wage increase. Attracting qualified applicants for low-skilled manufacturing jobs is difficult, and many newly hired workers prove to be unreliable. That said, competition for low-skilled workers is strong and is driving up starting wages.
Prices
Similar to the previous reporting period, statements about rising input costs originated primarily among construction and manufacturing contacts. Building contractors noted higher material prices across the board, but especially for Canadian softwood. Contractors expect a dramatic increase in lumber prices unless a tariff agreement is reached. Several contacts reported that construction subcontractors are constrained by a lack of qualified workers and are operating at capacity, resulting in significantly higher price quotes. Manufacturers pointed to rising steel prices as a primary factor driving up their input costs. Manufacturers, homebuilders, and general building contractors experienced little pushback when attempting to raise their selling prices. Freight haulers generally reported that their markets were able to sustain higher freight rates in the low-single digits. Grocery store shelf prices declined slightly.
Consumer Spending
Consumer spending at brick-and-mortar retailers rose slightly during the period and was attributed to the rollout of spring merchandise and promotional activity. Sales of household furnishings picked up, while electronics and apparel transactions were fairly soft. One chain reported that liquidations and accelerated store closures by retailers, who are rationalizing their brick-and-mortar footprint, are having an impact on foot traffic at malls. The contact noted that with more dark stores, the appeal of a mall decreases, and this may create a downward spiral. Foot traffic in grocery stores was flat. However, one chain reported that dollars spent per customer rose, so total revenue was up slightly. Year-to-date sales through April of new motor vehicles increased 3.5 percent compared to those of the year-earlier period. Auto dealers are concerned about higher-than-normal inventories and credit tightening for subprime buyers. A dealer group noted the group's new vehicle inventory was at its highest level since 2004.
Industrial Production
Activity in the manufacturing sector picked up slightly during the period. Contacts noted rising output by producers of heavy equipment sold to other manufacturers. This market segment had reported flat to declining orders since the beginning of the past recession. Suppliers to the construction and food services industries said that demand remains elevated. Demand for consumer packaged products was weaker than expected during the first quarter, although demand was above year-ago levels. First-quarter motor vehicle production at District plants declined when compared to that of the same time period a year earlier. Increased light truck production was insufficient to offset larger declines in car production. Manufacturers cited the strong dollar as the primary factor tempering offshore sales. A growing number of producers are increasing capital budgets. There was a notable increase in the number of contacts who are allocating monies for plant expansion.
The number of drilling rigs operating in the District continued to trend higher, albeit at a slow pace. Natural gas output remains at historic highs. High levels of coal production were maintained because of rising demand and reduced customer inventory.
Real Estate and Construction
First-quarter unit sales of new and existing single-family homes increased almost 4 percent compared to those of a year earlier. The average sales price rose 6 percent. Homebuilders attributed stronger sales to an improving job market and rising prices for buyers' existing homes. Estimates of single-family construction starts during the first quarter were much higher in Ohio compared to those of a year earlier. Estimated starts in District regions outside Ohio were flat or declining. The strongest demand for new homes was found in the move-up and high-end price point categories. Purchases by first-time buyers declined markedly during the period.
Activity across the commercial real estate sector remains elevated. Increases were reported in transaction volume and the average price per square foot for industrial and office properties during the first quarter compared to prior-year results. Office vacancy rates declined, and asking rents increased, although both at a slow pace. Nonresidential contractors reported that inquiries and backlogs remain strong. The highest demand is for commercial property development, public infrastructure projects, and education buildings.
Financial Services
Bankers reported that their credit portfolios grew slightly on balance since the last report. Although customer confidence remains high, that confidence has not yet translated into additional commercial or retail lending. On the commercial side, strongest demand is for CRE loans and M&A financing. Contacts expect that the current level of activity in these segments will continue. Although banks were still experiencing relative strength in auto lending and home equity products, several contacts noted a small decline in consumer lending overall, especially for credit cards. Activity in mortgage lending expanded slightly, mainly for new purchases. Contacts noted little change in loan application standards and delinquency rates.
Nonfinancial Services
Professional and business services firms generally reported moderate levels of activity during the period. Strongest demand was seen by engineering services and software and IT services firms. Factors contributing to strong demand for software and IT include clients' concerns about cyber security and data protection and a transitioning by many companies from owning and managing software to cloud computing.
Freight volume expanded during the period, and this expansion was attributed to improving economic conditions. Increased demand was seen primarily from steel producers and service centers and the energy sector. A majority of our contacts reported that they were able to push through rate increases.