December 4, 2013
The rate of growth in economic activity in the Seventh District continued to be modest but slowed a bit in October and early November. Growth in consumer and business spending remained modest, while manufacturing production and construction activity continued to rise at a moderate pace. Contacts remained hopeful for improvement in 2014, although they were slightly less optimistic than they were during the previous reporting period. Credit conditions changed little on balance. Cost and wage pressures remained mild. A longer growing season contributed to higher than expected corn and soybean yields.
Consumer spending
Consumer spending growth remained modest in October and early November. Auto sales in the District slowed during the government shutdown, but subsequently picked up in late October and November. Contacts noted that lower gas prices were causing sales to shift away from fuel-efficient vehicles. Non-auto retailers reported typical sales levels during the lull between the back-to-school and holiday seasons. Sales of electronics were up, while grocery sales were flat, and apparel sales declined. District retailers are anticipating moderate growth in sales during the holiday season, but with gains somewhat below those expected at the national level.
Business spending
Business spending grew at a modest pace in October and early November. Inventories were at comfortable levels for most retailers and manufacturers. A number of auto dealers reported that inventories were slightly higher than normal, but that this was an intentional buildup in anticipation of increased demand from buyers looking to lock in low interest rates. In contrast, steel service center inventories remained low. Growth in capital spending was up only slightly; but spending plans for the next six to twelve months increased, particularly in the manufacturing and finance sectors. Contacts reported investing in structures, equipment, information technology, and vehicles. In general, the pace of hiring edged down again and expectations for future hiring dropped. One staffing firm, however, reported an increase in billable hours, particularly in manufacturing. Many contacts noted continuing strong demand for skilled and experienced workers. Part-time seasonal hiring for the holidays was slightly lower than normal, with retailers choosing to increase hours instead of hiring new workers.
Construction/real estate
Construction and real estate activity increased moderately over the reporting period. Overall demand for residential construction grew slightly, although remodeling activity slowed considerably. Multifamily construction experienced moderate growth with strength concentrated in the apartment sector. In residential real estate markets, home sales, prices, and rents continued to rise, though at a slower rate than earlier in the year. Inventories of homes for sale stayed near record lows, but contacts expected them to rise as increasing house prices induce more people to list their homes. Nonresidential construction grew modestly, with contacts noting an improvement in the outlook for industrial building and hotels. Commercial real estate activity continued to expand as retail leasing picked up, though a large fraction of deals contained relatively short-term contracts.
Manufacturing
Growth in manufacturing production remained moderate. The auto and aerospace industries were again a source of strength for the District. A large number of new vehicle launches pushed auto production and capacity utilization higher. Steel production fell slightly even though imports were down and net demand from service centers picked up. Specialty metal manufacturers reported slight declines in new orders and backlogs, and were worried that demand would be weak toward the end of the year. Demand for heavy equipment remained soft as sales of farm and mining equipment declined. Rental companies, however, continued to make large investments, as many users prefer to rent rather than purchase equipment given the uncertain business environment. Demand for heavy- and medium- duty trucks was up in response to the improving housing market and the pull-forward of sales in anticipation of new EPA standards in 2014 that will raise the cost of trucks. Manufacturers of construction materials saw a slight increase in demand and expected moderate growth in the coming year. In general, manufacturing contacts remained somewhat optimistic for 2014. Nonetheless, they still expected heightened uncertainty--exacerbated by worries about rising healthcare costs and fiscal policy gridlock in Washington D.C.--to continue to dampen demand.
Banking/finance
Credit conditions changed little on balance over the reporting period. Volatility decreased significantly across several asset classes and equity markets saw significant improvements. With rising benchmark rates, contacts noted slight declines in spreads for corporate borrowers, especially in the high-yield debt market. Banking contacts noted a leveling off in the gradual uptrend in asset quality. Demand for commercial and industrial loans remained relatively unchanged. Competition among lenders increased for the limited number of opportunities, putting modest pressure on prices and structures. Contacts also noted an increase in commercial real estate development activity. Residential mortgage activity declined as the increase in borrowing rates resulted in fewer homeowners refinancing mortgages. In contrast, contacts noted increased consumer borrowing, particularly for purchasing and refinancing autos.
Prices/costs
Cost pressures changed little since the last report. Overall, commodity prices were up slightly. Steel, scrap, lumber, and gypsum prices rose, iron ore prices were flat, and coal and gasoline prices were lower. Retailers noted that heavy promotional activity is being planned for this holiday season. Wage pressures were up slightly. Non-wage labor costs were steady, though a number of contacts reported higher health insurance premiums because of regulatory changes in the Affordable Care Act.
Agriculture
Harvesting took longer this fall than a year ago given the larger size of the crop and delays from precipitation. Crop yields remained higher than expected across the District, even in areas that experienced yield losses from drought. In general, farmers tended to sell soybeans and store corn. Pastures and winter wheat fields were in better shape than they were last year. Crop prices fell over the reporting period, though higher exports of corn, soybeans, and wheat cushioned the decline. Lower fertilizer prices relieved some concerns about 2014 crop production costs. Milk and cattle prices were a bit higher; hog prices fell, although they remained above the level of a year ago. The prospects for livestock producers improved due to reduced feed costs.