September 3, 2014
Growth in economic activity remained moderate in July and August, and contacts maintained their optimistic outlook for the rest of the year. Consumer and business spending, manufacturing production, and construction and real estate activity all increased moderately. Credit conditions continued to improve. Cost pressures increased some, but remained modest. Corn, soybean, hog, and cattle prices were lower, while milk prices were higher.
Consumer Spending
Growth in consumer spending picked up to a moderate pace in July and August. Retailers reported noteworthy sales increases for apparel and lawn and garden items, but cited weaker growth at grocery stores. The relatively mild weather resulted in below-average sales of items such as summer-related toys and cooling appliances. Promotional activity scaled back some, but remained high, as clearance sales have been effective at eliminating excess inventories. Retail contacts noted that the cost of further intensifying promotions outweighed any potential benefits. Light vehicle sales increased, particularly for mid-size sedans and crossover vehicles. Activity in auto service and parts departments remained high as dealerships continued to address the spate of recent recalls.
Business Spending
Business spending continued to grow at a moderate pace in July and August. Inventories remained at comfortable levels for most manufacturers and retailers. Capital expenditures and spending plans both increased. More contacts reported capital expenditures to support capacity expansion, particularly in the auto and construction industries, and contacts increased their outlays on structures while maintaining spending levels on industrial equipment and information technology. The pace of hiring slowed slightly, though hiring plans ticked up. Demand remained strong for skilled workers, particularly for those in professional and technical occupations and skilled manufacturing and building trades. Shortages of skilled workers were reported in the manufacturing, construction, transportation, IT, and healthcare industries. Contacts again mentioned expanding internal training programs to address worker shortages and an increased willingness to pay higher wages and bonuses. In the construction industry, contractors were renting specialized equipment in place of hiring new workers. Demand for lower-skilled workers picked up some, with a staffing firm reporting increases in billable hours in the trade, transportation, and utilities industries.
Construction and Real Estate
Construction and real estate activity increased over the reporting period. Residential construction expanded at a moderate pace in both the single- and multi-family markets. Builders continued to note that activity varied widely by neighborhood, with most of the strength concentrated in high-income urban areas. Single-family home sales increased, while condominium sales weakened somewhat. Contacts were optimistic that sales would gain momentum in the fall, as continuing increases in home prices and residential rents signal solid underlying demand. Nonresidential construction also expanded at a moderate pace, led by demand for industrial and office buildings. Contacts again reported that automotive supply manufacturing plants were a particular source of strength. Commercial real estate activity increased broadly, as vacancies ticked down and rents rose. Leasing of industrial buildings, office space, and retail space all increased.
Manufacturing
Manufacturing continued to grow at a moderate pace in July and August. The auto industry remained a source of strength for the District. Demand for steel increased further. However, capacity utilization in the steel industry is still low by historical standards, and a contact noted that some capacity designated for nonresidential construction remains offline due to continued weak demand from this market segment. Steel service center inventories remained a bit low, but contacts expected to rebuild them over the next two months. Most specialty metal manufacturers reported improving order books, though a few were disappointed by second-quarter sales. Demand for heavy machinery picked up some on net, as higher demand for construction machinery overshadowed weakness for agricultural and mining machinery. Contacts noted that growth in farm machinery sales, in particular, has slowed, with dealers offering discounts on purchases of equipment for which there had been waiting lists in recent years. Moreover, there were reports of excess inventories of used farm equipment and layoff announcements at farm machinery plants in the District. Manufacturers of construction materials reported steadily increasing production and shipments, and a contact expected strong demand over the third quarter. A utility company reported that weather-adjusted energy usage was higher than a year ago at this time.
Banking and Finance
Credit conditions improved modestly in July and August. Business lending increased, with contacts noting continued growth in demand for the financing of equipment and commercial real estate from small and middle-market businesses. In addition, both small and middle-market businesses increased their utilization of credit lines. Growth in leveraged lending was relatively flat, with pricing and structure little changed from the prior reporting period. A banking contact noted that some corporate clients were shifting toward traditional and leveraged bank loans and away from high-yield debt to satisfy their funding needs. Banking contacts also continued to cite competitive pressures on terms and pricing for traditional and leveraged business lending, particularly from nonbank financial institutions willing to take on higher credit risk. Consumer loan demand increased moderately over the reporting period, with contacts noting an increase in credit card lending, continued growth in auto lending, and a slight uptick in new mortgage originations.
Prices and Costs
Cost pressures increased over the reporting period, but remained modest overall. Energy prices remained elevated. Steel prices were higher in spite of increased imports, as a large share of these imports remains at the docks due to customers’ unwillingness to pay elevated shipping surcharges. Retail prices were up slightly as contacts reported decreasing the generosity of sales promotions. Meat and dairy prices also rose, though contacts did not report price pressures for other grocery items. Overall, wage pressures were modest, but a number of contacts again reported wage pressures for skilled workers. In addition, a staffing firm reported that pay rates increased for staffing and professional positions. Non-wage labor costs were little changed.
Agriculture
Corn and soybean production in the District should exceed last year’s levels. Although much of the District recently weathered a dry spell, cool temperatures helped reduce the stress on crops. Nonetheless, crops in the northern parts of the District may not fully mature before the dates of normal first frosts. With national records expected for the corn and soybean crops, prices moved down from the prior reporting period. To avoid selling crops for lower prices than in recent years, farmers have explored options for storage and livestock feeding. Higher milk prices helped the livestock sector stay profitable even though hog and cattle prices slipped. Ethanol prices eased, but production remained profitable.