March 4, 2015
Growth in economic activity in the Seventh District remained moderate in January and early February, and contacts expected growth to continue at a similar pace over the next six to twelve months. Consumer spending and manufacturing production rose moderately, while business spending and construction and real estate activity increased modestly. Credit conditions improved on balance. Cost pressures were little changed, and price increases remained limited. Prices of most agricultural commodities declined.
Consumer Spending
Growth in consumer spending remained moderate in January and early February. Contacts reported that lower energy prices had a positive effect on retail sales, though not as much as they were hoping. Growth was robust for the general merchandise, clothing, and specialty gift sectors, but slower for food, beverages, furniture, and appliances. The pace of new light vehicle sales held steady, while sales of used vehicles increased. Auto dealers indicated that incentives were not as generous as during the previous reporting period, leading to less floor traffic. Dealers also noted that lower gasoline prices continued to shift the sales mix from cars to light trucks and SUVs.
Business Spending
Growth in business spending slowed to a modest pace in January and early February. Most manufacturers and retailers reported comfortable inventory levels. However, transportation disruptions at west coast ports related to the longshoremen labor contract negotiations delayed delivery of some retail items and led some manufacturers to hold higher levels of inventories as a precaution. In addition, some auto dealers reported that inventories were slightly elevated because of over-ordering in December. The pace of current capital spending slowed somewhat, though spending plans for the next six to twelve months continued to indicate steady growth. Outlays were again primarily for replacing industrial and IT equipment, though many contacts also reported spending for capacity expansion. The pace of hiring slowed, but contacts expect continued moderate employment growth in the next six to twelve months. A staffing firm reported demand was holding steady but that job placements were down because it had become increasing difficult to find workers to fill their customers' orders. Contacts again reported strong demand for skilled workers, particularly for those in professional and technical occupations and skilled manufacturing and building trades.
Construction and Real Estate
Construction and real estate activity increased modestly over the reporting period. Demand for residential construction was mostly unchanged, but with some additional growth in single-family building in urban markets. Home prices and residential rents both increased, while home sales held steady. Solid income growth and expanding credit availability for first-time homebuyers has led real estate contacts to revise up their sales forecasts for 2015. In addition, several contacts observed that markets in low-income areas are finally showing signs of improvement. Nonresidential construction grew moderately, driven primarily by demand for industrial buildings. Commercial real estate activity expanded broadly--vacancies declined, rents rose, and leasing of industrial buildings, office space, and retail space all increased.
Manufacturing
Manufacturing production continued to grow at a moderate pace in January and early February. Activity in the auto industry remained a source of strength for the District, with contacts citing the improving labor market and low gasoline prices as bolstering demand. Auto industry contacts expressed concern, however, that high capacity utilization rates are raising costs through the increased use of overtime and limited time for preventative maintenance. Demand for steel grew steadily. Weak demand abroad combined with the relative strength of the US economy continued to draw in imported steel and push down prices. Most specialty metals manufacturers reported steady gains in new orders and solid order books, though contacts supplying the oil and gas industry reported slowing demand. Contacts also noted that the strong dollar was hurting exports. Sales of heavy machinery and heavy trucks both picked up, and manufacturers of building materials expect steady growth in shipments for 2015.
Banking and Finance
Credit conditions improved on balance over the reporting period. Equity markets moved higher and volatility declined. In contrast, interest rate volatility ticked up. Business loan demand increased, driven by new equipment purchases and expansions of existing facilities. Credit line utilization by middle-market firms increased slightly and business banking contacts generally noted a better than expected start to the year. Consumer loan demand increased across multiple segments. Mortgage refinancings surged and new applications rose in response to lower mortgage rates. Demand for auto loans remained strong and growth in new credit card applications increased. One banking contact noted that downward pressure on auto loan rates was leading to increased competition for sub-prime borrowers.
Prices and Costs
Overall, cost pressures were little changed in January and early February. Energy and steel prices decreased, while cement and drywall prices rose. Retail food prices generally declined, with the exception of meat and dairy prices. The transportation delays at west coast ports pushed up shipping costs as some contacts were forced to use alternate, more expensive supply routes. More contacts said they increased prices than during the last reporting period. Of those reporting price increases, most cited increased demand or pricing power as the reason for the increase. Wage and non-wage costs changed little on balanced. Wage pressures continued to be more pronounced for skilled workers than for unskilled workers. However, a staffing firm reported some willingness from its clients to raise pay rates for unskilled workers in order to reduce turnover.
Agriculture
Corn, soybean, and wheat prices were lower than during the previous reporting period, although they recovered some in recent weeks. Apart from fuel costs, input costs for spring planting have remained steady. Some farmers purchased lower quality seeds than last year to reduce their planting costs. Even though higher relative input costs were likely to shift acres toward soybean production and away from corn, there were reports that farmers were reluctant to plan major changes in crop rotations. Contacts also noted plans to return some marginal ground to pasture or hay production, instead of planting corn or soybeans this spring. Hog production was strong, with no major issues from diseases, which had cut production last year. This pushed down pork prices substantially, and consumers began substituting from beef to pork. However, somewhat lower cattle prices did not translate into lower retail prices for beef. Milk prices declined amid rising stocks of dairy products and stalled exports. The slowdowns at ports along the west coast hurt exports of many agricultural products.