April 15, 2015
Growth in economic activity in the Seventh District remained moderate in March, and contacts expected growth to continue at a similar pace over the next six to twelve months. Consumer spending, business spending, and manufacturing production all grew moderately, while construction and real estate activity increased modestly. Credit conditions improved some. Cost pressures were generally little changed, although there were declines in some nonfarm raw materials prices. Prices of most agricultural commodities also fell.
Consumer Spending
Growth in consumer spending remained moderate in March. Retail contacts reported slower spending early in the reporting period due in part to unseasonably cold weather, but spending recovered by the end of March. Non-auto retail sales increased modestly, with stronger growth in the home improvement, household goods and appliances, recreational equipment, sporting goods, and specialty gift sectors, and slower growth in the apparel and food and beverage sectors. In contrast, new and used vehicle sales increased substantially. Lower gas prices continued to promote the shift from cars to light trucks and SUVs. Contacts also noted continued strength in demand for recreational vehicles.
Business Spending
Growth in business spending picked up to a moderate pace. Most manufacturers and retailers continued to report comfortable inventory levels. Exceptions included steel service center inventories, which one contact noted were "bursting at the seams" after a surge in imports at the end of last year, and some auto dealers, who reported lean light truck inventories because of greater-than-expected demand. The pace of current capital spending picked up somewhat and plans for the next six to twelve months continued to indicate steady growth in these expenditures. Outlays were again primarily for replacing industrial and IT equipment, though many contacts also reported spending for capacity expansion. Employment grew at a moderate pace and contacts expect this pace to continue through the rest of the year. A staffing firm reported steady demand for its services. In contrast, some manufacturers facing weaker demand reported cutting back on hours. Contacts continued to indicate that demand was strongest 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 in March. Demand for residential construction grew slightly, with contacts reporting some new development in suburban areas. Sales of single-family homes also picked up, and contacts expected that buyer demand would continue to improve throughout the year. Home prices increased, residential rents held steady, and housing inventories remained near historic lows, particularly for the bottom end of the market. Contacts noted continued improvement in markets in low-income communities as real estate valuations and retail activity both increased. Nonresidential construction activity ticked up, driven in large part by demand for industrial buildings. Low interest rates supported a modest expansion in commercial real estate activity. Leasing of industrial buildings, office space, and retail space all increased and rents rose.
Manufacturing
Manufacturing production continued to grow at a moderate pace in March. The auto industry remained a source of strength for the District, with contacts again citing improvements in the labor market and low gasoline prices as bolstering demand. Growth in the aerospace industry was also strong. Capacity utilization in the steel industry decreased, as elevated service center inventories weighed on steel production. Most specialty metals manufacturers reported gains in new orders and solid order books, with the exception of those supplying the oil and gas industry. Contacts also noted that the strong dollar was increasing import competition. Sales of heavy trucks and machinery both grew slowly, with demand for agricultural and mining equipment remaining weak. Manufacturers of construction industry equipment and supplies expect steady growth in 2015.
Banking and Finance
Credit conditions improved some over the reporting period. Financial market volatility stabilized and credit spreads declined slightly. Banking contacts noted an increase in business loan demand and an uptick in credit line utilization, especially from middle market and large corporate firms. Loans for owner-occupied real estate and equipment financing were significant sources of growth. Consumer loan demand also grew steadily. Low rates continued to spur mortgage activity, particularly for refinancing. Auto loan demand remained strong, with contacts noting continued strong competition for prime and super prime auto loans.
Prices and Costs
Overall, cost pressures were little changed in March. Energy prices were up slightly, but remained low. Steel and other primary metals prices declined, but contacts did not expect much further change in prices one way or the other in the near term. Some manufacturers reported that the decline in input prices created downward pressure on their prices. Retail prices were little changed. Most food prices declined slightly, with the exception of meat and dairy. Promotional activity at non-auto retailers increased slightly, while auto dealer incentives were little changed. Wage pressures increased slightly, while non-wage costs declined a bit as lower raw material costs outweighed increases in the cost of benefits. Wage pressures continued to be more pronounced for skilled workers than for unskilled workers, although there were more reports of wage increases for unskilled workers than in the previous reporting period.
Agriculture
High stocks of corn and soybeans and slower export growth put downward pressure on most crop prices. Stockpiles of crops from last year's good harvest started moving for sale amid concern about low future prices. Wet fields in some areas and a cold winter have prevented most fieldwork from beginning. Still, generally favorable conditions should allow rapid planting once temperatures rise. Although higher input costs were encouraging farmers to shift some acreage from corn to soybeans, corn still looks profitable in some parts of the District, and many farmers continued to prefer their normal crop rotations. Higher output of milk has put downward pressure on prices, leading many farmers to lock them in anticipation of possible further declines. Hog prices fell because so many were brought to market, while cattle prices were up as herds are being rebuilt.