April 15, 2015
On balance, the economy in the Fourth District expanded at a slight pace during the past six weeks. Activity at manufacturing plants was mixed. In residential real estate markets, unit volumes and single-family home prices rose; nonresidential construction fell below levels seen during the prior few months. Retailers and auto dealers reported marginally higher sales than a year ago. Spending for new drilling in the Marcellus and Utica Shales has been significantly curtailed. Freight volumes were lower due primarily to the effects of lingering cold weather and West Coast labor disputes. The demand for business credit continued to slowly move higher, while demand for consumer credit softened.
Payrolls were little changed on net, although construction contractors expect brisk hiring in the second quarter. Bankers are expanding payrolls in the areas of risk management and commercial lending. Staffing firms reported a pick-up in the number of job openings and placements in the health care, IT, and manufacturing industries. Upward pressure on wages is limited to experienced and technically skilled personnel in construction and freight hauling. Overall, input and finished goods prices were steady. We heard reports about declines in prices for agricultural commodities, oil, and steel, and rising prices for some building materials.
Manufacturing
Factory contacts reported mixed activity during the past six weeks. Suppliers to the aerospace, motor vehicle, and construction industries continue to see strong or strengthening demand. Some producers of consumer products reported that new orders are slowly rising. Manufacturers experiencing weakening demand attributed it to a retrenchment in the oil and gas industry and a strengthening dollar. On balance, our contacts are less bullish about near-term business prospects compared to earlier in the first quarter. Factors tempering growth expectations include exposure to foreign markets and uncertainty about the direction of oil and gas prices. Reports from steel producers indicate that the industry's downturn may be waning. One contact noted that demand from the construction sector is starting to pick up. Another said that demand for tubular products from oil and gas customers is still particularly weak, although inventory is slowly being absorbed. Price pressures affecting steel that are associated with the downturn in oil prices and the rising dollar have been significant, but some contacts believe the pressures are close to bottoming out. Year-to-date auto production at District assembly plants fell almost 7 percent.
Capital spending remained on plan for the most part. Deviations were in response to changes in customer demand--higher or lower. Monies were allocated primarily for maintenance and new equipment. Aerospace suppliers are increasing their R&D budgets. Raw material prices declined, particularly for agricultural commodities, oil, petroleum-based products, and steel. Producers were reluctant to pass through lower input prices to customers. On balance, manufacturing payrolls were steady.
Real Estate and Construction
Year-to-date sales through February of new and existing single-family homes rose 3 percent compared to the same time period in 2014. The average sales price was about 6 percent higher. Construction starts were down slightly. Homebuilders reported that business traditionally begins to pick up late in the first quarter, and March sales matched their expectations. New-home contracts were concentrated in the move-up price-point categories; prices increased recently due to higher land and labor costs and lower existing-home inventory. Several builders commented that their spec-home inventory is at a low level, which they attributed to capacity issues and difficulty in obtaining construction financing. Homebuilders remain optimistic. They believe the potential for higher interest rates might serve as an impetus for potential buyers to sign a purchase contract.
Several general contractors reported a slowing in nonresidential construction due to lingering cold weather. Nonetheless, inquiries have been coming in at a steady pace, and backlogs were characterized as normal. Demand is greatest in commercial building, healthcare, higher education, and public infrastructure. Credit is more readily available to successful developers than it has been over the past few years. Capital spending by general contractors was mainly for technology, new equipment, and maintenance. Our contacts, while optimistic about short-term growth prospects, are concerned about potential labor shortages.
Materials prices were stable apart from increases for concrete, drywall, and finished wood products. Diesel fuel and structural steel prices were lower. Payroll growth remained flat due to the harsh winter weather. As the spring season progresses, general contractors expect a period of fairly robust hiring, including craft workers, project engineers, and managers. Wage pressure is building across the industry. Subcontractors are busy, and they are pushing through rate increases to cover rising costs, including for labor, and to widen margins.
Consumer Spending
On net, retail sales were flat during the past six weeks when compared to the post-holiday period. Same-store revenues were marginally better than a year ago, which contacts attributed to the winter weather being less harsh this year. Two retail chains reported that their revenues were adversely affected by labor disputes at California ports. Product lines in highest demand included women's apparel and health and wellness products. Contacts are hopeful that lower gasoline prices will have a greater impact on consumer spending, which would help boost second-quarter sales to levels above those in 2014. Vendor and shelf prices were steady. Beef prices have fallen from historic highs but remain elevated. Retailer's capital spending was mainly for updating existing stores, and their payrolls were flat.
Year-to-date new motor vehicle sales through February were slightly higher than those of a year ago. Sales began to pick up in March with the warmer weather. One contact reported that consumer preferences have been shifting from cars to SUVs and trucks, which is boosting transaction prices for dealers and margins for manufacturers. Looking at 2015, dealers expect sales will remain strong, but they believe that total domestic sales will flatten out at 2014 levels. New inventory is slightly elevated due to February's lower unit volume. Used vehicle transactions showed a modest increase over last year. Dealers are starting to hire seasonal sales personnel, while service departments are feeling wage pressures due to a lack of qualified mechanics.
Banking
Bankers reported that their business-loan-portfolio growth was flat to moderate. Any easing in demand was attributed to seasonal factors and the weather. Credit applications were strongest for C&I loans and multifamily-construction financing. Consumer credit demand softened. A regional banker reported that he has not seen a pass through of savings due to lower gasoline prices to higher consumer spending or loan applications. However, his core deposits grew about 8 percent year-over-year across a broad set of consumer accounts. Direct auto lending has softened at some banks, as captive-finance operations are becoming very aggressive in financing new car purchases. Several bankers reported flat to declining balances on home equity products. Many of our contacts noted a slowing in their residential mortgage business, which was attributed to the weather and a dwindling inventory of homes. Refinancing activity was down. Delinquency rates held steady, at very low levels, and bankers expect little change going forward. No changes were made to loan-application standards. Capital spending by banks was primarily for technology, including cyber security, and branch maintenance. Payrolls expanded, on net. Hiring was for jobs in commercial lending and risk management.
Energy
Little change in District coal production was reported. Spot prices for metallurgical and steam coal declined since our last report. Shale gas activity was mixed. While drilling has been curtailed--the number of drilling rigs across the District declined 25 percent since mid-December--production remains at high levels. One industry executive reported that even with the current low prices for oil and natural gas, there is still a lot of industry optimism surrounding the Marcellus and Utica Shales. Capital spending has been pulled back, especially by upstream companies. One contact reported that his firm has cut its capital budget by 40 percent year-over-year. Pricing for materials and equipment was flat to down. Layoffs by oil and gas companies and their supplier industries were reported.
Freight Transportation
Freight volumes declined since our last report. Contributing factors include the harsh winter weather that lingered into early March and fallout from the labor dispute lessening shipments from the California ports. Our contacts reported that with improving weather conditions, volumes are slowly returning to the high levels seen late last year, though the effects of the labor dispute are expected to persist for several quarters. Little change in costs was noted other than the downward trend for diesel fuel and petroleum products. In a few cases, fuel surcharges were lowered. A strong pricing environment was attributed primarily to capacity issues. Capital spending in 2015 is projected to be strong. Several carriers decided to order replacement equipment earlier in the year than originally anticipated. Some reports indicated that monies are being allocated for footprint expansion--terminals, aftermarket parts production, and service facilities. Hiring is for replacement and to add capacity. Difficulty in attracting and retaining drivers and maintenance technicians is putting significant upward pressure on wages for both job categories.