April 15, 2015
Economic activity in the Twelfth District continued to improve moderately during the reporting period of mid-February through the end of March. Overall price inflation was slight, while wage inflation was moderate. Retail sales and demand for business and consumer services increased moderately. Overall manufacturing activity improved modestly on net. The pace of output in the District's agricultural sector was unchanged. Real estate activity advanced, especially in the commercial real estate sector. Lending activity increased moderately.
Prices and Wages
Overall price inflation was slight during the reporting period. Declines in oil prices contributed to lower ocean freight costs and tempered increases in overall costs of construction materials in some areas. Industrial metals prices declined slightly. Competition from online shopping continued to pressure overall in-store grocery and other retail prices. However, beef prices continued to climb, and contacts expect further increases. Competitive pressures and technological advances contributed to price declines across the technology sector. Contacts in the health care industry reported that significant losses by insurers in the wake of health reform generated downward pressure on the price of health care services. Contacts expect significant rate increases for insurance on the health exchange in the fall, as insurance companies attempt to recoup previous losses.
In general, wages increased at a moderate pace during the reporting period. Contacts noted some seepage of wage pressures that had been limited to higher end jobs in urban areas into middle tier jobs and smaller towns. A metals manufacturer increased starting and lower-end wages recently. Some contacts expressed concern that many small businesses in rural areas will be unable to sustain proposed increases in the minimum wage in their state. Reports of increases in wages for skilled construction workers were widespread across the District. Wages for software developers and specialized workers in aerospace and healthcare continued to increase.
Manufacturing
District manufacturing activity improved modestly on net. Contacts observed robust production of commercial aircraft and electronic components. Reports pointed to persistent revenue growth in the biotechnology and pharmaceutical manufacturing sectors. Demand for aluminum and wood products weakened. Production of motor vehicles has slowed this year, perhaps due to overproduction late last year. A weak outlook for spending by the Department of Defense contributed to softness in new orders and diminished capacity utilization in the defense aerospace sector. Capacity utilization in the steel manufacturing sector declined below levels observed in 2014 and early 2015. However, demand for steel products used in construction, in particular, has been largely stable in the Twelfth District. Continued soft demand for equipment used in the mining and the energy sectors held back orders for recycled steel and metals.
Agriculture and Resource-Related Industries
The pace of output in the District's agricultural sector was unchanged during the reporting period. Drought conditions continued to create challenges for many farmers, but those with adequate access to water benefited from favorable weather conditions. Reduced water availability affected plantings of annual crops, including rice, corn, and cotton. The need to purchase water or drill for water put upward pressure on the cost of production. Some farmers' outlooks deteriorated, given weakness in certain drought-related metrics, such as snow pack levels, recorded at only 8% of their historical average. Reports indicated that exports have increased somewhat since the labor disputes at West Coast ports were resolved.
Retail and Services
Overall retail sales activity grew moderately during the reporting period. Auto sales were healthy. Demand for mobile devices grew robustly, but sales of personal computers declined. Consumers exhibited strong demand for entertainment and gaming products. After a very good holiday shopping season, some areas saw continued momentum in the first quarter. Other areas with strong holiday sales reported unexpectedly mixed activity recently. One contact noted that tax preparers in their area are finding that a large proportion of filers projected lower than actual incomes and are facing significant repayments of excess health subsidies.
Demand for business and consumer services grew moderately during the reporting period. Spending at restaurants increased, boosted by low gas prices. Contacts in the technology industry expect business spending on software to accelerate in 2015, especially in the security, cloud computing, and analytics segments. In areas with active residential construction, demand for engineering and architectural services was strong, with larger backlogs than at any time since before the recession.
Real Estate and Construction
Real estate activity advanced during the reporting period. Multi-family residential construction activity is robust in many areas, although a shortage of skilled labor in selected regions is damping the pace slightly. Several contacts reported that although the pace of single-family construction remained slower than that of multi-family, single-family construction picked up. Low inventories of single-family homes limited the pace of sales in some areas. A few contacts also cited stringent mortgage qualification requirements as an impediment to home purchases. Nevertheless, the pace of sales of single-family homes increased notably in some areas, with multiple offers and few days on the market. Many contacts reported heavy commercial construction activity. Commercial real estate vacancy rates declined, and rents increased, driven in part by strong demand from the technology and healthcare sectors.
Financial Institutions
Lending activity in the District increased moderately during the reporting period. Demand for commercial real estate and business loans increased. Some banks are building a sizable pipeline of pending loans and have increased interest rates a bit in order to bring demand more in line with supply. Selected areas with relatively tight labor markets and increasing wages showed strong demand for mortgages. However, with the exception of auto loans, demand for consumer loans remained low. Deposits continued to grow somewhat, despite very low interest rates. Although competition for creditworthy borrowers overall remained vigorous, some contacts reported that national and large regional banks seem to be shifting away from small and medium customers and concentrating more on large customers. Venture capital investments increased during the reporting period, but private equity financings declined.