June 1, 2016
Aggregate business activity in the Fourth District grew at a modest pace since our last report. Manufacturing output increased on balance, albeit at a slow rate. The housing market improved, with higher unit sales and higher prices. Nonresidential contractors reported that construction pipelines are strong and backlogs continue to grow. Retailers experienced disappointing sales during March and into April. Motor vehicle sales moved slightly higher. Commercial and retail credit conditions expanded slowly. Oil and gas exploration remains depressed, while investment in pipeline projects moved forward. Freight volume trended lower.
Payrolls were little changed on balance during the past six weeks. Job increases in construction and banking were offset by losses in manufacturing and freight hauling. Wage pressure was most evident in high-skilled jobs across industries and in the retail sector. Staffing firms noted little change in the number of job openings and placements. Temporary job openings are reportedly increasing. Other than small increases for select steel and petroleum-based products, input and finished-goods prices were steady.
Manufacturing
Reports indicated a modest increase in manufacturing output on net. Activity for suppliers to the motor vehicle, aerospace, commercial construction, and housing industries remains elevated. A moderation in the appreciation of the US dollar was cited as contributing to an uptick in demand. Key factors tempering output growth include a depressed energy sector and slow growth in business fixed investment. Contacts also noted that uncertainty about the general economy motivated producers and their customers to keep inventories at low levels. Year-to-date production through April at District auto assembly plants declined 1.4 percent when compared to that of the same time period during 2015. Although little change in demand was cited, steel producers were encouraged by an increase in domestic steel prices since the beginning of the year and a slight downturn in imports. One steel executive reported that his capacity utilization rate rose 7 percentage points since the start of the year. The outlook, according to our contacts, continues to improve. Sentiment weighs toward an expansion in the coming months.
A modest increase in capital budgets was reported over the period. While allocations are primarily for new equipment and maintenance, a growing number of contacts cite increased spending for R&D and footprint expansion. The latter was attributed to asset purchases from energy and steel firms that are downsizing. On balance, raw-material prices drifted higher over the period, a circumstance which was primarily attributed to higher steel prices. That said, reports indicated declining prices for other commodities--agricultural and metals. Finished-goods prices moved slightly higher in response to rising input costs. Manufacturing payrolls continued to shrink across job categories. Firms cutting employment cited a need to reduce costs because of weakened demand. A few manufacturers noted merit increases of 3 percent to 4 percent. Otherwise, wages held steady.
Real Estate and Construction
Year-to-date sales through March of new and existing single-family homes increased by more than 8 percent compared to those of a year earlier. The average sales price increased 3 percent. Builders and real estate agents attributed robust sales to low interest rates and an improvement in consumer confidence. Low inventories of existing homes are contributing to rising prices and are providing the impetus for potential buyers to consider building a home. Estimates of single-family construction starts rose moderately over the period. New-home contracts remain concentrated in the move-up price point categories, though reports indicated rising activity across lower price points. New-home list prices held steady over the period. Homebuilders and real estate agents expect stability or further improvement in housing markets during the upcoming months.
Nonresidential contractors said that business conditions remain favorable. They reported an increase in the number of publicly funded and industrial projects. The former was attributed to last December's passage of the congressional five-year highway bill. One builder noted that he has seen a significant increase in demand for spec-industrial construction. General contractors continue to increase their billing rates, with little pushback, in order to boost margins and cover higher labor costs. In general, construction project pipelines are strong, and backlogs continue to build. Survey respondents expect revenues for all of 2016 to be on par with or higher than those of a year ago.
General contractors reported little change in building materials prices apart from small increases for steel and petroleum-based products. Construction payrolls continued to expand, but the pace of growth has slowed over the period. Although new positions are being created, a majority of new hires are for replacement or seasonal help. The industry continues to experience wage pressure, especially for attracting and retaining high-skilled, high-performing employees. Subcontractors remain very busy. They are challenged by labor shortages and, as a result, many are selective when bidding. In order to cover rising labor costs and to widen margins, many subcontractors are increasing their rates.
Consumer Spending
Retailers reported disappointing same-store sales during the post-Easter period when compared to that of the same time period a year ago. Apparel was soft apart from activewear, and reports on home furnishings were mixed. The only segment reporting strong activity was restaurants. Contacts said that market conditions are very competitive at this time as consumer shopping preferences continue to shift from brick-and-mortar locations to Internet and mobile services. Consolidation continues to be prevalent across the retail sector. Within commercial centers, small local businesses are either becoming part of a franchise or exiting the market. Little change in retail conditions is expected in the upcoming months. Vendor and shelf prices were fairly stable. Apparel retailers are pushing back on their suppliers for cost reductions as a means of stemming margin declines. Changes in staffing were limited to store openings and closings. There are growing concerns about the implications of minimum wage increases on retailers' ability to staff stores.
Year-to-date sales through April of new motor vehicles rose 1 percent District-wide compared to those of a year ago. Purchases of light trucks and SUVs continue to dominate the market. For luxury brands, weakening demand that began early in 2016 continued into April. Although new-vehicle sales are expected to remain stable at high levels this year, dealers reported that fleet sales are rising, while retail transactions have flat lined or declined. Transaction prices were stable during the past couple of months, and leasing remains very popular. Dealer payrolls increased along seasonal trends.
Banking
Reports showed a modest expansion in business and consumer credit conditions, on net, over the period. On the commercial side, CRE, multifamily CRE, and C&I lending increased. Banks experiencing a decline in credit demand noted that uncertainty about the economy is driving down business investment in plant expansion and equipment. Demand from the energy sector was particularly weak. In retail banking, reports indicated that consumers are becoming more confident. Bankers saw a strong seasonal pickup in mortgage activity and higher demand for auto and credit card loans. Little change was reported in loan-application standards and delinquencies. Any improvement in delinquency rates was more prevalent on the consumer side. Core deposit balances in consumer, business, and public fund accounts increased over the period. Capital budgets expanded slightly. Spending was primarily for technology, including cyber-security, mobile, and regulatory compliance applications and for maintenance projects. Payrolls showed a moderate increase. Newly created jobs are mainly in commercial lending, regulatory compliance, cyber-security, and IT. In order to retain employees in these competitive job categories, above-average salary increases are being awarded on a more frequent basis.
Energy
The number of rigs operating in Marcellus and Utica Shales was little changed over this reporting period after declining precipitously over the past year. Nonetheless, the number of producing wells and regional natural gas output remain at historic highs. Demand for natural gas is rising as gas displaces coal as the fuel of choice. Investment in pipeline projects moved forward. Some of our contacts believe that wellhead prices may have bottomed out and those prices may start to increase slowly during the fourth quarter. Little hiring is occurring in the oil and gas industry at this time, and wage increases are sluggish. Even if business conditions stabilize, or begin to improve, a quick turnaround in this labor situation is not anticipated.
Freight Transportation
Freight volume contracted over the period, as well as on a year-over-year basis. Our contacts primarily attributed this situation to a general slowdown in economic activity leading to higher inventories across supply chains. Demand from the energy sector was cited as being particularly weak. Segments experiencing strong volume were automotive and building materials. There were many reports of overcapacity in the system, and it is forcing some haulers to lower shipping rates and to reduce capital budgets, especially for equipment purchases. One contact noted that the number of active railroad cars declined 35 percent compared to that of a year ago. The outlook by contacts is becoming more cautious, and they expect little change in volume during the upcoming months. Freight payrolls drifted lower. A majority of contacts reported cutting jobs in select categories based on changes in service-level demand. Attracting qualified replacement drivers and maintenance technicians remains difficult.