July 13, 2016
Business contacts in the Fourth District reported a steady level of activity over the period, with little change in the pace of growth. Reports by industry were mixed. Production at manufacturing plants was stable, though steel producers were encouraged by a boost in demand and higher prices. The housing market continued to grow at a steady pace, with higher unit sales and higher prices. Commercial builders reported that construction pipelines are strong, and they expect revenues to grow for the next couple of years. Retailers experienced disappointing same-store sales. The pace of growth in retail car sales has slowed. Commercial and retail credit conditions expanded slowly. Oil and gas exploration remains depressed, while investment in pipeline and midstream projects moved forward. Freight volume trended lower.
Payrolls were little changed during the past six weeks except in the construction sector, which saw strong growth. Wage pressures were most evident in high-skilled and entry-level jobs in the banking, construction, and retail sectors. Staffing firms noted an increase in the number of job openings, especially for temporary positions. However, job placements lagged openings. Other than small increases for select petroleum-based and steel products and declines in agricultural products, input and finished-goods prices were steady.
Manufacturing
Manufacturing output was little changed over the period. The most often cited factor tempering output growth is weakness in the global economy. Downward pressure attributable to the strong dollar is starting to ease. Activity for suppliers to the motor vehicle, aerospace, commercial construction, and housing industries remains elevated. We heard reports about growing opportunities for manufacturers of LED lighting products and retail supply chain equipment. Oil price increases are providing some encouragement to the energy-sector supply chain. Year-to-date production through May at District auto assembly plants declined 4 percent when compared to that of the same time period during 2015, but the industry remains strong. Although steel producers are encouraged by the increase in domestic steel prices and a rise in demand, some contacts believe that the industry is at the peak of a mini cycle that will correct itself during the back end of the year. The more optimistic outlook that was expressed by many manufacturers during the past few cycles was tempered. A majority now expect that business conditions will be little changed during the third quarter.
Capital allocations are primarily for maintenance projects and equipment. However, a growing number of contacts cited increased spending for product development, while the number planning a footprint expansion has fallen sharply. On balance, raw-materials 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. Payrolls were little changed across job categories. Several manufacturers noted annual cost-of-living increases. Otherwise, wages were steady.
Real Estate and Construction
Year-to-date sales through April of new and existing single-family homes increased 9 percent compared to those of a year earlier. The average sales price rose almost 5 percent. Builders and real estate agents reported that the low interest rate environment is a primary factor driving sales at this time. Year-to-date estimates of single-family construction starts were significantly higher across all regions of the District compared to those of a year ago. New-home contracts remain concentrated in the move-up and high-end price point categories. New-home list prices rose about 2 percent on average over the period to cover higher labor costs and to increase margins. Homebuilders' capital budgets rose slightly; allocations are mainly for land and equipment purchases. Some contacts expressed concern about a slowing in the sales of new homes during the fourth quarter that goes beyond normal seasonal variation.
In general, commercial contractors reported favorable business conditions. Revenues and backlogs are typically higher than those of a year ago. Several builders reported capacity issues that are resulting in pushing out a project's construction cycle. Construction demand is broad based. Contractors in the eastern part of the District are encouraged by the decision to move forward with constructing an ethane cracker and by ongoing investment in oil and gas pipeline and midstream projects. General contractors continue to increase their billing rates with little pushback in order to boost margins and cover higher labor costs. Construction project pipelines are strong, and contractors expect revenues to grow for the next couple of years. It appears that customers are not allowing a potential rise in interest rates or presidential election politics to interfere with their building plans.
Home builders and commercial contractors reported a modest increase in building materials prices, especially for steel, concrete, and drywall. Payrolls expanded at a robust pace over the period. New positions being created are primarily in the skilled trades and to a lesser extent in sales. The industry is experiencing 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, 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 in the weeks prior to the Memorial Day weekend when compared to those of the same time period a year ago. Although apparel remains challenged as a segment, sales of on-trend fashion items are doing well. Furniture sales were characterized as strong. One major chain reported that its digital sales outpaced its brick-and-mortar transactions during the first quarter. A shopping center developer commented that brick-and-mortar retailing, including high-end stores, continues to contract as consumer shopping preferences shift to the Internet and mobile devices. Retailers expect total revenues to rise in the near to medium terms, as the benefits of capital investments targeted at restructuring and adapting to the new retail market-place are realized. Vendor prices were fairly stable other than declines for food. Several retailers and restaurateurs reported either raising prices or reducing promotions as a means of widening margins. Changes in staffing were limited to store openings and closings. There are growing concerns about how the implications of minimum wage increases and the new overtime rule will affect retailers' ability to staff stores.
Year-to-date sales through May 2016 of new motor vehicles were on par with those of a year ago. Original equipment manufacturer incentives continue to rise and are now reportedly above 10 percent, but average transaction prices are also rising because of the ongoing shift in consumer preferences from cars to light trucks (including SUVs). New-vehicle unit volume is expected to remain at high levels this year, though dealers anticipate retail transactions to decline and fleet sales to rise. Consumers are seeing increasing value in the purchase of used cars. The large number of leased vehicles being turned in is putting downward pressure on their resale prices. Year-to-date sales of used vehicles rose almost 5 percent compared to those of a year ago. Dealer payrolls increased along seasonal trends.
Banking
Bankers were generally satisfied with their commercial and retail credit portfolios. Growth was characterized as steady overall, albeit at a slow pace. On the commercial side, loan demand from business services and healthcare providers has increased. C&I lending was slower than desired: Customers reportedly have confidence in the sustainability of their own businesses, but they have less confidence in the overall economy. In the CRE segment, financing remains competitive as developers are turning to alternative lenders such as pension funds or other equity partners for long term financing. Reports from retail banking indicated a seasonal pickup for loans to purchase recreational vehicles. Home equity products remain in high demand, while auto lending has slowed. Little change was reported in loan-application standards and delinquencies. Core deposit balances in consumer and business accounts increased over the period; however, the pace of growth has slowed. Banks' capital budgets expanded slightly, with spending allocated primarily for technology. Payrolls were stable on balance. Newly created jobs in commercial lending, regulatory compliance, and risk management were offset by jobs lost to cost-cutting measures and attrition. Wage pressures are being felt in select competitive job categories and at the entry level.
Energy
The number of rigs operating in the Marcellus and Utica Shales was little changed during this reporting period after declining precipitously during the past year. Nonetheless, the number of producing wells and regional natural gas output both remain at historic highs. Several contacts expressed the sentiment that the oil and gas industry may have reached the bottom of the current cycle, and they are hopeful that the industry will begin turning around late this year. Wellhead prices rose slightly. Investment in pipeline and midstream projects moved forward. Little hiring is occurring in the oil and gas industry at this time, and wage increases are sluggish.
Freight Transportation
Freight volume contracted over the period and on a year-over-year basis. Our contacts attributed this situation to a slowdown in economic activity, especially in the industrial sector, and to rapid changes in retail distribution. Weakness was seen in energy, fabricated metal products, machinery, and food products. Segments experiencing strong volume were automotive and building materials and furnishings. We heard reports about overcapacity in the system, and this overcapacity is forcing some haulers to lower shipping rates and to reduce capital budgets. One contact noted that most locomotives scheduled for delivery this year will not be used, but kept in storage. The number of parked locomotives is reportedly the same as in 2008. The outlook by contacts is cautious, and they expect little change in volume on balance during the upcoming months. Hiring is limited to replacement and some seasonal staffing.