January 18, 2017
Summary of Economic Activity
Growth in economic activity in the Seventh District continued at a modest pace in late November and December, though contacts expected it to move up to a moderate pace over the next six to twelve months. While manufacturing production grew at a robust rate and business spending grew at a moderate rate, consumer spending increased modestly and construction and real estate activity edged up. Financial conditions improved some, prices increased modestly, and farm incomes were little changed.
Employment and Wages
Employment growth slowed to a modest rate over the reporting period, though contacts expected growth to pick up to a moderate rate over the next six to twelve months. Contacts continued to indicate that the labor market is tight and that they are experiencing more difficulty filling positions at all skill levels. One manufacturing contact reported such difficulty finding high-skilled workers that they had traded in expensive, sophisticated machinery for cheaper, less sophisticated equipment that was easier to operate. A staffing firm reported no change in billable hours and ongoing difficulty filling orders at the wages employers were willing to pay. That said, overall, wage growth picked up to a moderate pace. Some contacts reported larger wage increases for high-skilled occupations, while a number of contacts indicated that they raised wages equally for all employees. Many contacts also reported rising healthcare costs.
Prices
Prices again rose modestly in late November and December. Retail prices increased only slightly. Contacts reported rallies in energy and metals prices and that these had led to higher steel prices. Higher transportation costs continued to weigh on agricultural returns, particularly for milk producers.
Consumer Spending
Growth in consumer spending picked up to a modest pace over the reporting period, and most contacts expected that pace to continue in 2017. Contacts reported stronger sales in the food and beverage, general merchandise, hardware, and personal services sectors. Sales of new light vehicles strengthened further, supported in part by even more aggressive incentives. Many dealers reported record sales for the calendar year and expected similar sales levels in 2017. Used light vehicles sales increased as well, as the high number of new vehicles coming off lease helped push down prices.
Business Spending
Growth in business spending remained at a moderate pace overall in late November and December. Retailers largely indicated that inventories were at comfortable levels, though many auto dealers reported that inventories were uncomfortably high in spite of strong sales. Manufacturing inventories were generally at desired levels, though steel service center inventories were below historical norms. Current capital expenditures grew at a moderate pace and contacts expected that pace to continue over the next six to twelve months. Outlays were primarily for replacing industrial and IT equipment. Shipping volumes increased slightly.
Construction and Real Estate
Construction and real estate activity edged up over the reporting period. Residential construction grew slightly across home types and locations. Home sales and prices increased slightly overall, though growth varied by price range: demand for homes under $250,000 grew strongly, while demand for homes between $250,000 and $500,000 was flat, and demand for homes over $500,000 was up slightly. Nonresidential construction increased modestly on balance. While one contact reported having the largest backlog of projects in years, another reported that demand for more space from automotive suppliers had eased. Commercial real estate activity increased slightly in both the for-sale and for-lease segments. Commercial rents and availability of sublease space were little changed, and commercial vacancy rates decreased slightly.
Manufacturing
Growth in manufacturing production picked up to a robust pace in late November and December. Growth continued to be strong in autos and aerospace (though it slowed a bit in autos) and was moderate overall among other industries. Demand for steel increased some, but remained modest. Contacts expected production of steel to pick up in 2017, driven partly by a projected recovery in oil and gas demand. Heavy machinery manufacturers reported growth in sales, reflecting both strengthening end user demand and a smaller-than-expected cutback in dealers' inventories. A number of specialty metals manufacturers indicated that order book growth was stronger than expected at the end of the year. Manufacturers of construction materials again reported slow, but steady, increases in shipments, in line with the modest pace of improvement in construction.
Banking and Finance
Financial conditions improved on balance over the reporting period. Financial market participants reported broad-based growth in equity prices and low volatility. Loan demand from middle-market businesses increased slightly overall, with improvements spread widely across sectors. Credit quality and standards were little changed, though one contact reported that standards were loosening because of competitive pressure. Consumer loan demand was little changed. Residential mortgage activity increased slightly, and with rising rates, there was a shift in the mix from refinancing to new originations. Contacts reported a slight decline in auto loan demand and that auto loan quality was unchanged.
Agriculture
Farm incomes were little changed in late November and December. Corn prices moved higher and sales picked up some, but inventories remained high following the record harvest. Soybean sales were up moderately while soybean exports remained strong. Contacts reported modest declines in input costs, as fertilizer and seed prices fell. Farmland rents were also somewhat lower, but had not fallen as much as land values. A rally in cattle prices, as well as increases in dairy, egg, and hog prices, provided some relief for stressed livestock operations.