January 18, 2017
Summary of Economic Activity
Economic activity grew slightly on balance across the Fourth District since our last report. Labor markets continue to show signs of tightening. Upward pressure on selling prices increased. Retailers reported disappointing same-store sales through the early part of the holiday shopping season, while motor vehicle unit sales increased. Production at manufacturing plants was stable. The housing market improved, with higher unit sales and higher prices. Commercial builders reported some pull back in inquiries and backlogs. Reports indicated a healthy increase in upstream shale gas activity. Coal production rose. Freight volume expanded over the period, but volume was flat compared to that of the same time period a year ago.
Employment and Wages
Payrolls were little changed on balance since our last report. Job gains in banking were offset by losses in construction and freight hauling. Staffing firms reported a slight improvement in the number of job openings and placements; healthcare professionals were in highest demand. Job losses in manufacturing since late summer have been stemmed. While not creating new positions, manufacturers are replacing employees who leave voluntarily. Homebuilders and commercial contractors reported temporary seasonal layoffs. The construction industry continues to experience some wage pressure, especially from high-skilled workers. Staffing levels at banks increased on net. Many bankers noted wage pressure at the entry level and for high-skilled jobs, citing competition from within and outside their industry.
Prices
Upward pressure on selling prices increased over the period. Manufacturers reported widespread increases in finished goods prices in response to rising raw-material costs, primarily for steel. Increasing wellhead prices for natural gas were attributed to the cold weather and storage withdrawals. Coal prices rose in response to drawdowns of domestic power plant coal inventories, the strengthening gas prices, and a firming in export prices that was supported by continued tightness in international coal supplies. Shortages of homebuilding materials have been driving up prices, especially for concrete, drywall, and framing lumber. Commercial building contractors saw rising prices for structural steel and rebar. A few retail chains reported reassessing their shelf prices because of intensifying price competition. New motor vehicle average transaction prices have risen about 1 percent in the past year, but that number hides distinct trends for cars and light trucks. Car prices have declined because of rising dealer and OEM incentives. In contrast, light truck prices increased because of larger sticker price increases and lower incentives. Upward pressure on freight hauling rates is expected during 2017 because implementing regulations associated with the new electronic logging requirements may lead to a temporary reduction in freight capacity.
Consumer Spending
Retailers reported disappointing same-store sales through the early part of the holiday shopping season. The unusually warm weather was cited as driving down purchases of cold-weather items. An apparel chain noted significant price competition from several competitors who are in the process of liquidating. Another chain reported that although foot traffic has increased, price declines for select product lines has resulted in flat sales in those lines. Going forward, traditional retailers expect little change in sales because of intensifying price competition, especially from Internet sellers. Several contacts reported cutting capital budgets because of weakening sales. However, investment in e-commerce remains strong. Year-to-date unit sales through November of new motor vehicles declined 1 percent when compared to the year-earlier period. Light trucks continue to dominate transactions. Used motor vehicle transactions have increased about 3 percent.
Manufacturing
Factory output was little changed over the period, though several contacts cited a seasonal downturn in new orders. Activity for suppliers to the motor vehicle and construction industries remains elevated. Factors tempering output growth for other manufacturing industries include a general malaise in the industrial products market and weakness in the energy sector. Year-to-date production through November at District auto assembly plants fell 5 percent when compared to that of the same time period during 2015. Car inventories remain significantly higher than those for light trucks. Steel producers reported rising volumes, a situation which they attributed to lower imports. Capital spending increased slightly over the period, but a large share of the monies was allocated for maintenance projects. Spending on new equipment and product development fell. Post-election confidence has buoyed the outlook of many contacts; however, it remains uncertain how potential changes in the regulatory environment ultimately will affect capital investment.
Real Estate and Construction
Year-to-date unit sales through November of new and existing single-family homes increased 5 percent compared to those of a year earlier. The average sales price rose 4.5 percent. Homebuilders are concerned about rising interest rates and the affect they will have on consumers' willingness to purchase new homes. First-time-buyer and first-move-up contracts moved higher, whereas sales of high-end homes slowed. Year-to-date estimates of single-family construction starts were much higher in Ohio and Kentucky, but lower in Pennsylvania, compared to a year earlier.
Although overall activity remains elevated, nonresidential contractors reported a slowing in the number of inquiries and a decline in backlogs, a situation which they attributed to seasonal factors and uncertainty leading up to the presidential election. General contractors are expecting to see an increase in spending on infrastructure projects and for warehousing and distribution centers. Many general contractors reported raising billing rates to cover higher material costs, especially for steel.
Banking
Bankers reported that lending pipelines are relatively strong, but there is little organic growth. Several contacts reported seasonal slowing in select product lines, especially on the retail side. The outlook is more positive since the presidential election because some clients are expecting regulatory relief. One banker noted the first round of federal funds rate increases is unlikely to be passed through to savers. However, future increases will likely result in higher interest rates paid on savings accounts. Credit quality remains strong, and little change was reported in loan-application standards. On the commercial side, the strongest demand was for CRE loans. Reports from retail banking indicated that the highest demand was for auto loans and home equity products. Core deposit balances continued to increase.
Energy
Reports showed a healthy increase in the number of permits issued and the number of drilling rigs operating in the Marcellus and Utica Shales during the past couple of months. Nonetheless, upstream activity is below levels seen two years ago. Natural gas output remains at historic highs. Coal production continued to move higher as customers respond to their low inventories and improving market conditions for their products.
Freight Transportation
Freight volume expanded over the period on balance and was attributed to a slowly improving economy. However, volume was flat compared to that of the same time period a year ago and was characterized as sluggish. As a result, some carriers reduced staffing through attrition. Freight shipping rates were relatively stable, other than select increases in the fuel surcharge. Capital spending was primarily for new equipment.