2007-2011 Beige Book: Federal Reserve Board Commentary on Current Economic Conditions, including the Great Recession and Economic Crisis of 2008
Federal Reserve System
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Summary of Commentary on Current Economic Conditions by Federal Reserve District - The Federal Reserve Board
Commonly known as the Beige Book, this report is published eight times per year. Each Federal Reserve Bank gathers anecdotal information on current economic conditions in its District through reports from Bank and Branch directors and interviews with key business contacts, economists, market experts, and other sources. The Beige Book summarizes this information by District and sector. An overall summary of the twelve district reports is prepared by a designated Federal Reserve Bank on a rotating basis.
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Beige Book
June 8, 2011
Summary of Commentary on Current Economic Conditions by Federal Reserve District
Summary
Prepared at the Federal Reserve Bank of New York and based on information collected on or before May 27, 2011. This document summarizes comments received from businesses and other contacts outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials.
Reports from the twelve Federal Reserve Districts indicated that economic activity generally continued to expand since the last report, though a few Districts indicated some deceleration. Some slowing in the pace of growth was noted in the New York, Philadelphia, Atlanta, and Chicago Districts. In contrast, Dallas characterized that region's economy as accelerating. Other Districts indicated that growth continued at a steady pace. Manufacturing activity continued to expand in most parts of the country, though a number of Districts noted some slowing in the pace of growth. Activity in the non-financial service sectors expanded at a steady pace, led by industries related to information technology and business and professional services.
Consumer spending was mixed, with most Districts indicating steady to modestly increasing activity. Elevated food and energy prices, as well as unfavorable weather in some parts of the country, were said to be weighing on consumers' propensity to spend. Auto sales were mixed but fairly robust in most of the country, though some slowing was noted in the Northeastern regions. Widespread supply disruptions--primarily related to the disaster in Japan--were reported to have substantially reduced the flow of new automobiles into dealers' inventories, which in turn held down sales in some Districts. Widespread shortages of used cars were also reported to be driving up prices. Tourism activity improved in most Districts.
Residential construction and real estate continued to show widespread weakness, except in the rental segment, where market conditions have strengthened and construction activity and development have picked up. Non-residential real estate leasing markets have been generally stable, while construction activity has remained very subdued. Loan demand was steady to stronger in most Districts, especially in the commercial and industrial sector, and widespread improvement was reported in credit quality.
Agricultural conditions were unfavorable across much of the nation, largely reflecting unseasonably cool and wet weather; widespread flooding along the Mississippi River hampered agricultural production in the Atlanta and St. Louis Districts. In the Dallas District, in contrast, drought conditions hurt the wheat crop and led to broader damage from wildfires. The energy industry showed continued strength, with robust expansion in oil drilling and extraction activity.
Labor market conditions continued to improve gradually across most of the nation, with a number of Districts noting a short supply of workers with specialized technical skills. Wage growth generally remained modest, though there were scattered reports of steeper increases for highly skilled workers in certain occupations. Most Districts continued to report widespread increases in commodity prices; manufacturers are said to be passing along a portion of the higher costs in the form of price hikes and fuel surcharges.
Consumer Spending and Tourism
Consumer spending was generally described as steady to up modestly since the last report, with most Districts indicating small increases from a year ago. Non-auto retail sales were indicated to be expanding steadily in the Philadelphia, Cleveland, Minneapolis, Kansas City and Dallas Districts, while sales were characterized as stable or decelerating in the New York, Atlanta, Chicago, St. Louis and San Francisco Districts. Sales were reported to have declined in the Richmond District, and Boston described sales as mixed but generally down from a year earlier. Retail inventories were generally said to be at satisfactory levels, though St. Louis characterized inventory levels as being on the high side. A number of Districts noted that a combination of unfavorable weather and high fuel and food prices have weighed on consumer spending in recent weeks. Cleveland and San Francisco noted increased spending on discretionary items, and Philadelphia indicated that some luxury goods retailers fared relatively well. On the other hand, Chicago reported a decline in discretionary spending.
Most Districts reporting on vehicle sales indicated that they have been steady to stronger since the last report, specifically Richmond, Chicago, St. Louis, Kansas City, Dallas and San Francisco. In addition, Atlanta noted firm demand for automobiles. On the other hand, some softening in car sales was noted in the northeastern Districts of New York, Philadelphia and Cleveland. Many Districts indicated that supply disruptions, primarily from Japan, have contributed to lean inventories, which have impeded auto sales somewhat. There has also been widespread tightening in the market for used cars, reflecting both strong demand and a shortage of inventory. Shifts in consumer demand toward smaller, more fuel efficient cars were noted in the Philadelphia, Cleveland, and Chicago Districts, while St. Louis mentioned a shift from higher-end to lower-end models.
Tourism activity has generally strengthened since the last report, and the outlook for the summer season looks positive. Improvement in this sector was reported in the Richmond, Atlanta, Kansas City, and San Francisco Districts; in addition, New York reported that tourism increased in April but appeared to edge back in early May. Dallas maintained that travel activity has been mixed, while Minneapolis indicated that tourism has been slow recently due to adverse weather, but that inquiries and advance bookings for the summer season look strong. St. Louis noted that flooding forced the temporary closure of numerous casinos along the Mississippi River.
Nonfinancial Services
Activity in the non-financial service sectors continued to strengthen in most Districts, with the notable exception of St. Louis, which reported fairly widespread declines. Service sector activity generally expanded in the Boston, New York, Philadelphia, Richmond, Minneapolis, Kansas City and Dallas Districts, though Richmond noted deceleration in the pace of growth. There were also pockets of strength in particular sectors. Information technology firms saw activity expand in the Boston, Richmond, Minneapolis, Kansas City, and San Francisco Districts. Employment agencies in the Boston and Chicago Districts indicated continued improvement in activity, while New York and Dallas reported some slowing in this industry. New York, Richmond and Minneapolis cited strengthening in business and professional services, while San Francisco indicated steady to mixed activity in this sector.
Activity in the transportation sector improved in the Cleveland, Atlanta, Kansas City and Dallas Districts. Philadelphia and Richmond noted some slowing in growth, and New York reported steady shipping activity, while San Francisco indicated a slowdown in cargo traffic at Southern California seaports. Dallas also reported weakening in container trade volumes but noted increases in cargo volume, railroad shipments and small parcel shipments.
Manufacturing
Manufacturing activity was reported as continuing to increase since the last report in all but two districts, although many noted that the pace of growth had slowed. The Boston, Atlanta, St. Louis, Minneapolis, and San Francisco, Districts reported that activity expanded, and the Dallas District reported a pickup in demand; the Philadelphia, Richmond, Chicago, and Kansas City Districts reported that activity expanded but at a slower pace, while activity was reported as steady in the New York District and stable to growing in the Cleveland District. Supply disruptions related to the earthquake in Japan led to reduced production of automobiles and auto parts in several Districts. The Cleveland District noted a sharp drop in auto production, the Atlanta and St. Louis Districts also saw production fall, and auto deliveries were reported as having declined in the Richmond District. The Atlanta District said lost production in its region would be made up later in the year. Contacts in the Chicago District said that contingency plans to deal with supply disruptions were helpful in mitigating the effects. High-tech firms in the Boston and Dallas Districts reported that shortages of parts, due to disruptions in Japan, had adverse effects on business; in contrast, there were few supply constraints that affected technology-related products in the San Francisco District.
Growth was reported as strong for semiconductors in the San Francisco and Boston Districts. The Cleveland District reported that steel producers were seeing shipping volumes level off after a strong first quarter performance, and the Chicago District noted a decline in second quarter orders for industrial metals, although orders for the third quarter were coming in at a more positive pace. A contact in the Richmond District said that demand for industrial metals had leveled off. The Chicago District reported a decline in activity for construction materials and household goods. Production remained strong for makers of commercial aircraft and parts in the San Francisco District.
Looking forward, contacts in most districts were generally optimistic about the outlook, although less so than the last report. The Cleveland District said that the majority of manufacturing contacts maintained a favorable outlook, although some are delaying the start of capital projects. Contacts were generally cautiously optimistic in the Boston District, although some expect sales growth to moderate. Contacts were mostly positive about the outlook in the Philadelphia District, though the level of optimism was not quite as strong as in the last report. Chicago District contacts expect conditions to rebound in the coming months. A majority of contacts in the Atlanta District planned to increase production.
Real Estate and Construction
Residential real estate sales markets showed continued weakness in most Districts, while rental markets strengthened. Most Districts indicate that home prices have declined since the last report: Boston, Philadelphia, Richmond, Atlanta, Kansas City, and San Francisco all report some downward drift in selling prices, while reports from the New York and Cleveland Districts indicate that prices have been steady, on balance. No district indicates a general increase in home prices. Sales activity, though widely reported to be at low levels, picked up somewhat in the Philadelphia, Atlanta, Chicago, and Kansas City Districts. Dallas indicated that improved traffic has raised prospects of improved sales in the second half of 2011, and Boston observed signs that the market is stabilizing. Sales activity was characterized as mostly steady in the New York, Cleveland, Dallas and San Francisco Districts, but declining in the St. Louis and Minneapolis Districts. Those Districts reporting on the residential rental market--specifically, New York, Atlanta, Chicago, Minneapolis, Dallas, and San Francisco--all indicate that conditions have strengthened. In terms of residential construction, activity has remained generally depressed, with a number of Districts reporting a large overhang of distressed properties. However, a number of Districts--New York, Cleveland, Atlanta, Chicago, and San Francisco--report improved prospects for development of multi-family rental properties.
Commercial and industrial real estate markets have generally been steady since the last report, though there have been scattered signs of a pickup. Commercial leasing markets showed modest signs of improvement in the Richmond and San Francisco Districts. Boston and Dallas noted some firming in property sales markets, but Kansas City reported declines in prices for office buildings. Non-residential construction, though widely reported to be at very low levels, rose modestly in the Boston, Chicago, Minneapolis, and Dallas Districts, though Chicago noted that public sector projects are becoming smaller. Cleveland observed a pickup in industrial and high-end commercial development but a pullback in healthcare-related projects. Richmond reported some pockets of strength in the retail market. More broadly, contacts in a number of Districts expressed a general sense of optimism about the outlook for the second half of 2011.
Banking and Finance
Most Districts described loan demand as mixed or slightly improved since the last report. Consumer loan demand showed some improvement in the Cleveland, Richmond, and St. Louis Districts, but held steady or weakened in the New York, Atlanta, Dallas, and San Francisco Districts. Demand for residential mortgages (including new purchases and refinances) increased in Cleveland but held steady in New York, Richmond, St. Louis, and Kansas City. Contacts in the Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Dallas, and San Francisco Districts noted a modest uptick in business loan demand. The increase in business loan demand in Cleveland was described as broad-based, including a pickup in construction loan requests for multi-family dwellings. Boston noted an improved lending environment for commercial real estate, and demand for commercial mortgages increased in New York and Dallas. Commercial and industrial loan activity increased in Richmond, Chicago, St. Louis, Dallas, and San Francisco, held steady in New York, and decreased in Kansas City. Outside of banking, Chicago and San Francisco indicated increased investment activity by hedge funds, venture capital firms, and other forms of private equity.
Credit standards were reported to be mixed but, on balance, a bit easier in recent weeks. New York, Cleveland, and Atlanta noted increased credit availability for automobile loans; Atlanta, Minneapolis and San Francisco indicated easier credit for some types of business loans. Boston reported some easing in commercial real estate lending, but New York reported tighter standards in that segment. Credit standards on home mortgage loans tightened somewhat in the St. Louis District. A number of Districts noted improvements in overall credit quality: specifically, Philadelphia, Cleveland, Richmond, Kansas City, Dallas, and San Francisco. New York indicated rising delinquency rates on consumer loans but declining rates on commercial loans and mortgages.
Agriculture and Natural Resources
Agriculture conditions were unfavorable in many districts, with various weather related difficulties leading to delays and below-average plantings of key crops. Excess precipitation and cool temperatures delayed the planting of corn, soybeans, and other crops in the Richmond, Atlanta, Chicago, St. Louis, Minneapolis, and Kansas City Districts, although Richmond reported that some parts of its District benefited from favorable weather conditions. Cool temperatures also delayed the development of some crops in the San Francisco District. Flooding on the Mississippi River slowed activity for farmers in the St. Louis and Atlanta Districts. The Dallas District reported that drought conditions had become severe and that the wheat crop was expected to be particularly poor; wildfires also led to significant agricultural losses in its District. Commodity prices were reported as strong in the Atlanta and Minneapolis Districts, but were down in the Chicago District. Hog prices were higher in the Chicago, Minneapolis, and Kansas City Districts, while cattle prices were reported as lower in the Chicago and Kansas City Districts but higher in the Minneapolis and Atlanta Districts.
Activity in the energy industry remained robust. Drilling activity was reported as strong and growing in the Dallas District, and work is being re-permitted in the Gulf of Mexico. The San Francisco District reported that oil extraction activity grew strongly in response to rising demand overseas, and that the demand for natural gas continued to expand. In the Minneapolis District, oil exploration activity increased. Contacts reported an increase in drilling activity in the Kansas City District, although shortages of equipment and labor created some drilling constraints. The St. Louis District reported that coal production was modestly lower.
Employment, Wages, and Prices
Most Districts reported gradual improvement in labor market conditions since their last reports. Boston, New York, Richmond, Atlanta, Chicago, Minneapolis, Kansas City, and Dallas all noted general improvement in employment conditions, while job growth was mostly limited to the manufacturing sector in the Cleveland and St. Louis Districts. Demand for permanent and temporary-to-permanent hiring increased in the Boston, Richmond, Atlanta, and Chicago Districts. While labor was generally available, contacts in the Boston, Atlanta, Minneapolis, Kansas City, Dallas, and San Francisco Districts indicated that labor market conditions have tightened for workers with specialized technical skills, particularly in the healthcare and technology sectors. Despite signs of continued modest improvement in most labor markets, Minneapolis noted several examples of expected layoffs and St. Louis reported plans for layoffs in the District's services sector.
Wage pressures were reported to be largely contained in most Districts, as abundant labor availability has continued to limit the pace of wage growth. Modest wage pressures were reported in the Boston, Cleveland, Chicago, Minneapolis, Kansas City, Dallas, and San Francisco Districts, while wages were reported as steady in New York and Philadelphia. However, contacts in the Minneapolis, Kansas City, Dallas, and San Francisco Districts noted that wage increases have been more significant for some highly skilled workers in occupations with labor shortages. Firms' expectations for labor and benefits costs moderated slightly in Atlanta.
Input prices continued to increase in most Districts, particularly for agricultural commodities, petroleum-based products, and industrial metals, although the pace of growth slowed in the Chicago and Kansas City Districts. In addition, several Districts reported that fuel surcharges have increased or become more widely used since the last report. While Boston indicated that firms were able to pass along most input price increases into selling prices, contacts in Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Minneapolis, Kansas City, Dallas, and San Francisco noted only a limited ability to pass through these cost increases to their customers, with manufacturers generally being more successful than retail or construction firms. In general, selling prices increased only modestly, except for food and energy prices, which continued to escalate. In addition, low inventory levels contributed to price increases for used cars in the New York, Cleveland, Chicago, and San Francisco Districts. Plans to implement future increases in selling prices were reported in the Boston, New York, Chicago, and Dallas Districts.
First District--Boston
Many business contacts in the First District report improving economic conditions. Firms in manufacturing, software and information technology, and staffing services cite ongoing increases in demand, with manufacturers reporting the most strength. Commercial real estate markets are improving modestly, retail reports are mixed, and residential real estate markets remain weak. Both retailers and manufacturers report input cost increases, which they are generally passing along to customers. Labor markets, by contrast, are seeing some net hiring, but wage increases remain subdued. Outlooks remain generally optimistic, although cautious.
Retail
First District retailers report mixed sales results for the period from late March through mid May, with comparable same-store sales ranging from low double-digit decreases to low single-digit increases. A few contacted retailers mention decreases in demand, and all express concern about the negative impact of rising fuel prices on their own costs, especially shipping, and on consumers' shopping habits.
Inventory levels are mixed, with one retailer explaining inventory has been temporarily increased due to global supply concerns, such as output disruptions in Japan. Contacts note steep price increases for commodities, including cotton, dairy, grains, meat, produce, and nuts; they are passing along price increases where possible. Headcount changes are mixed, as some firms add people in line with new store openings and select hiring opportunities, while one has cut jobs and anticipates outsourcing select positions. Capital spending is mixed. Outlooks range from concerned to cautiously optimistic.
Manufacturing and Related Services
Business conditions continue to be good at surveyed manufacturers. A parts manufacturer for autos and other vehicles reports that it is struggling to keep up with increased demand. A firm in the semiconductor industry also cites very strong sales growth in the first quarter of this year continuing into the second quarter. Reports from local pharmaceutical manufacturers are also favorable, especially compared with the end of last year, and a company in the medical devices business notes improving sales of its traditional product line after a lengthy period of very sluggish growth. Overall, contacted manufacturers are cautiously optimistic that growth will continue at a reasonable pace for the rest of the second quarter and into the second half of the year. Some firms, however, expect sales growth to moderate somewhat, in part because the second half of 2010 was strong for many respondents.
Commodity prices continue to be a concern for manufacturers whose production inputs include petroleum or gas-related products and/or firms that use a lot of metals such as steel. Most of the affected companies have already raised prices with little push-back from their customers, and a number of them plan to implement further price hikes this summer. By contrast, a pharmaceutical company with overseas sales notes downward pressure on their selling prices to government health care systems in Europe, which they attribute to ongoing fiscal imbalances across the Euro-area and related interventions to reduce costs and government debt. Some firms still report modest supply chain disruptions because of the earthquake in Japan (mostly semiconductor-related and other high tech inputs) or worldwide demand-related shortages of selected petroleum-related products. However, one affected firm notes that supply conditions have improved slightly recently and others say they continue to make adjustments to avoid a big impact on their production or sales.
The employment situation at surveyed manufacturers continues to be relatively stable, as many continue to try to increase output using existing workers. A semiconductor firm notes that the cost of this year's merit raises will be offset through other productivity gains, so the overall cost impact is negligible. Those firms that are hiring are doing so at a relatively moderate rate to meet increased demand for existing or new products. In particular, some pharmaceutical companies plan to meet increased demand by increasing their headcounts between 5 percent and 10 percent. Much of the hiring and investment at contacted firms is occurring overseas as they look to expand their operations, especially in Asia. Most respondents have already or plan to institute merit increases for their employees in 2011, ranging between 2 percent and 5 percent, which they note are a little lower than before the recent recession.
Capital spending at most contacted manufacturers continues to be in line with previous years. A few companies, however, are investing more in order to adjust their capacity to meet increased demand. Overall, the outlook for the contacted firms is favorable and most respondents seem somewhat more upbeat than at the beginning of this year.
Software and Information Technology Services
New England software and information technology firms report modest increases in activity through May. Year-over-year revenue increases, ranging from 4 percent to 20 percent, were generally driven by increases in software license revenues, while maintenance contracts grew at a slower rate. Contacts report pick-ups in demand across sectors, including manufacturing, financial, and medical. Increased activity has led to increasing headcounts, many by more than 5 percent from a year ago. Contacts generally cite a tightening labor market, especially for specialized technical positions, but note that it has not resulted in upward pressure on wages. Selling prices are holding steady, although half of responding firms observe less discounting pressure currently than in Q4 2010; in fact, two contacts plan to raise prices modestly later this year. Capital and technology spending is mostly steady, with only two contacts reporting an increase in outlays. The outlook among software and IT services firms remains positive, with most expecting their current rate of growth to continue through the end of 2011.
Staffing Services
The majority of New England staffing contacts report that business conditions continue to improve, although a few have experienced stagnant or volatile activity over the past three months. Revenues are flat to increasing year-over-year, with increases from 3 percent to 35 percent. Labor demand continues to strengthen, with notable improvements in the information technology, medical, manufacturing, and legal sectors. However, a few contacts lament an elongated hiring cycle, with employers "still waiting for the perfect candidate." Demand for permanent and temporary-to-permanent hiring continues to trend upwards-a sign that "things are heading in the right direction." Labor supply, at least at the high end, continues to be tight in the region. Bill rates and pay rates are steady, with most contacts reporting only modest changes. Looking forward, most New England staffing contacts are more positive than they were three and six months ago, predicting strong growth in the rest of 2011.
Commercial Real Estate
Across the region, contacts report that commercial leasing activity remains modest, especially in the office sector where job growth has been tepid. The Hartford office market shows very light leasing activity and negligible absorption. In Providence, office leasing volume was also very light, but rents are said to be firming up. Office leasing activity in Boston is described as slow-to-moderate, and some say recent activity is slower than in the first quarter. Boston deals consist largely of tenant renewals, resulting in little net absorption. The biotechnology and pharmaceuticals sector in Boston is seen as comparatively dynamic, generating strong demand for office space in Cambridge and planned new construction in Boston's waterfront area. In Portland, activity is flat for the most part, although at least one significant office leasing deal was signed. Investor interest in apartments remains strong in Boston, with some contacts expressing concern that sales prices are getting too high; interest in prime office properties also strengthened in Boston. The lending environment for commercial real estate is described as increasingly favorable to borrowers. The outlook among contacts is cautiously optimistic. All expect at least slow growth in office and retail demand for the remainder of 2011 and some see potential for significant improvement in market conditions by early 2012, although a few mention risks posed by fiscal conditions and related political uncertainty at both the state and national levels.
Residential Real Estate
Residential real estate markets throughout New England experienced significant declines in sales and median prices in April compared to a year earlier. Contacts attribute the sales declines to the homebuyer tax credit, which boosted sales for the first half of last year. Condominium sales fell during the same period, and the median price of condos slipped across much of the region. Most contacts see job security as a significant hurdle in the recovery of the residential real estate market. Several contacts also note that stricter lending requirements among large banks have shrunk the potential pool of homebuyers. In general, contacts report that potential buyers are anticipating further price declines and sellers continue to price homes competitively in order to find a buyer quickly. While overall market activity remains weak, respondents see some improvement in the medium to high-end segments of the market.
Contacts throughout the region expect year-over-year declines to continue for the next few months because of last year's homebuyer tax credit. Although several contacts believe that much of the New England real estate market has begun stabilizing, they caution that a lengthy recovery still remains.
Second District--New York
The Second District's economy has continued to expand since the last report, though at a somewhat diminished pace. Labor market conditions have continued to improve modestly. Retail sales have held steady at favorable levels since the last report. Consumer confidence reports have been mixed. Tourism activity picked up in April but tapered off a bit in early May. Commercial real estate markets have been relatively stable. The residential purchase market has been steady to somewhat softer, but the rental market has continued to improve; new residential construction remains low. Finally, bankers report further weakening in consumer loan demand, tighter credit standards on the commercial sector, and higher delinquency rates on consumer loans but somewhat lower delinquencies in other loan categories.
Consumer Spending
Retail sales have held steady since the last report and are running modestly above comparable 2010 levels. Sales were somewhat ahead of plan, despite unseasonably cool and wet weather, which likely had a small negative effect on spending. Two contacts--a major retail chain and a large mall in upstate New York--report that sales weakened in the first half of May, after a robust April. Inventories are reported to be in good shape. Selling prices have been steady overall, though some contacts describe the pricing environment as more promotional than a year ago. One major retail chain indicates that prices have been stable during the first half of the year; yet moderate price increases are planned for the second half of 2011--largely for cotton-based merchandise.
Auto dealers in upstate New York report that sales of new vehicles have cooled somewhat since the first quarter but remain at fairly high levels, up moderately from a year earlier. Some of the slowing in sales is attributed to supply disruptions related to the tsunami in Japan. One local auto dealers' association reports an exceptionally low inventory of used vehicles, which has hampered sales volume and pushed prices up. Retail credit conditions continued to improve, while wholesale credit conditions were mixed.
Consumer confidence surveys have given mixed results. Siena College reports that consumer confidence among New York State residents fell to its lowest level of the year in April--largely attributed to surging food and energy prices. In contrast, the Conference Board reports that consumer confidence among residents of the Middle Atlantic states (NY, NJ, Pa) surged in April, reaching its highest level since late 2007; the rise was largely driven by improved perceptions of job availability.
Tourism activity in New York City strengthened in April, though there were signs of some pullback in May. Occupancy rates at Manhattan hotels moved up by more than the seasonal norm in April, and room rates accelerated, running 5-10 percent higher than a year earlier. Partly due to a spate of new show openings, Broadway theaters report that both attendance and total revenues surged in April and were running 10 to 15 percent ahead of a year earlier, after a sluggish March,. Attendance and revenues slipped in May, although both were still up from a year earlier.
Construction and Real Estate
Housing markets across the District have been mixed since the last report: the home purchase market has been steady to somewhat softer, but the rental market has continued to strengthen. Buffalo-area Realtors report steady market conditions, with sales activity and pending sales down from a year earlier but prices up roughly 5 percent. More broadly, home prices have been running moderately ahead of a year earlier across most of upstate New York, despite pockets of weakness in metropolitan Rochester and Albany. However, prices in the New York City metropolitan area, including northern New Jersey and southwestern Connecticut, have drifted down slightly and are modestly lower than a year ago.
An authority on New Jersey's housing industry reports that sales of existing homes have slowed since the last report, and new home sales remained depressed. A sizable inventory of foreclosed properties--roughly equal to nine months of sales--is reported to be putting downward pressure on home prices overall. However, low volume and a sizable incidence of distressed sales make it difficult to gauge price trends in northern New Jersey. Activity in New York City's co-op and condo market was mixed but generally stable since the last report, with Manhattan, Brooklyn and Bronx holding steady--in terms of both prices and sales activity. Some softening was evident in Queens and Staten Island. Long Island's market has been stable, though conditions have weakened in the Hamptons, where sales activity is off, especially at the high end.
In contrast with the sluggish purchase market, rental markets have performed fairly well, particularly in New York City: Manhattan rents are reported to be up roughly 6 percent from a year ago. Moreover, when the widespread withdrawal of landlord concessions is factored in, the rise in effective rents has been steeper. Rental vacancy rates have drifted down. Contacts in both New York City and northern New Jersey see relatively little new residential construction, and note that most new and proposed development is for rental housing.
Commercial real estate markets have been largely steady since the last report. Office markets showed signs of modest improvement in New York City, Long Island, and most of upstate New York, as vacancy rates edged down while asking rents were steady to up slightly. However, market conditions weakened somewhat in northern New Jersey, Westchester and Fairfield Counties, and in the Albany area. Industrial vacancy rates rose in Long Island but were little changed in other markets. In much of the District, asking rents on industrial properties, which had been declining through the end of 2010, have leveled off or moved up modestly in recent months.
Other Business Activity
Reports from business contacts give a mixed picture of the labor market. A major New York City employment agency reports that, after a robust March, hiring activity weakened noticeably in April and early May, though it picked up again in the third week of May. Still, the supply of available workers has dwindled further, and more workers are testing the water and leaving current jobs for new ones. Starting salaries have remained steady and below pre-recession levels. Law firms, in particular, have started hiring more, while financial sector hiring has been stable. A contact in the securities industry reports that the jobs being added there tend to be mostly in support areas, such as legal and compliance, as opposed to revenue-generating areas.
Non-manufacturing firms broadly indicate that both business and hiring activity have been steady to modestly higher since the last report. Contacts have become slightly less optimistic about the near term outlook and have scaled back hiring plans somewhat. Non-manufacturing firms report that cost pressures remain widespread but have not broadened since the last report. Manufacturing firms in the District report that business activity was generally steady in April and early May. Contacts report that they are adding workers, on net, and plan to continue to do so in the months ahead. Manufacturers also note increasingly widespread price pressures, and roughly two in five say they plan to hike their selling prices in the months ahead. A trucking-industry contact reports that shipping activity has shown no sign of slipping, despite the recent surge in diesel prices.
Financial Developments
Reports on loan demand were mixed: small to medium sized banks indicate a decrease in demand for consumer loans, an increase in demand for commercial mortgages, and no change in the demand for residential mortgages and commercial and industrial loans. Respondents indicate no change in credit standards for the household sector but a tightening of standards for commercial loans and especially commercial mortgages. Bankers report a decrease in spreads of loan rates over costs of funds for all loan categories--particularly on residential mortgages. There were also fairly widespread decreases in deposit rates. Finally, delinquency rates rose for consumer loans but decreased for commercial mortgages and, to a lesser extent, on commercial and industrial loans. Delinquency rates on residential mortgages were unchanged.
Third District--Philadelphia
Business activity in the Third District has improved overall since the last Beige Book, although the pace has softened. Manufacturers reported increases in shipments and new orders in May, although at a much slower pace than the past two months. Retailers posted slight year-over-year sales increases in May. Motor vehicle dealers reported a slowdown in sales during May compared with the first four months of the year. Third District banks reported little overall change in loan volume outstanding, on balance, since the last Beige Book. Residential real estate agents said sales have increased seasonally, but house prices have been flat to down. Contacts in the commercial real estate sector said that market conditions have shown little change since the first quarter. Service-sector firms reported modest increases in activity. Business contacts reported further price increases for inputs as they did in the previous Beige Book. There have been some retail price increases, and more firms in a range of sectors have implemented fuel surcharges.
Expectations among Third District business contacts are mostly for slow growth. Manufacturers forecast a modest rise in shipments and orders during the next six months. Retailers expect sales to advance slowly on a year-over-year basis. Auto dealers say the outlook is uncertain. Bankers expect only slight growth in lending. Contacts in residential real estate expect moderate seasonal gains in sales, but they expect sales for this year as a whole to be about the same as sales last year. Contacts in commercial real estate expect conditions to improve slowly, with markets firming around the end of the year. Service-sector companies expect continued slow growth.
Manufacturing
Reports of widespread, robust demand growth for manufactured products as of the last Beige Book gave way to two months of easing in the breadth and pace of recovery. Less than 30 percent of Third District manufacturers reported increases in shipments and orders in May -- slipping from over 50 percent since the last Beige Book. Among key manufacturing sectors in the Third District, the number reporting increases of both shipments and orders narrowed to 7 from 13 since the last Beige Book. The strongest reports of orders came from producers of chemicals; food; stone, clay, and glass; and fabricated metal products. Since the last Beige Book, declines in orders broadened from producers of apparel and rubber products to include producers of electronic equipment and instruments. Failure to pass a multiyear transportation infrastructure reauthorization bill and the ongoing real estate slump were cited by five different manufacturing sectors as hampering the recovery.
Third District manufacturers remain mostly positive about business conditions over the next six months; however, the percent of firms expecting increases fell off sharply since the last Beige Book, from 66 percent to 36 percent. Among the firms contacted in May, about 38 percent expect increases in new orders and shipments, while about 20 percent expect decreases. A little uncertainty has crept back into manufacturers' expectations, with several contacts citing "swings" in activity. Capital spending plans over a six-month planning horizon have changed little since the last Beige Book, with about one-third of firms projecting increases.
Retail
Third District retailers generally reported small year-over-year increases in sales in May, although results varied by store type. Discount stores and some luxury goods retailers posted better increases than mid-price retailers and department stores. Retailers said sales of spring apparel have been held back by cool, rainy weather. Several merchants said that high gasoline prices were deterring shopping trips and constraining consumers' discretionary buying. Looking ahead, store executives expect just slow growth in sales. One merchant's comment expressed the general opinion: "The consumer is responding to value. Only confidence in the job situation will prompt broader buying."
Third District auto dealers generally reported that sales slowed in May from the pace set from January through April. Some dealers said they were facing supply constraints resulting from the interruption of Japanese vehicle and parts production, and some dealers said demand has slowed as consumers reconsider model preferences in response to higher gasoline prices. Dealers are uncertain of the future course of sales; most said the sales rate going forward will be more sensitive to gasoline prices and consumer confidence than it had been earlier in the year.
Finance
Third District banks contacted in May gave mixed reports on loan volume outstanding. Some posted increases in consumer and business loans, but others reported drops in these categories since the last Beige Book. On balance, total credit extended by banks in the region has been flat in recent weeks. Although some bankers have had recent increases in loan demand from small and medium businesses, most said demand for credit from this sector has been weak. "Loan demand hasn't moved at all," one said, even as competition among lenders has increased. Most of the banks surveyed in May indicated that credit quality has been improving, although some said the pace of improvement has been slow. Looking ahead, the general view among the region's bankers is that loan demand will move up slightly, at best, in the near future.
Real Estate and Construction
Residential real estate activity has picked up since the previous Beige Book in most parts of the Third District, according to residential real estate agents contacted for this report. Agents continued to note that the sales pace has been relatively stronger for middle- and low-price homes and weaker for high-price homes. Agents attributed the improved sales pace to the usual seasonal gain and buyers' concern that mortgage loan rates are likely to increase in the future. Looking ahead, residential real estate agents expect sales for this year as a whole to be level with last year. An agent who remarked that "we are off the bottom, but it's going to be a slow comeback" expressed a common opinion. Residential agents generally reported flat to slightly falling house prices for existing homes. New homebuilders indicated that these lower existing home sales prices further reduced their customer traffic in May. While they see more committed buyers among the traffic, overall demand for new homes remains flat.
Commercial and industrial market conditions in the Third District have shown little change since the previous Beige Book, according to area nonresidential real estate contacts, although some noted that office vacancy rates have edged down slightly in some areas. Rents have been steady in most areas, and concessions remain common. Contacts in commercial real estate reported that demand for space in Class A office buildings has strengthened relative to Class B space as local companies relocate upon lease expirations. "Companies are trading up for higher quality," one contact said. This trend is expected to continue for the rest of this year, and any reduction in vacancy rates for less desirable buildings is expected to lag the modest decline in Class A vacancy rates that commercial real estate agents forecast for the balance of 2011. Industrial rents have been flat, but some contacts expect them to rise toward the end of the year as demand for space grows in the absence of new supply.
Services
Third District service-sector firms contacted for this report generally described demand for their services as growing modestly. Business-service firms noted some increased activity as a result of both greater usage by current clients and demand from new client companies. An executive at a business-service firm said, "Our activity in cyclical sectors is starting to improve." Contacts in the transportation sector reported some recent easing in the slow, steady growth rate that held for the first four months of the year. Contacts in engineering and architectural services reported slight gains in current activity and a somewhat stronger upturn in inquiries. Most of the service-sector firms polled in May expect growth to continue at around its recent pace.
Prices and Wages
Since the previous Beige Book, nearly half of all manufacturers reported rising factor prices, especially for energy and commodities, but less than half of those firms are able to pass costs through to their customers. However, imposition of fuel surcharges by service firms in the region has increased. Retailers generally indicated that selling prices have been steady, except for food products and some petroleum-based products and imports. Retailers noted that consumers continue to favor lower price-point merchandise, and stores are continuing to alter merchandise selection to include more of those items.
Business firms in the region reported mostly steady wages since the last Beige Book. Reports on nonwage employment costs varied; some firms indicated that benefits costs, primarily for health insurance, have been stable, but others indicated that they have had increases ranging up to 10 percent or more compared with a year ago.
Fourth District--Cleveland
Business activity in the Fourth District continued to expand at a modest pace since our last report. Manufacturers reported a slight rise in production, though several noted a softening in market conditions. Freight transport volume increased for a broad range of manufactured goods. Information received from retailers remained positive, while auto dealers experienced a slight downturn in sales. Energy producers noted little change in output. New home construction was sluggish, whereas nonresidential building is picking up some. The demand for business credit rose slightly, and activity in consumer lending was mixed.
Rising payrolls were mainly limited to the manufacturing sector. Staffing-firm representatives noted moderate growth in the number of new job openings, with vacancies concentrated in health care and manufacturing. Wage pressures are largely contained. Reports of elevated prices for commodities, steel, fuel, and other raw materials were common. As a result, manufacturers, retailers, and freight carriers passed through some of these higher input prices to their customers.
Manufacturing
Reports from District factories indicate that production was stable or slightly up during the past six weeks, with a moderate rise in backlogs. A majority of our contacts maintain a favorable outlook, some of which was attributed to strength in offshore markets. However, several manufacturers said that market conditions are beginning to soften. Many steel producers and service centers reported that the rise in shipping volume seen in the first quarter is beginning to taper off, due in part to pricing issues and declines in consumer demand. Shipments are being driven by capital goods, autos, and energy-related industries. They anticipate volume remaining at current levels until a seasonal slowdown, which typically occurs during the third quarter. District auto production dropped sharply during April on a month-over-month and year-over-year basis. Most of the decline was due to supply disruptions caused by events in Japan.
Manufacturers remain committed to raising capital outlays in the upcoming months relative to year-ago levels. Nonetheless, about a third of our contacts reported that they are delaying the start of some projects. Capacity utilization rates are below what is considered normal for a majority of manufacturers. Prices for metal and agricultural commodities, steel, and petroleum-based products remain elevated. Most of our contacts reported passing through some of these higher input prices to their customers. A few producers commented that steel and scrap prices have peaked and are expected to begin falling back. Manufacturers continued hiring at a modest pace, with most new hires being higher-skilled workers. Several contacts also noted a slight increase in wage pressures.
Real Estate
New home construction remains at a very low level, with purchases mainly in the move-up buyer categories. The uptick in traffic and sales noted in our last report was not sustained. Two of our contacts told us that more interest exists in multi-family construction than single-family. Home builders do not expect the market to turn around any time soon, which they attributed to tight credit, a glut of houses on the market, and the fact it currently costs more per square foot to build a new house than to buy an existing house. List prices and discounting of new homes held steady, while some upward pressure on the cost of building materials was reported. Several builders said they want to construct more spec houses, but banks are unwilling to provide financing. Subcontractors are doing somewhat better due to facing less competition and taking on additional remodeling work. General contractors continue to work with lean crews, and no hiring is expected in the near term.
Information on nonresidential construction varied widely. However, one aspect our contacts agreed on was a moderate improvement in inquiries. Activity is being driven by industrial projects and high-end projects (greater than $100 million) that are now in the construction phase, after several years of planning. We heard reports of a pullback in healthcare-related work. A majority of our contacts expect that activity will slowly improve as the year progresses. Financing is more readily available if developers are willing to increase their equity share. We heard reports of increased prices for building materials, particularly for steel. One contact noted that materials suppliers are holding back price increases due to a lack of demand. Contractors are absorbing rising materials prices in their margins. General contractors held payrolls steady, and they expect little, if any, new permanent hiring in the upcoming months.
Consumer Spending
Reports from retailers indicate that sales for the period from early April through mid-May rose in the low to mid-single digits and were generally on or ahead of plan. However, some of the increase was attributed to the rise in gasoline and food prices. Transactions were mostly higher relative to year-ago levels. Many of our contacts noted that rising sales included discretionary items. Looking forward, retailers are cautiously optimistic about third-quarter sales. We continue to hear about rising vendor prices, although they were mainly limited to food- and fuel-related products. Retailers passed through some of the increases to consumers. Reports on profit margins were mixed, with declines taken primarily by grocers. Capital outlays remain on plan and are slightly higher than year-ago levels. No change in payrolls is expected at existing stores.
Auto dealers reported that new-vehicle sales showed a slight downturn during April and early May. March sales were given a big boost due to regional auto shows. On a year-over-year basis, vehicle purchases increased for almost all of our contacts. Demand for smaller, fuel-efficient cars continues to rise, while inventories were characterized as somewhat low by most dealers and may be hurting sales. Dealers are cautious in their outlook due to high gas prices and concern over the availability of vehicles with a Japanese nameplate. Demand for used cars is fairly strong, especially those that are fuel efficient. However, scarce inventory is contributing to rising prices. Credit availability and pricing have improved, and the use of leasing as a credit alternative is growing. Automakers are now putting in place timetables for dealers to complete reimaging and expansion of their facilities. The only roadblock from the dealers' perspective is the ability to obtain financing. Most auto dealers are beginning to hire on a selective basis.
Banking
Demand for business loans was stable or grew at a modest pace. Industries driving loan demand were broad-based, with a few of our contacts noting a pick up in construction loan requests for multi-family dwellings. On the consumer side, demand for home equity lines of credit and vehicle purchases (direct and indirect) remains strong, while activity in other installment loan categories was weak. Interest rates for business and consumer credit were stable, but competitive. Half of our contacts noted an uptick in the residential mortgage market, with activity equally distributed between refinancing and new purchases. Overall core deposits continue to grow, especially in demand accounts. The credit quality of business and consumer applicants was characterized as steady or improving. Delinquency rates were stable or trending down across loan portfolios, with the exception of real estate. Staffing levels have shown little change during the past few weeks, and about half of our respondents said that they expect some selective hiring to occur during 2011.
Energy
Reports indicate that oil and natural gas drilling and production held steady during the past six weeks, with little change expected in the near term. Wellhead prices paid to independent producers were flat for natural gas and continued on a modest upward trend for oil. Coal production was stable to moderately lower since our last report, with little change anticipated for the remainder of the year. Spot prices for coal, especially metallurgical, are moving higher, which was attributed in part to a rise in transportation costs. We heard several reports of increased prices for diesel fuel, equipment, parts, and materials used in coal production. Severe spring weather in the Midwest is interfering with coal shipments to utilities and exports from New Orleans. Energy payrolls are expected to remain at current levels.
Transportation
Freight transport executives reported that shipping volume expanded for a broad range of manufactured goods, and they expect markets will continue to grow in the upcoming months. Several contacts told us that they are attempting to raise their shipping prices as customer contracts come up for renewal, and they are seeing a slight bottom-line improvement. The price for diesel fuel remains elevated, with most of the increase being passed through to customers via surcharges. We also heard several reports about rising costs associated with recent changes in environmental and federal safety regulations. Capital outlays are expected to accelerate during 2011, if financing can be obtained. Spending will be mainly for replacement, although some additions to capacity have been announced. Hiring has been for driver replacement, seasonal work, and maintenance mechanics. Wage pressures are emerging due to a tightening of the driver pool.
Fifth District--Richmond
Economic activity has been sending increasingly mixed signals since our last report. The banking sector improved moderately, led by gains in commercial and industrial lending. Tourism also strengthened, with holiday bookings expected to be above year-ago levels. Reports on District labor markets were generally positive; however, employment agents noted that some manufacturing clients were cautious about hiring. Residential and commercial real estate agents generally described activity as mixed. Moreover, manufacturing lost momentum, with several contacts noting that demand had leveled off in recent weeks. In addition, revenue growth among non-retail service firms weakened, and retailers said that sales fell over the last month as shopper traffic dropped sharply. Manufacturing firms reported that input prices grew at a faster pace since our last report, but pass-through was limited and price growth at services firms remained moderate.
Manufacturing
District manufacturing cooled in May after expanding for seven months. Several textile and apparel contacts described their business as being unpredictable, with "very little depth." Similarly, a producer of coated steels mentioned that, although the first quarter had been fairly strong, order volume had been going down since then. Also, a supplier of specialty materials reported that his business had leveled off in recent weeks because demand for his customers' goods had slowed. Several contacts stated that the disruptions in Japan had affected automotive deliveries, due to lack of electronic components and paints. Firms reported that their customers were strongly resisting any price increases, despite knowing that commodity prices were rising. Our latest manufacturing survey revealed that prices of raw materials rose notably over the last month, but prices of finished goods were up only moderately.
Retail
Retail sales generally slowed since our last report. Several firms attributed the slowdown to higher gasoline prices. A central Virginia retailer noted that, even though consumer confidence was good in the area, buying behavior was "tentative, as customers' needs were superseding their wants," driving stores to compete aggressively on price. Apparel and general merchandise retailers reported soft sales, and a large bookseller in central North Carolina stated that sales had weakened over the last month. In contrast, a store manager at a big box discount store in Virginia Beach said sales had improved in the last month and that the store was hiring again. Most auto dealers that we contacted cited flat-to-stronger sales, despite scattered reports of inventory or parts shortages caused by the Japanese crisis. Grocery sales remained solid, and several contacts reported passing through price increases to their customers. A number of surveyed wholesalers reported faster revenue growth in recent weeks. Durable goods wholesalers generally noted a pick-up in revenues despite the reported ongoing slump in retailers' big-ticket sales. Retail prices edged up, and wages were little changed.
Services
Contacts at non-retail services firms reported somewhat slower revenue growth in recent weeks. Executives at several healthcare facilities noted flat demand for services over the last month. One hospital administrator also expressed uncertainty about the financial effect on his hospital of the increase in "newly insured" populations under healthcare reform. He noted significant challenges for smaller, rural hospitals with respect to information technology investments needed to secure federal matching opportunities. In contrast, professional, scientific, and technical firms that we survey reported slightly quicker revenue growth. Price growth at services firms was mild, while wage increases were widespread. A healthcare system executive in central Virginia reported that salary pressures were being driven by shortages in some specialties.