Fourth District Beige Book—Complete Report

Date: 09/03/2014


The economy in the Fourth District expanded at a moderate pace during the past six weeks. Manufacturers reported accelerating business activity. Demand for nonresidential construction services strengthened, while purchases of new and existing homes leveled off. New motor vehicle sales grew at a robust pace; retailers and operators of hospitality venues saw higher year-over-year revenues. Since our previous report, coal production and shale gas activity were little changed, freight volume grew at a moderate to strong rate, and the demand for business credit moved higher. Consumer demand for auto loans remains strong.

On net, payrolls showed a mild increase. Many companies would like to add workers, but they are unable to find qualified candidates. Staffing firms reported little change in the number of job openings and placements. Upward pressure on wages is being felt mainly by the construction and freight transport industries. Input and finished goods prices were stable, apart from increases for metals, agricultural products, and diesel fuel, and a decline in coal prices.


Demand for business credit expanded at a moderate pace over the reporting period. Demand was strongest for commercial real estate loans, C&I lending to manufacturers and energy producers, and from healthcare providers. While little change in interest rates was reported, pricing competition remained keen. Consumer credit demand was roughly stable on net. Applications for auto loans remain very strong, while households made slightly less use of HELOCs. A seasonal uptick for boat and RV loans was noted. Residential mortgage activity was flat. Although purchase transactions dominate mortgage applications, several bankers saw an increase in refinancings. Most of our contacts reported a slight decline in delinquency rates across loan categories. No changes were made to loan-application standards during the past six weeks. Core deposits held steady or showed modest growth, with increases coming mainly from commercial customers. On balance, banking payrolls held steady. New hires were mainly in the areas of compliance and risk management; however, in response to reduced traffic at branches, payrolls there are being reduced and some jobs are being changed from full- to part-time, especially those that are considered entry level.


Sales of new and existing single-family homes have leveled off since our last report. Year-to-date purchases through July were slightly lower compared to a year ago. Several homebuilders noted that their construction backlogs are strong at this time due to a sales surge in the spring, but they are uncertain about activity several months down the road. Single-family construction starts across the District are on a gradual upward trend and are ahead of year-ago levels. New-home contracts were spread across all price-point categories. New-home pricing was fairly stable; any increases were attributed to rising development costs, including for lots. Year-to-date selling prices of existing homes trended slowly higher and are above those seen in 2013.

Nonresidential builders reported strong pipeline activity during the past couple of months, and a majority indicated that the level of activity has picked up from year-ago levels. Inquiries are markedly higher and backlogs are growing, in many cases extending into 2015. The hesitancy that was seen earlier in the year on the part of customers to commit to a project has diminished. Market demand is broad based, with contractors becoming less dependent on non-commercial projects. Most builders are fairly optimistic in their outlook, but they remain concerned about labor issues and tight margins.

Builders are projecting modest increases in materials costs, mainly around 2 to 3 percent. The highest price increases are expected for drywall, steel products, softwood, plywood, and diesel fuel. Many general contractors (GCs) reported that they are looking to increase their payrolls, but it is very difficult to find qualified craft-workers. Some GCs have been increasing wages and upgrading benefit plans as a means of attracting and retaining skilled workers. Subcontractors are pushing through rate increases to cover rising construction costs (including labor) and to widen their margins. GCs reported a declining number of bids from subcontractors, which they believe is attributable to inadequate capacity on the part of their subs.


Reports from District factories indicated that new orders and production grew at a moderate pace since the latter part of the second quarter. Companies seeing the strongest demand are linked to the food, motor vehicle, and oil and gas industries. A few manufacturers attributed stronger demand to customers completing inventory adjustments. Year-over-year revenues are generally higher. Our contacts are optimistic in their outlook, with a majority projecting strong demand for the remainder of the year. Steel shipments dipped slightly since our last report due to seasonal factors, though one contact described demand for value-added industrial steel products as strong. Fourth-quarter steel shipments are projected to be better relative to the third quarter, even on a seasonally adjusted basis. Auto production at District assembly plants for the first seven months of this year was more than 9 percent higher as compared to the same period in 2013.

Capital expenditures are in line with budgeted amounts for the fiscal year. Companies considering an increase to their capital budgets as the year progresses reported that the additional monies will be used mainly for capacity expansion and process automation. A growing number of manufacturers reported rising prices for raw materials, especially metals and agricultural products. Several noted that the increases are beginning to impact their profitability. Higher materials prices were passed through to customers with little pushback. We heard numerous reports about new hiring for managerial, professional (engineering and IT), and production positions. On the production side, there is a growing trend to hire on a temporary or part-time basis until the worker demonstrates that he or she can perform the job. The boost in hiring has put little upward pressure on wages.

Retail Sales

Spending at retail outlets and hospitality venues during June and July was generally higher as compared to the early part of the second quarter. Revenues showed a modest increase relative to the same time period in 2013. There is some consensus that even though consumers are growing more confident, their discretionary spending is still relatively weak. Back-to-school items are doing well. A few retailers observed that while their brick and mortar sales have stalled, on-line purchases have risen significantly. Hotel operators told us that occupancy rates are rising and consumers are more accepting of higher prices. Fourth-quarter revenues are projected to be higher, with expected year-over-year percent gains in the low-to-mid single digits. We heard several reports about higher food prices continuing to put upward pressure on restaurant prices and difficulties associated with passing these cost increases through to consumers. Otherwise, vendor and shelf prices held steady. Hotel operators are investing significant monies in upgrading their properties, and some retailers are increasing capital budgets allocated for their e-commerce operations. Retail payrolls are stable.

New motor vehicle sales continued to increase at a robust pace. Year-to-date purchases through July were up 6 percent compared to 2013. Sales of SUVs and trucks picked up during the past few weeks. Some contacts believe that a stronger construction industry is responsible for rising truck sales. With model-changeover time approaching, dealers are seeing some buildup of new car inventory. Used-car purchases showed a modest increase month-over-month and year-to-date. Looking forward, dealers believe that the level of sales will remain elevated, although the pace of sales growth might slow somewhat. The use of incentives has picked up, especially for less popular models. We heard a report about dealers needing to be more adept at using technology to attract younger buyers. Demand for service technicians is growing, but dealers are having difficulty finding qualified applicants.