Beige Book - September 3 2014
Summary of Commentary on Current Economic Conditions by Federal Reserve DistrictPrepared at the Federal Reserve Bank of Philadelphia and based on information collected on or before August 22, 2014. 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.

Source: Board of Governors of the Federal Reserve SystemReports from the twelve Federal Reserve Districts indicated that economic activity has expanded since the previous Beige Book report; however, none of the Districts pointed to a distinct shift in the overall pace of growth. The New York, Cleveland, Chicago, Minneapolis, Dallas, and San Francisco Districts characterized their growth rates as moderate; Philadelphia, Atlanta, St. Louis, and Kansas City reported modest growth. Boston reported that business activity appeared to be improving, and Richmond reported further strengthening. Philadelphia, Atlanta, Chicago, Kansas City, and Dallas explicitly reported that contacts in their Districts generally remained optimistic about future growth; most of the other Districts cited various examples of ongoing optimism from specific sectors.
General consumer spending grew in most Districts at rates ranging from slight to moderate, with few changes in the pace of growth compared with the last Beige Book. Most Districts reported a continued expansion of auto sales, noting record-high levels for several markets within the Philadelphia and Dallas Districts; however, in some parts of the New York and Philadelphia Districts sales began to fall back from their relatively high levels. Tourism activity was reported to have increased across much of the nation, with many Districts reporting higher hotel booking and occupancy rates.

Activity among nonfinancial service sectors improved overall. District reports on manufacturing were mixed--divided almost evenly into one of three characterizations of the sector's activity: expanding, contracting, or unchanged. Among Districts reporting on their firms' near-term expectations, the manufacturing outlook remained generally upbeat, with New York, Philadelphia, Richmond, and Atlanta reporting increased optimism.

Since the previous Beige Book, residential real estate activity, particularly sales of existing homes and construction of new homes, generally expanded or held steady in about half of the Districts. About half of the Districts also reported some growth in construction and in sales or leasing of nonresidential properties.

Overall, loan demand rose in eight Districts and held steady in one. Credit standards were largely unchanged. Six Districts reported improving credit quality, falling delinquency rates, or both.

Reports regarding farm products were mixed; for some crops, high anticipated harvests have put downward pressure on prices and expected farm incomes. Generally, oil and gas production and demand for related activities continued to edge up from already high levels, while total coal production mostly held steady.

Trends in employment, wages, and prices were relatively unchanged in the Federal Reserve Districts, with greater wage pressures reported in sectors where shortages of skilled labor persisted.Consumer Spending and TourismMost Districts reported some growth in consumer spending with a pace of growth characterized as ranging from slight to moderate. Compared with the last Beige Book, the Chicago District noted a pickup in growth; Philadelphia indicated somewhat slower growth; and merchants in the Atlanta District reported that sales had weakened slightly. San Francisco contacts suggested that consumers appeared more optimistic about the recovery, New York reported mixed consumer confidence, and Cleveland and Richmond indicated that consumers were being conservative in their discretionary spending. Strong sales were noted for clothing and apparel in Boston and Chicago; household and home improvement categories in Boston and Kansas City; electronics in San Francisco; and back-to-school items in New York, Philadelphia, Cleveland, Atlanta, and Dallas. Cleveland also noted that some retailers have seen a significant rise in online shopping.

Since the previous Beige Book, auto industry contacts in most reporting Districts have noted continued expansion, with sales at high levels. In the Philadelphia District, Pennsylvania dealers claimed statewide record auto sales in July, as did an auto dealer in Dallas. However, sales in Pennsylvania began to back off their highs in August. Likewise, New York reported mixed results from some upstate auto dealers. Cleveland, Chicago, Kansas City, and San Francisco noted increased sales of SUVs and pickup trucks. Some Cleveland contacts attributed rising truck sales to a stronger construction industry, while contacts in San Francisco cited a decline in fuel prices as a factor. Inventory levels were mixed among reporting Districts, declining slightly in Kansas City, remaining at or above desired levels in St. Louis, and building up in Cleveland.

Tourism activity increased in all reporting Districts. Hotel occupancy rates remained high or rose in the Boston, New York, Philadelphia, Cleveland, Atlanta, and San Francisco Districts. San Francisco reported that strength in visitor volume in Las Vegas was due more to convention attendance than to tourism, and Richmond cited group bookings for business and reunion events as sources of strength. Most reporting Districts indicated optimism about future activity levels, with Boston, Richmond, and San Francisco reporting strong advance hotel bookings through the fall.Nonfinancial ServicesOn balance, nonfinancial services have grown since the previous Beige Book. The Boston District reported strong demand for software and information technology services, with contacts attributing this strength to continued economic recovery and robust demand for software products. New York, Philadelphia, and San Francisco firms reported moderate growth, and providers of professional business services in Minneapolis reported increased activity. Richmond, St. Louis, and Dallas reported modest growth in services, and Kansas City reported stable sales growth for professional and high-tech services firms. Conditions for staffing services were generally positive across reporting Districts. Staffing activity generally increased in Boston, and staffing contacts in Philadelphia noted increases in new clients and firms hiring to grow their businesses. Dallas reported mixed demand from staffing firms, noting strength in engineering, information technology, and health-care positions but flat demand for legal services.

Districts reporting on transportation services generally noted growth. Cleveland, Atlanta, and Dallas reported moderate to strong freight volumes. Richmond contacts attributed some recent growth in port activity to ships diverted from West Coast ports and to an early arrival of the peak import season. Kansas City transportation firms reported stable sales growth and continued high demand for construction products. Cleveland noted that amid broad-based demand strength, shipments of consumer durables and energy-related commodities and materials stood out. Dallas cited notable growth in shipping volumes for steel. Contacts from New York, Cleveland, and Atlanta mentioned driver shortages or difficulties finding qualified drivers, and contacts in Cleveland, Richmond, and Atlanta noted concerns about capacity for various types of transportation.ManufacturingSince the last Beige Book period, the Cleveland, Richmond, and Dallas Districts reported that manufacturing activity has expanded; New York, Atlanta, Minneapolis, and Kansas City indicated that their growth rates had moderated somewhat. San Francisco cited mixed reports from a variety of contacts. Boston, Philadelphia, and Chicago reported continued growth.
Within manufacturing, growth was reported across a broad base of sectors. Increases in auto production or derived demand for steel and other related products were cited by Philadelphia, Cleveland, Chicago, and Dallas. San Francisco cited increases in steel capacity utilization over recent months. Cleveland cited slightly lower steel shipments because of seasonal factors but indicated underlying demand was strong. Construction was cited as a source of increased demand by manufacturing contacts in the Philadelphia, Chicago, Minneapolis, and Kansas City Districts. Chicago reported that demand for heavy machinery picked up some on net, as higher demand for construction machinery overshadowed weakness for agricultural and mining machinery. Firms in the Boston District reported strengthening demand for semiconductors, while San Francisco reported that demand for semiconductors strengthened in part because of robust orders from other countries. With the exception of motor vehicle producers, manufacturers in the Atlanta District generally reported weakness in new orders and shipments. Manufacturing associated with the energy sector was cited as a continued source of growth by Philadelphia, Cleveland, and Dallas.

Contacts in most Districts expressed optimism about the near-term outlook for manufacturing growth. Moreover, in the New York, Philadelphia, Richmond, and Atlanta Districts, optimism reportedly increased in comparison with the previous reporting period. Boston and Cleveland reported that current capital spending is roughly in line with earlier plans. Kansas City indicated slightly diminished capital spending plans, but the outlook remained solidly positive across contacts.Real Estate and ConstructionBarely half of the Districts reported stable or growing residential real estate activity related to the construction of new homes and sales of existing houses. New construction and existing home sales generally grew modestly; market conditions tended to vary by metropolitan area and by neighborhood within metropolitan areas. Boston, New York, and Dallas reported high levels of ongoing multifamily construction projects; Chicago reported a moderate pace of growth, and San Francisco noted a pickup in activity.

A little over half of the Districts reported some degree of growth in nonresidential real estate activity, with increased construction, leasing, or both tied to steady or falling vacancy rates and to rent increases. None of the Districts reported a decline in overall activity, although New York and St. Louis described activity as mixed. In addition to traditional office space, certain Districts reported increased demand for specific projects: Boston noted demand for construction in the hospitality sector, Philadelphia cited industrial and warehouse projects, Richmond noted distribution centers, and St. Louis reported new retail and mixed-use projects as well as new industrial facility construction.Banking and FinanceOverall, banking conditions continued to improve from the prior Beige Book period. Loan volumes increased in nearly all reporting Districts, led by moderate gains in the San Francisco District and modest gains in Chicago. Philadelphia, St. Louis, and Dallas noted slight gains; Kansas City reported steady demand. Lending volumes rose in Richmond and appeared to increase, on net, in New York and Cleveland.

Auto lending was the category most often cited as growing. The Cleveland and Atlanta Districts reported very strong auto loan demand, while Philadelphia, Richmond, Chicago, St. Louis, and San Francisco also noted growth in this category. In addition, Philadelphia, Chicago, and St. Louis reported growth in credit card borrowing. San Francisco also noted a slight increase in unsecured consumer credit. New York and Cleveland reported that overall consumer loans had leveled off, while consumer installment loans were described as somewhat softer in the Kansas City District. Philadelphia and San Francisco reported increasing usage of home equity lines of credit, while slightly less usage was reported in the Cleveland District.

Demand for business credit expanded in most reporting Districts. Commercial and industrial (C&I) lending increased in the New York, Cleveland, Richmond, Chicago, St. Louis, and Dallas Districts; reports from the Philadelphia District were mixed. Cleveland reported that demand for C&I loans was greatest from manufacturers, energy producers, and health-care providers; Dallas also noted demand related to energy projects. Commercial real estate lending exhibited slight to moderate growth in the New York, Cleveland, Richmond, Chicago, and San Francisco Districts; Philadelphia and Dallas reported no change; and volumes in the Kansas City District decreased slightly.

Demand for residential mortgages was less robust; only the Philadelphia, Richmond, Chicago, and Dallas Districts reported increases (which were typically only slight), and New York, Cleveland, St. Louis, and Kansas City reported no change or slight decreases. Cleveland did note some increase in refinancing loans, as did Richmond; however, New York and Philadelphia reported continued declines in this loan category.

The Philadelphia, Dallas, and San Francisco Districts reported that credit quality improved further, while New York and Cleveland stated that delinquency rates fell across all loan categories. A survey of St. Louis District banks showed improved creditworthiness of applicants and unchanged or slightly lower delinquencies for several loan categories.

Credit standards remained generally unchanged in most Districts. Bankers in the Atlanta District reported that they were well capitalized but remained cautious about residential lending and fiercely competitive over commercial lending. Contacts in the Richmond and San Francisco Districts described intense competition among lenders for customers with high-quality credit. Philadelphia and Cleveland also reported heated competition. However, according to Atlanta District contacts, standards remained especially rigorous for first-time homebuyers.Agriculture and Natural ResourcesFarming contacts in many Districts have reported record-high crop yields, resulting in declines in market prices for cotton, corn, soybeans, and other agricultural commodities. The lower prices have resulted in lower expected incomes for some crop producers while reducing feed costs for some livestock producers. Dallas reported that historically high cattle prices have slowed the efforts of cattle producers to rebuild their herds. Chicago reported that hog and cattle prices have slipped during this Beige Book period; however, higher milk prices have helped the livestock sector stay profitable. Atlanta, Dallas, and San Francisco reported some drought-related disruptions. San Francisco reported higher shipping costs among growers because locomotives were being diverted to the Midwest to haul oil and gas rail cars to refineries in Texas.

Activity in the energy sector was generally positive. Oil and gas production and related activities continued to edge higher from already high levels, and total coal production was mostly steady. The Atlanta, Minneapolis, Kansas City, and Dallas Districts reported modest to brisk growth in activities related to oil production (refining, exploration, drilling, rigging, and oil field and geological services). Producers in the Kansas City District indicated that slightly lower oil prices have not negatively affected drilling plans. In contrast, coal production was reported to be relatively stable in the Cleveland and Richmond Districts; St. Louis pointed to modest growth. Richmond reported a modest decline in coal prices, and Cleveland described spot coal prices as remaining depressed. In addition, Cleveland indicated that activity in the Marcellus and Utica shale fields was continuing relatively unchanged at a high level.Employment, Wages, and PricesLabor market conditions, as measured by hiring trends, were reported to be relatively unchanged from generally modest rates in most Districts; however, contacts in nearly all Districts reported difficulties finding certain types of skilled labor. Contacts cited shortages of skilled information technology workers in the Boston District, of truck drivers in New York, and of construction workers in Atlanta. Employment agencies in New York described the job market as strengthening, and some Dallas contacts noted that the labor market remains very tight in the energy sector. Contacts in Cleveland, Richmond, and San Francisco also mentioned challenges finding qualified workers. Staffing contacts in Philadelphia reported that some of their clients are hiring to grow their businesses.

Generally, Districts reported little change in wage pressures, which were commonly characterized as slight or modest. Richmond was an exception, reporting that wage growth slowed in the manufacturing and service sectors. Stronger wage pressure was reported for specific categories of skilled workers. In particular, Atlanta, Chicago, Dallas, and San Francisco noted greater wage pressure for jobs in energy, construction, trucking, manufacturing, engineering, information technology, finance, and health care, among others. Some general contractors in the Cleveland District reported that they have increased wages and upgraded benefit plans as a means of attracting and retaining skilled workers.

Overall, price pressures remained largely unchanged. Input prices were described as modest, stable, or benign in reports from Boston, Cleveland, Atlanta, and Kansas City. Chicago noted that prices fell for corn, soybeans, hogs, and cattle but rose for milk during the current Beige Book period. San Francisco cited higher building supply prices, Minneapolis cited higher prices for some metals, and Chicago noted that energy prices generally remained elevated. Cleveland District contacts in the manufacturing and freight transportation sectors noted some ability to pass higher input prices through to customers with little pushback. By contrast, only a few companies in the Atlanta District noted plans to increase prices over the remainder of the year and expressed confidence that any increases would stick.