Eight times a year, the Federal Reserve issued the Beige Book, with a formal title “Summary of Commentary on Current Economic Conditions by Federal Reserve District”, a snapshot of business conditions in each of the Federal Reserve, 12 regional bank districts.
The idea is to detect trends in consumer spending, manufacturing and real estate, among other areas.
November has been quite a business month with the election, the military actions in the Middle East, the economic climate in Europe, the aftermath of Hurricane Sandy; the latest Beige Book was released on Wednesday, November 28th, based on information collected before November 14, 2012.
Economic activity expanded at a measured pace in recent weeks, according to reports from contacts in the twelve Federal Reserve Districts. Cleveland, Richmond, Atlanta, Chicago, Kansas City, Dallas, and San Francisco grew at a modest pace, while St. Louis and Minneapolis indicated a somewhat stronger increase in activity. In contrast, Boston reported a slower rate of growth. Weaker conditions in New York were attributed to widespread disruptions at the end of October and into November caused by Hurricane Sandy. Philadelphia reported general weakness that was exacerbated by the hurricane. Contacts in a number of Districts expressed concern and uncertainty about the federal budget, especially the fiscal cliff.
Among key sectors, consumer spending grew at a moderate pace in most Districts, while manufacturing weakened, on balance.
Several Districts reported slight gains in residential and commercial real estate.
Travel and tourism varied by District. Non-financial services also differed among Districts, in transportation; reports were, again, mixed. In addition, hurricane disruptions slowed freight shipments in some Districts, while simultaneously boosting demand for shipments of emergency supplies. In banking and financial services, higher demand for home mortgage loans and auto loans increased consumer lending in some Districts, although small business loan demand was generally described as weaker to only moderately higher. Credit quality improved on net.
Consumer Spending and Tourism
Consumer spending increased at a moderate pace in most Districts in recent weeks, with mixed reports from Dallas. In New York, sales were ahead of plan prior to Hurricane Sandy, and merchants expect to recoup sales lost during the storm as residents replace destroyed or damaged property.
Automobile sales varied by District. New York contacts said sales had flattened. Used car sales remained robust in New York
Looking to the holiday sales season, the Districts whose contacts gave an outlook noted mostly upbeat expectations. New York retailers anticipated recovering lost sales during the holiday season, Contacts in Boston, Cleveland, and Chicago remarked on their uncertain sales expectations because of the potential for tax changes in 2013, as the national budget outlook remained uncertain.
Tourism slowed in some Districts while strengthening in others. New York District tourism was mixed prior to Hurricane Sandy; hotel bookings initially dropped off following the storm, but business bounced back the next week. In addition, late cancellation of the New York marathon likely brought large numbers of visitors to the city in early November. Hurricane Sandy affected areas of the Philadelphia District along the coastlines of Delaware and southern New Jersey, in some cases demolishing houses and devastating businesses. New Jersey also suffered losses in revenue from the closure of Atlantic City casinos and the cancellation or delay of conventions there; expectations were that most areas along the Jersey shore would be rebuilt and ready for the summer season.
Reports from nonfinancial services providers differed among Districts. Boston reports were generally weaker than expected for tech services, while New York businesses indicated that the effects of Hurricane Sandy had negatively impacted both workers and customers. In the New York District, prolonged power and communications outages and extreme flooding hurt firms and residents, particularly on Long Island and in northern New Jersey.
Conditions in the manufacturing sector were mixed, though on balance, most Districts reported that conditions had weakened since the previous report. The Boston, New York, Philadelphia, Atlanta, Chicago, Minneapolis and Kansas City Districts reported that activity had either slowed or declined somewhat, with most reports leaning toward the latter.
Manufacturing contacts from five of the twelve Districts expressed concern about the outlook for 2013, in part, due to the uncertainty regarding the outcome of the fiscal cliff.
Real Estate and Construction
Overall, markets for single-family homes continued to improve across most Districts with the exception of Boston and Philadelphia. Residential real estate markets in the New York District were mixed but generally firm prior to the storm. Selling prices were steady or rising. Boston, New York, Richmond, Atlanta, Kansas City, and Dallas noted declining or tight inventories.
Construction and commercial real estate activity generally improved across Districts since the last report.
Several Districts noted segments of little change in commercial real estate activity. Commercial and industrial conditions were mixed throughout most of New York prior to the hurricane. New York added that, while office markets across upstate New York were unaffected by the storm, there were some signs of recent softening.
Banking and Financial Services
Loan demand generally was either mixed or slightly stronger across most Districts in recent weeks. Among those noting mixed results, New York reported that demand for consumer and especially commercial and industrial loans weakened, but commercial and residential mortgage demand was steady.
Used car loan demand was weak in the Dallas District, although first mortgage and energy-related lending increased. San Francisco cited weak-to-moderate business loan demand, but consumer lending expanded further with the help of auto loans and home mortgage refinancing; however, San Francisco noted that lending activity as a whole was unchanged. Most remaining Districts, including Philadelphia, Cleveland, Atlanta, and Kansas City reported moderate increases in total loan demand. In the Philadelphia District, banks reported widespread bank and ATM closings due to Hurricane Sandy.
With respect to loan quality, New York reported that delinquency rates increased in the consumer and commercial and industrial segments but held steady in the residential and commercial mortgage segments.
Employment, Wages, and Prices
Modest improvements in hiring activity were reported by most Districts. Labor markets were generally described as improving modestly by Boston, Atlanta, Chicago, Minneapolis, and Dallas. Staffing firms, according to Boston and Cleveland, experienced improved business conditions
Finally, contacts in a number of Districts reported difficulties finding qualified workers in some specialized occupations.
Wage pressures were generally characterized as "subdued" or "contained" throughout much of the nation, according to the latest District reports. Virtually every District described wage growth as modest at best.
As with wages, price pressures changed little from the modest pace that was reported in the last assessment. Almost every District described price growth as modest, although examples of higher price growth were occasionally cited.
Reports for the Second District: New York
The Beige Book for the Second District which includes New York, reported that economic activity in the district has weakened since the last report, (which was issued in early October), largely reflecting widespread disruptions from Hurricane Sandy.
Prices of finished goods and services have generally been stable. The labor market is difficult to gauge at this point--while hiring activity tapered off noticeably due to the storm, relatively few business contacts indicate that they plan to reduce headcounts in the months ahead.
Retailers report fairly strong sales for October but indicate that business in the last two weeks has been severely hampered by storm disruptions; auto dealers in upstate New York report some softening in auto sales in October.
Tourism activity in New York City was fairly strong prior to the storm; hotel business tapered off only modestly in early November, as the adverse effects of travel cancellations were partly offset by increased demand from local residents without power or access to their homes.
Residential real estate markets were generally firm through the latter part of October, though the storm has caused a substantial slowing in sales activity in and around New York City. Finally, bankers report some weakening in loan demand and increased delinquency rates in the consumer and commercial & industrial loan segments; for residential and commercial mortgages, both loan demand and delinquency rates are little changed.
Retail sales are reported to have been ahead of plan in October but exceptionally weak in early November in the New York City area, mainly due to widespread power outages, store closings and accessibility problems for both customers and workers. With the holiday sales season coming up--and with many residents in the region needing to replace destroyed or damaged property--all the lost sales are expected to be made up in the weeks ahead. One major chain reports that it is hiring more holiday-season staff than in 2011. The pricing environment is described as stable.
Auto dealers reported that used car sales reportedly remain fairly robust. There has also been some softening in business at dealers' service departments. Wholesale and retail credit conditions remain favorable.
Tourism activity in New York City was mixed in October but dropped off noticeably following the late-October storm. Hotels across much of lower Manhattan lost business in late October and early November, when they were without power for a number of days. Overall revenue for Manhattan hotels slumped nearly 10 percent below 2011 levels during the week of the storm but bounced back in the subsequent week.
The New York City marathon, although cancelled at the last minute, likely brought large numbers of visitors to the city during the first weekend in November. Attendance and revenues at Broadway theaters, which had already weakened modestly in October, fell sharply during the week of the storm; attendance rebounded modestly in the second week of November but remained roughly 15 percent below last year's level. In my discussion with a principal at one of the theater companies, attendance has returned with near record attendance during the Thanksgiving holiday.
Finally, consumer confidence in the region climbed to its highest level in well over a year in October (prior to the storm), based on both the Conference Board's survey of residents of the Middle Atlantic states (NY, NJ, Pa) and Siena College's survey of New York State residents.
Construction and Real Estate
Residential real estate markets in the District were mixed but generally firm prior to the storm, and its effects on the market remain unclear at this point.
Manhattan's rental market remained on a positive trajectory in October, with rents up roughly 5 percent from a year earlier and vacancy rates continuing to decrease. Contacts in the metro market report rents continue to rise and industry leaders expect rents to rise by as much as ten percent in 2013.
Sales markets in both Manhattan and the outer boroughs were fairly active in October, with prices steady and the inventory of available homes characterized as low.
An expert on New Jersey's housing sector notes that conditions were improving gradually prior to Sandy and expects that post-storm rebuilding will boost multi-family construction.
The storm caused a noticeable slowdown in sales activity throughout the New York City metropolitan region, but this is expected to be temporary. With many homes along the New York City, Long Island and New Jersey shorelines severely damaged or destroyed, the lean housing inventory is a concern, as displaced residents seek short-term rentals.
There is some concern as to how much of the shore communities will be rebuilt and how quickly, but one industry expert anticipates that residents in the severely-damaged areas will be strongly motivated to return and rebuild. Some of the biggest potential challenges are likely to be shortages of construction equipment and materials, and steeper prices for insurance.
Commercial real estate markets were mixed prior to the storm. A number of large office buildings in lower Manhattan remain out of commission due to extensive flooding; however, a major brokerage contact indicates that displaced businesses do not seem to have had much trouble finding temporary quarters.
Overall market conditions are not reported to have changed much, thus far, since the storm--between the end of September and mid-November, asking rents have risen modestly in Manhattan but declined modestly in northern New Jersey.
Other Business Activity
Manufacturers across the District indicate continued weakness in general conditions since the last report; virtually all contacts in the New York City area report some loss in business due to storm-related disruptions. Manufacturers in upstate New York, which was not significantly affected by Sandy directly, reported only scattered and indirect effects from the storm, though these contacts also report some further weakening in business conditions.
Business contacts throughout the southern part of the District--in both manufacturing and other sectors--report widespread effects of the storm, particularly in northern New Jersey and on Long Island. In these parts of the District, many businesses indicate that the impact has been both severe and protracted, due to prolonged power and communications outages, as well as transportation disruptions that have prevented both workers and customers from accessing the business.
A trucking industry expert notes that many terminals and warehouses sustained severe flooding, which has disrupted business; at least one firm has gone out of business as a result. Business contacts in both manufacturing and other sectors report steady input price pressures and little change in selling prices.
Labor market conditions have weakened, probably temporarily, in the aftermath of Sandy. A major New York City employment agency specializing in office jobs reports a sharp drop-off in business after the storm, because many firms either shut down or operated without key personnel.
Separately, a growing number of manufacturing contacts--not only in the New York City area but also in upstate New York--report declines in employment at their firms.
However, businesses in other sectors report little or no change in employment. Contacts in both manufacturing and other sectors expect headcounts to remain steady, on net, over the next six months.
Small- to medium-sized banks across the District report weaker demand for consumer and especially commercial & industrial loans but steady demand for commercial and residential mortgages.
Bankers report increased demand for refinancing. In my discussion with lenders, demand for refinancing is expected to be greater in the final two months of 2012 as compared to the prior year. CMBS financing has returned with highly competitive pricing by Wall Street.
Respondents do not report any change in credit standards in any loan category. Bankers indicate a decrease in spreads of loan rates over costs of funds for all loan categories--particularly commercial mortgages.
Respondents also indicate decreases in average deposit interest rates: nearly two in five bankers report a decrease while none reports an increase. Bankers note increased delinquency rates for consumer loans and commercial & industrial loans but no change in delinquency rates for residential or commercial mortgages.
When asked what effects Sandy had on their business, almost half of the bankers report no noticeable effect so far; however, many of these respondents expect that effects of the storm could become evident in the future, especially for commercial businesses and as damage to collateral is assessed.
On the other hand, more than 40 percent of those surveyed were affected directly by the storm, with widespread branch closings and power outages reported. Banks in the most severely affected areas--largely New Jersey, as well as lower Manhattan and Queens--have received a high volume of calls from customers with home damage, and banks are physically inspecting buildings for damage before making new loans.