Federal Reserve Beige Book June - Business Insider

UPDATE:?The Federal Reserve's latest Beige Book report is out.

The key headlines: the Fed says growth was "modest to moderate" across most of the United States. Most areas saw slight to moderate gains in consumer spending. Hiring increased at a "measured pace" in several districts.

Below is the full text of the release.

Summary of Commentary on Current Economic Conditions by Federal Reserve District

Prepared at the Federal Reserve Bank of Minneapolis and based on information collected on or before May 24, 2013. This document summarizes comments received from business and other contacts outside the Federal Reserve System and is not a commentary on the views of Federal Reserve officials.

Overall economic activity increased at a modest to moderate pace since the previous report across all Federal Reserve Districts except the Dallas District, which reported strong economic growth. The manufacturing sector expanded in most Districts since the previous Beige Book. Most Districts noted slight to moderate gains in consumer spending and a moderate increase in vehicle sales. Tourism showed signs of strength in several Districts. A wide variety of business services expanded, and transportation traffic increased for producer, consumer, and trade goods. Residential real estate and construction activity increased at a moderate to strong pace in all Districts. Commercial real estate and construction activity grew at a modest to moderate pace in most Districts. Overall bank lending increased since the previous report. Credit quality and deposits increased, while credit standards were largely unchanged. Agricultural conditions remained mixed across Districts, as weather patterns varied. Overall activity in the energy sector was flat, and mining was down.

Hiring increased at a measured pace in several Districts, with some contacts noting difficulty finding qualified workers. Wage pressures remained contained overall, although several Districts reported a modest or moderate rise for selected occupations. Districts reported level prices to mild price increases; some manufacturers raised prices and some increases for input prices were noted.

Manufacturing
The manufacturing sector expanded in most Districts since the previous Beige Book. Activity increased in the Boston, Cleveland, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco Districts. Manufacturing contacts in the New York District reported steady business activity. In the Philadelphia District, manufacturers reported that orders and shipments have fallen somewhat, and in the Richmond District, manufacturing activity softened since the previous report, although there were scattered reports of improvement. Most firms in the Boston District are reasonably optimistic about the outlook, and many contacts in the Cleveland District believe that business conditions will continue to improve slowly during the second half of the year. However, the near-term outlook has waned somewhat in the New York District.

Continuing a theme from the previous report, strength in residential construction was a boon to manufacturers who supplied that industry. Firms in the Philadelphia District supplying the home-building sector reported strong orders, and the Cleveland District noted that suppliers to residential construction were among those seeing the strongest activity, while the Richmond, St. Louis, Dallas, and San Francisco Districts all reported increased demand for lumber or wood products. Growth in the auto industry was noted by the Philadelphia, Cleveland, Atlanta, Chicago, and St. Louis Districts, although the Chicago District reported that the auto industry grew at a more moderate pace. Producers of inputs for the oil and gas industries saw growth in the Philadelphia, Cleveland, and Atlanta Districts. The food processing industry grew in the Philadelphia and Dallas Districts. Electrical equipment saw increased activity in the Boston and San Francisco Districts but lower activity in the Philadelphia District. Demand for fabricated metals expanded in the Philadelphia District, while specialty metal manufacturers in the Chicago District reported small increases in new orders, noting that their customers had become more cautious. Fabricated metals producers in the Dallas District reported that demand remained steady for both private and public projects.

The defense industry experienced weakening activity in the Cleveland District, and a producer of defense equipment in the Richmond District cited government sequestration and orders being canceled or delayed. Steel production was mixed. Steel producers in the Cleveland District reported that shipping volume was stable but remains below levels seen early in the first quarter, and both the Cleveland and Chicago Districts noted an increase in imports of steel. The St. Louis and San Francisco Districts reported an increase in demand for steel. Lower demand for primary metals was noted in the Philadelphia and Dallas Districts.

Consumer Spending and Tourism
Most Districts noted that consumer spending increased during the reporting period, ranging from slight to moderate gains. Retail activity in the Boston, Philadelphia, and Dallas Districts was characterized as modest or moderate, while the Cleveland, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, and San Francisco Districts reported slight growth. Retailers in the New York District reported that sales were tepid in April but picked up in May. Meanwhile, the Richmond District noted that sales were flat during the reporting period. The Boston, New York, Philadelphia, Cleveland, Richmond, Chicago, and Minneapolis Districts reported that late winter weather slowed retail sales; the Chicago District noted that sales picked up once warmer weather arrived. Demand for home furnishings and furniture was strong or picked up in the Boston, Cleveland, and Richmond Districts; however, furniture sales slowed in the Chicago District. The Kansas City District reported that appliance purchases were particularly strong. Inventories were generally at desired levels in the New York and Chicago Districts. The outlook for retail spending was positive in the Kansas City and Dallas Districts, while more cautious expectations were noted in the Boston, Cleveland, and St. Louis Districts.

Vehicle sales generally increased moderately across Districts. The New York, Richmond, and San Francisco Districts reported that sales remained strong or at high levels. Meanwhile, the Minneapolis District reported modest growth in auto sales, and contacts in the Kansas City District reported that sales declined. Used car sales increased in the Chicago and St. Louis Districts, while the Richmond District noted that the availability of used cars improved. Meanwhile, the New York, Cleveland, and San Francisco Districts reported a shortage of used cars or a decline in used car sales. Inventories increased in the Cleveland and Kansas City Districts, while inventories were lean in the Philadelphia District. More respondents to a St. Louis District survey indicated that inventories were too high than too low. The Philadelphia, Cleveland, St. Louis, Kansas City, and Dallas Districts noted that the outlook for future sales was generally positive.

Tourism showed signs of strength in several Districts. The Boston District reported increased tourism revenues but noted that attendance at museums and attractions was down, perhaps due to weather affecting leisure travel plans. The New York District noted that tourism activity was mixed but fairly robust since the previous report. The Richmond District reported that unseasonably cool weather negatively affected some resorts. Leisure and international travel continued to experience healthy demand in the Atlanta District. Extended winter weather boosted skiing in parts of the Minneapolis District. The San Francisco District reported that travel and tourism activity in Hawaii was robust, while activity in southern California declined a bit. Hotel occupancy and room rates were higher in the Atlanta and Kansas City Districts. Advanced bookings and the overall outlook for summer travel were optimistic, but the San Francisco District noted some concern that the flow of international visitors could taper off in coming months due to potential weakness in the global economy.

Nonfinancial Services
Nonfinancial services activity grew at a modest to moderate pace since the previous report. The Philadelphia District noted steady gains, while moderate growth was reported in the Minneapolis District. The San Francisco District saw flat demand for health care and legal services. The Boston District noted sluggish activity in information technology services, while the Kansas City District saw increased demand for high tech services. Information technology, distribution, business support, health care, engineering, and hospitality firms expanded in the St. Louis District. The Richmond District reported "renewed vigor," especially for technology and architectural firms. The Dallas District saw strong demand for accounting services and modest increases in legal services.

Transportation activity increased. The Cleveland District noted strong activity, while both import and export traffic increased in the Richmond District. The Atlanta District reported increased movement of petroleum products and wood products but decreased shipments of grain products, metallic ores, military machinery, and transportation equipment. The Dallas District saw increased cargo and container volumes. The Kansas City District reported slower transportation activity due to poor weather conditions. Minneapolis District contacts expected small increases in freight traffic in the second half of the year.

Real Estate and Construction
Residential real estate and construction activity increased at a moderate to strong pace in all Districts. Several Districts reported that higher demand and low inventory of homes available for sale are resulting in multiple offers on properties. Almost all Districts reported higher home sale prices. The Kansas City District reported concerns that appraisals were not keeping pace with price increases. Foreclosed properties available for sale have declined significantly in the San Francisco District. The rental market remains tight with noticeable increases in rental rates in the New York District. Residential construction increased across all of the reporting Districts. Several Districts noted increases in multifamily projects. The Minneapolis District reported that many markets saw huge percentage increases in building permits from a year ago. Builders are cutting back on discounting in the Cleveland District. The Richmond District noted that increased construction has pushed up the price of building lots, and the Atlanta District reported that the lack of available lots has constrained building activity. The Philadelphia District commented that builders are facing problems, as the long housing recession has disrupted the supply chain for materials and the pool of skilled workers.

Commercial real estate and construction activity expanded at a modest to moderate pace in most Districts. The New York District reported that the Manhattan market is particularly robust. The Chicago District noted that an increase in demand for leasing was pushing up commercial rents, with strong demand from the health care sector. However, a market in the Boston District indicated no change in commercial rents or vacancy rates since the previous report. A market in the Richmond District had more hotels complete construction, and retail space was absorbed at a faster pace. Commercial construction continues to expand. The Philadelphia District said that most construction activity is related to ongoing demand for industrial warehouse space, higher education facilities, and public utility infrastructure. The Atlanta District reported that most activity was coming from build-to-suit projects. The Dallas District noted an increase in office building construction. The Cleveland District said that many projects are in development, but new inquiries are weak. The San Francisco District noted that in some regions, construction of publicly funded commercial projects has slowed due to funding constraints from state and local governments.

Banking and Finance
Overall bank lending increased modestly since the previous report. The Cleveland District noted that consumer demand for auto loans increased and that demand for residential loans shifted from refinancing to new purchases. The Chicago District indicated modest growth in business loan demand. The Dallas District reported robust growth in residential mortgages and auto lending with continued weakness in corporate transactions. The New York District saw an increase in demand for all types of loans except commercial and industrial loans, where demand was unchanged. San Francisco District banking contacts reported ample liquidity and competition among lenders for well-qualified business borrowers but limited credit availability for small businesses. The Philadelphia District noted slow loan growth, and the Atlanta District reported weak loan activity.

Credit quality improved, on balance. The New York and Cleveland Districts reported widespread decreases in delinquency rates for business and consumer loans. Several Districts reported that credit standards have not changed much since the previous report.

Agriculture and Natural Resources
Agricultural conditions remained mixed across Districts, as weather patterns varied. Recent rains brought drought relief to the Atlanta, Chicago, and Minneapolis Districts but delayed or slowed plantings in the Richmond, Atlanta, Chicago, St. Louis, Minneapolis, and Kansas City Districts. Meanwhile, drought conditions worsened in the Dallas District, and contacts in the San Francisco District remained concerned that limited water availability in parts of the District could pass through to lower seasonal hiring and reduced agricultural output in coming months. Farm incomes increased in the Minneapolis District, while farm income growth softened in the Kansas City District. Well over 90 percent of the St. Louis District's winter wheat crop was rated in fair or better condition, but winter wheat crop conditions deteriorated further in the Kansas City District, with much of the crop in relatively poor condition. Forage crops were having a great spring in the Richmond District, and pastures and hayfields were in good condition.

Overall activity in the energy sector was flat, and mining was down. The San Francisco District saw decreased natural gas drilling. The Cleveland, Atlanta, and Kansas City Districts noted that oil activity was flat and that natural gas activity was up. The Minneapolis District reported that the energy sector remained strong. The Dallas District said that drilling activity was up. Coal mining was down slightly in the Cleveland and St. Louis Districts, while coal mining in the Kansas City District was steady. Iron ore mining production was down in the Minneapolis District.

Employment, Wages, and Prices
Hiring increased at a measured pace in several Districts, with some contacts noting difficulty finding qualified workers. Labor markets continued to improve in the New York District. The Boston District reported that with only a few exceptions, businesses were not hiring much beyond replacement, while labor markets in the Richmond District were uneven. Labor markets continued to improve slowly in the Chicago District. The St. Louis District reported that employment levels over the past three months have stayed the same or increased for a majority of contacts. Labor markets tightened in the Minneapolis District, particularly near the oil boom area in western North Dakota and eastern Montana, although some easing in the pace of growth was noted over the past six months. Labor markets were steady in the Dallas District. The New York, Philadelphia, Richmond, Minneapolis, Kansas City, and Dallas Districts cited examples of contacts reporting difficulty finding qualified people to fill vacancies. The Richmond and Cleveland Districts noted that new hours of service regulations may exacerbate difficulty finding truck drivers. A number of Districts reported solid demand for workers in information technology, health care, and engineering. The Richmond and Atlanta Districts cited employment reductions due to cutbacks in government orders or staffing at government offices. Among staffing services firms, billable hours increased in the Philadelphia District but decreased in the Boston District. Meanwhile, staffing services were steady in the Dallas District and mixed in the Cleveland District. The outlook for hiring was generally positive in the Richmond and Minneapolis Districts.

Wage pressures remained contained overall, though several Districts reported a modest or moderate rise for selected occupations. The Cleveland, Minneapolis, Dallas, and San Francisco Districts indicated that overall wage pressures were subdued. The Philadelphia and Kansas City Districts reported that wage pressures increased slightly, while reports were mixed in the Richmond District. The New York District noted that although qualified job candidates were said to be increasingly hard to find, most employers were holding the line on compensation. Exceptions included increased wages for home builders in the Philadelphia District, and legal and financial services in the Dallas District. Contacts in the Richmond, Chicago, and Kansas City Districts expressed concern over the effect of health care reform on labor costs. The Philadelphia and Cleveland Districts reported increased costs for health insurance.

Districts reported level prices to mild price increases. The Boston District reported that aside from food, input prices were generally unchanged, although a few manufacturers have raised their own prices. Manufacturers in the Richmond District indicated that finished goods prices grew at a somewhat quicker pace. The Kansas City District reported that while finished goods prices remained fairly flat, manufacturers planned to raise finished good prices over the next few months to partially offset higher input costs. However, most firms in the Atlanta District continued to report having little pricing power, and the Chicago District noted that pass-through to downstream prices remained limited. The Philadelphia and Cleveland Districts reported higher construction materials prices. Meanwhile, the San Francisco District noted that prices for cement, logs, and lumber edged up, while prices for wood products, steel, and some metals declined. Gasoline prices spiked higher in the Minneapolis District, and several Districts noted that natural gas prices increased since the previous report. The Dallas District reported that most contacts expect price increases to remain modest for the remainder of the year.

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First District--Boston

First District business contacts generally report year-over-year increases in economic activity, although some--notably in software and information technology services and staffing--indicate the pace of growth is slowing. Retailers mostly say demand is recovering well after weather-related softness during the winter; manufacturing contacts' sales are also ahead of last year. With only a few exceptions, businesses are not hiring much beyond replacement. Aside from food, input prices are generally said to be unchanged, although a few manufacturers have raised their own prices. The outlook is fairly positive, with most respondents expecting the current pace to continue or pick up.

Retail and Tourism
Retailers are rebounding from the negative impact of harsh and prolonged winter weather earlier this year, but the late arrival of warmer spring weather has affected the sales of some seasonal items. Merchant contacts report April year-over-year comp-store sales ranging from a 0.5 percent decline to a 9 percent increase. Demand is strong for women's apparel, home furnishings, and furniture. Respondents say consumer sentiment seems a bit more positive, especially over the last month or so, yet overall expectations remain cautious. Contacts continue to predict low-single digit sales increases for 2013.

Greater Boston tourism revenues are up after softer performance attributed to harsh winter weather earlier in the year. Through Q1 2013, hotel revenues are up 2 percent year-over-year, and occupancy rates are also up 2 percent. Restaurants revenues are 1.5 percent ahead of a year ago. Much of this increase is attributed to strong domestic and foreign business travel. Attendance at museums and attractions is down, perhaps due to weather affecting leisure travel plans. Boston-area tourism was reduced by the marathon bombings as some groups were forced to reschedule visits.

Manufacturing and Related Services
Three-quarters of contacted manufacturers report higher sales compared with the same period a year ago. Geographically, firms say that Europe remains weak and that both the U.S. and Asia are growing but slightly below expectations; by contrast, one contact called Europe a bright spot because it exceeded somewhat low expectations. An electrical equipment manufacturer reports low to middle single-digit growth across the board except for their products going into residential construction, which consistently rack up double-digit growth versus the year-earlier period. Several contacts, including the electrical equipment manufacturer and a supplier to the semiconductor industry report unusually volatile month-to-month readings.

All of our contacts report little or no pricing pressure on the input side and several say they were able to make price increases stick on the sell side. A dairy firm says food prices are up because of drought conditions, but notes that recent rainfall may change that. Winter storms had some temporary effect on energy prices for some firms.

Five of eight contacts are hiring, although only one is hiring in any significant way and their hiring is outside the U.S. Of the contacts not adding to headcounts, only one is laying off workers; this firm--a maker of parts for machinery--is planning to reduce headcount by 2 percent to 3 percent over the next six months on top of a similar reduction over the last six months.

Six of eight respondents are increasing capital expenditures and one of the others says its expenditures are low only relative to some exceptional investments in 2012. One contact in the electrical equipment business says they have "too much cash" and are looking for investments. Firms cite mixed opportunities to acquire other companies, with one having a "full pipeline" of acquisitions and another saying there is nothing to buy.

Three-quarters of contacts are reasonably optimistic about the outlook. Several who reported some softness in the winter said their customers were talking about demand growing in the second half.

Software and Information Technology Services
New England software and information technology services contacts generally report continued sluggishness through May to date, with year-over-year revenue increases moderating further in the most recent quarter to the low or middle single digits. Two contacts attribute the slowdown to economic uncertainties in the U.S. and Europe, which they say have led many manufacturers to delay the execution of long-term license agreements. A healthcare contact, by contrast, attributes the dip to the ending of federal stimulus funding for electronic health records software. Only one contact, a provider of cloud-based payment and banking software, reports accelerated growth, with revenues in the first quarter up more than 15 percent relative to Q1 2012. Lackluster activity has led the majority of contacts to slow the pace at which they are hiring; many now plan to maintain their current headcounts through the end of the year. Selling prices and capital and technology spending are largely unchanged. Looking forward, software and IT firms in New England remain cautiously optimistic, with most expecting more robust growth in the second half of 2013.?

Staffing Services
First District staffing contacts report weaker-than-expected demand in recent weeks, with billable hours generally falling towards their year-earlier levels. The dip in activity reportedly reflects a leveling off in the IT sector and downticks in temporary and permanent hiring in the light industrial and manufacturing sectors. There is, however, renewed activity in the healthcare sector, with one contact reporting a substantial increase in demand for ambulatory nurses. In terms of labor supply, candidates with high-end skill sets, such as mechanical and electrical engineers and software developers, remain hard to find. Nevertheless, bill rates and pay rates have gone largely unchanged in 2013. Looking forward, staffing contacts are generally less upbeat than they were three months ago, with most expecting only modest growth through the end of 2013.

Commercial Real Estate
Commercial real estate leasing and sales activity held roughly steady or improved in recent weeks in the First District. A Hartford contact notes a modest increase in foot traffic for downtown and suburban office space but no significant changes in rents or vacancy rates since the last report, virtually no construction, and a flat industrial market. In Boston's inner-suburban corridor, office rents are up and vacancies down. In Boston proper, prime retail rents are up at least 5 percent over the quarter; office fundamentals continue to improve across the city, very slowly in the financial district and at a brisker pace in the Seaport/Innovation district. Leasing volume dipped slightly in downtown Providence and mostly improved in suburban Rhode Island, with rents about flat. Defense-industry tenants in southern Rhode Island are reducing their space needs in response to federal spending cuts, moves that are likely to put downward pressure on rents in the local submarket in coming months. In Portland, retail leasing activity picked up and apartment rents rose while the office leasing market was flat. Business confidence in southern Maine reportedly improved but no major expansions or hiring plans were announced.

Values for prime downtown Boston properties--including office buildings and apartment buildings--continue to rise, leading to talk of overheating. Investors are purchasing empty retail space in Boston for the first time since the onset of the Great Recession. Continuing a recent trend, investors are increasingly purchasing prime, well-leased commercial properties in Hartford, Providence, and Portland, markets which are seen as value propositions in comparison with higher-priced Boston. So far in the cycle, however, new construction in these markets has been very limited. Commercial real estate loan demand rebounded at one regional lender as competition for such loans drove mortgage interest rates to new lows.

Contacts are mostly optimistic that commercial leasing fundamentals will continue to improve at least slowly in the coming months. The outlook includes upside potential for absorption in Providence, Hartford, and Boston based on deals in progress and current employment trends. In Rhode Island, however, the upcoming gubernatorial election and state and local budget deficits--as well as the defense cutbacks noted above--present downside risks. In Connecticut, negative effects of sequestration on defense-industry tenants seem inevitable, but the commercial leasing implications are uncertain.

Residential Real Estate
Throughout much of the First District, the median sales price of single-family homes and condos rose year-over-year in March and April. Sales of single-family homes also increased from a year earlier in most of the region during April, after weaker sales results in March. According to contacts, demand for homes remains strong due to low interest rates, relatively low prices, and improving confidence among buyers. However, contacts continue to report that shrinking inventory levels are slowing sales and placing upward pressure on prices. In Massachusetts and the Greater Boston area, dwindling inventory levels have been a significant source of concern; contacts in the other states also express worry about falling inventory levels, but to a lesser extent. Several respondents note that much of the housing recovery has been centered around urban areas while rural areas have experienced more modest improvements. Within the Greater Boston area, realtors have observed an increasing frequency of multiple offers on properties.

Contacts anticipate that single-family home and condo prices will continue to rise over the next several months, with inventory levels a significant factor determining the degree to which sales can grow. Overall, contacts say they feel optimistic about the trajectory of the housing market and believe the market will continue to recover as general economic conditions improve.

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Second District--New York

Economic activity in the Second District has continued to expand at a moderate pace since the last report. Price pressures have abated somewhat among manufacturers, though they remain more widespread in the service sector; contacts continue to report that selling prices are steady to up modestly. Labor market conditions continue to improve, and businesses increasingly report difficulty finding well-qualified workers. Retailers report that sales were tepid in April but picked up in early May, and new automobile sales have remained strong. Tourism activity has been mixed but generally robust. Commercial and residential real estate markets have strengthened further since the last report. Finally, credit conditions improved across the board, with bankers reporting increased loan demand, widespread narrowing in loan spreads, and declining delinquency rates across all loan categories.

Consumer Spending
Retailers report that sales were generally soft in April but strong in early May. One major retail chain reports that same-store sales were somewhat below plan in April--partly due to cool weather--but picked up in early May; another indicates that sales have been running somewhat ahead of plan in both months. Both retailers indicate that their New York City stores performed relatively strongly. Two malls in upstate New York report that business was sluggish in April, partly due to cool weather, but has been brisk in the first half of May; a number of new stores are scheduled to open in the weeks ahead. Inventories remain at desired levels, prices are characterized as steady, and no unusual discounting is reported.

Auto dealers in the Buffalo and Rochester areas report that new vehicle sales were robust in April and early May, running well ahead of comparable 2012 levels. On the other hand, sales of used automobiles softened further and are down from a year earlier; this is partly attributed to better deals on new vehicles. Wholesale and retail credit conditions for auto purchases remain in good shape.

Tourism activity has been mixed but generally fairly robust since the last report. Manhattan hotels report that business was steady at a strong level in April and picked up in early May; occupancy rates have been roughly on par with a year ago, with room rates up 2 to 4 percent. Bookings for Memorial Day weekend are described as very strong. Albany area hotels indicate a pickup in business in April, with occupancy and room rates rising for the first time since last summer. On the other hand, overall attendance at Broadway theaters remains tepid, running 10-20 percent below a year ago in April and the first three weeks of May; this mainly reflects a reduction in the number of shows running. Finally, consumer confidence in the region has been mixed: The Conference Board's April survey of residents of the Middle Atlantic states (NY, NJ, Pa) shows confidence surging to its highest level in more than a year; however, Siena College's survey of New York State residents shows consumer sentiment little changed in April, at its lowest level since then end of 2011.

Construction and Real Estate
Residential real estate markets in the District have strengthened further since the last report. New York City's home sales and rental markets have shown further signs of tightening--on both the sales and rental sides. Both apartment sales prices and transaction volume continue to run well ahead of a year ago in Manhattan and especially in prime areas of Brooklyn, reflecting a low inventory of available units. The rental market also remains tight: rents continue to rise at a roughly 6-7 percent annual rate in Manhattan and at a somewhat faster pace in Brooklyn; the Queens rental market is also seeing a pickup. Long Island, where the housing market had been generally flat until recently, has seen a recent sharp pickup in pending home sales and a drop in the inventory of homes for sale. Northern New Jersey continues to see modest, steady improvement in its housing market. With a relatively low inventory of new homes, prices are rising gradually; however, a sizable overhang of distressed properties is reported to be restraining price appreciation. A real estate contact in western New York reports increasingly strong market conditions: inventories have fallen, bidding wars have become increasingly common, and home prices have been rising.

Commercial real estate markets across the District have also shown signs of improvement thus far in the second quarter. Manhattan's office market has been particularly robust: vacancy rates are little changed, despite a sizable block of new development coming onto the market; asking rents are up roughly 5 percent over the past year. Elsewhere in the region, office markets are mostly steady to stronger: vacancy rates fell in Long Island, northern New Jersey, Rochester and Albany and were little changed in the Long Island and Buffalo markets. One exception is the Westchester/Fairfield county market, where vacancy rates have risen to a ten-year high, and office rents have been declining. The market for industrial space has been steady to stronger: vacancy rates have declined modestly in the Long Island and Westchester/Fairfield markets and held relatively steady in northern New Jersey and across upstate New York.

Other Business Activity
Manufacturing contacts again report steady business activity in recent weeks, while their optimism about the near-term outlook has waned somewhat. In contrast, contacts in other sectors generally report some pickup in business activity and employment; they also express increased optimism about the business outlook, and a growing number of them plan to add workers and increase capital spending. Price pressures are mostly reported to be steady and moderate in the manufacturing sector but more widespread among service-sector businesses; still, relatively few service-sector contacts say they are increasing their selling prices.

The labor market continues to improve gradually but steadily. A growing proportion of business contacts say they are adding workers, except in the manufacturing sector, where employment is reported to be little changed. Two major employment agencies report that hiring activity has been fairly robust, particularly for information technology workers. There is also reported to be fairly strong demand in fields such as auditing and compliance. Large financial firms, typically a major source of jobs in New York City, are reported to be hiring only sporadically. While the temp business remains strong, a growing number of firms are hiring full-time workers. Although qualified job candidates are said to be increasingly hard to find, most employers are still said to be holding the line on compensation, though some are becoming more negotiable.

Financial Developments
Small- to medium-sized banks report an increase in demand for all types of loans except for commercial & industrial loans, where demand was unchanged. Bankers report little change in demand for refinancing, on balance. Contacts report that credit standards are unchanged across all loan categories. Bankers continue to indicate narrowing in spreads of loan rates over costs of funds for all loan categories--most notably in commercial mortgages. Interest rates on deposits continue to decline, on balance. Finally, bankers report fairly widespread decreases in delinquency rates for all loan categories.

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Third District--Philadelphia

After many months at a generally more modest pace of growth, aggregate business activity in the Third District has accelerated somewhat to a moderate pace of growth during this current Beige Book period. In particular, the growth rate of residential construction, general retail sales, general services, staffing services, and tourism appears to have accelerated somewhat from a more modest rate of growth to join auto sales and existing home sales at a moderate growth rate. Commercial real estate leasing continued to expand at modest rates, while commercial real estate construction continued to expand only slightly. Manufacturing appears to have declined somewhat after expanding slightly last period. Loan volumes at Third District banks resumed growing slightly across most categories, while credit quality continued to improve. General price levels, as well as wages and home prices, were reported to have increased slightly overall--similar to the last Beige Book period.

The overall outlook for growth has improved slightly since the last Beige Book to anticipate a continuation of the current moderate pace of growth. Despite lingering uncertainties, contacts expressed greater confidence in the underlying strength of the economy, especially as the housing market recovery begins to gain strength. Firms are more comfortable reinvesting where necessary; however, many continue to hold off on major expansion plans of capital and labor until the recovery gains more momentum.

Manufacturing
Since the last Beige Book, Third District manufacturers have reported that orders and shipments have fallen somewhat. The makers of food products, lumber and wood products, paper products, and fabricated metals have reported gains since the last Beige Book. The makers of primary metals, electronic equipment, and instruments reported lower activity. Reports were mixed for makers of industrial machinery. Firms supplying the home-building sector reported strong orders and ongoing hiring to keep pace. Other contacts attributed growing demand to the oil and gas, auto-related, and aerospace sectors. Firms supplying other sectors reported flat or weakened demand. Employment levels were generally reported as flat to down.

Across all sectors, Third District manufacturers remained optimistic that business conditions will improve over the next six months. One contact from a housing-related manufacturer reported that orders from contractors were 22 percent ahead of last year; still, another stated that "firming in the housing market is key to a more favorable outlook" from his firm's dealers. Overall, firms have somewhat increased their expectations of future hiring and their plans for capital spending since the last Beige Book.

Retail
Third District retailers reported moderate growth overall. Since Easter sales shifted to March this year, April began with a continuation of modest growth; however, retailers reported strong sales for Mother's Day weekend. Restaurants were booked with moms and their families, which generated heavy traffic and sales for adjacent retailers. Volatile spring temperatures created challenges for apparel retailers as shoppers shifted their interest between winter and summer lines with the rise and fall of the thermometer. Promotional sales remained critical for producing the best results for many retailers.

Auto dealers have continued to report a moderate pace of sales growth since the last Beige Book, with some weekly variability. Sales in the Philadelphia market were described as strong. Dealers continued to maintain lean inventories and have retained a positive outlook. However, hiring plans remain tentative and modest; expectations of rising health-care costs further constrain the willingness of dealers to expand their workforces.

Finance
Overall, Third District financial firms have reported slight increases in total loan volume since the previous Beige Book. Banking contacts cited stronger demand for C&I loans and real estate loans--commercial and residential. Credit card loan volumes were relatively unchanged, while reports of other consumer lending were mixed. A nascent housing recovery in many Third District markets has increased demand for new mortgages and the ratio of purchases to refinancings. A small amount of hiring has been prompted at banks and bank servicing companies by the moderate recovery, as well as by changing compliance regulations. Banking contacts reported little change in lending standards overall; however, a few banks reported some easing for commercial real estate loans. Most banks continued to report improving credit quality. Many banks cited strong competition within their local markets. Financial institutions remain generally optimistic about future growth.

Real Estate and Construction
Following a little softness, homebuilders throughout most of the Third District resumed a moderate growth of contracts signed for new construction. Contracts signed from January through May--"Five good months in a row!" one builder exclaimed--have generated significantly greater construction activity than last year for many builders, large and small. Significant cost pressures face builders as the long housing recession has disrupted the supply chain for materials and the pool of skilled workers. In addition, some builders have faced labor shortages due to higher wages offered for certain trades that are in demand for the Hurricane Sandy recovery. Residential brokers reported moderate activity during April and May for the Third District overall. Existing home sales that closed during the period varied geographically with strong growth reported in the Philadelphia market. Brokers were also pleased by even stronger growth of sales contracts pending, which was more widely reported throughout the District. The estimated months' supply of the existing inventory of homes continued to fall significantly. Brokers still expect that a shadow inventory of homes held by reluctant, if not underwater, owners will emerge as prices begin to rise once more.

Nonresidential real estate contacts continued to report little change in the modest pace of overall leasing activity and slight growth of construction. New office construction remains limited to an occasional build-to-suit client, while most construction activity is related to ongoing demand for industrial warehouse space, multifamily residential units, higher education facilities, and public utility infrastructure. Contacts continue to report the presence of too many firms chasing too few projects, such that margins are squeezed thin on winning bids. Overall, contacts expect slow steady growth but remain optimistic, citing greater prospect activity and a greater willingness to make decisions.

Services
Third District service-sector firms are reporting a moderate pace of growth overall--a bit stronger than the last Beige Book. On the heels of a strong winter/spring season, resorts in the Poconos are entering their summer season with strong bookings and many sold-out weekends. Stronger cash flows are allowing properties to reinvest by refurbishing and adding new amenities. At least one major new resort is making plans to enter the market. Early bookings are also up along the shore in Delaware and New Jersey. In the wake of Hurricane Sandy, the state of New Jersey has launched a sizeable marketing campaign to remind people that most of the shoreline tourist area remains intact and ready for vacationers.

In other sectors, staffing firms have reported strong increases in billable hours--an improvement since the prior Beige Book. Staffing contacts cited no wage pressures and expressed more positive outlooks for future growth. Other service-sector firms reported steady growth and credited the recovering housing markets with strengthening and expanding the base of consumer spending. Firms are hiring, although not aggressively. Overall, service-sector firms remain generally optimistic about future growth.?

Prices and Wages
Overall, price levels continued to increase slightly, similar to the previous Beige Book. Manufacturing firms continued to report slight overall increases for prices paid and slight overall decreases in prices received. Auto dealers reported no changes in pricing. Despite passing along some costs, homebuilders continued to face tight margins with lumber and skilled labor commanding high prices. Most real estate contacts reported stable, if not rising, prices for lower priced homes, and contacts in some markets noted stable prices for higher priced homes. Wage pressures remain constrained, according to most contacts other than homebuilders. Rising costs associated with medical insurance benefits remain a concern for many employers.

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Fourth District--Cleveland

The economy in the Fourth District grew at a moderate pace since our last report. Manufacturing orders and production were steady or higher. The momentum seen in residential construction since the beginning of the year, including multifamily, has been maintained. In nonresidential construction, projects are moving very slowly from the development to the construction phase. Retail sales were below our contacts' expectations during April, while new motor vehicle sales posted moderate gains on a year-over-year basis. Conventional and unconventional natural gas and oil production was flat, and drilling has declined during the past few months. Output at coal mines trended lower. Freight transport volume exceeded projections made at the beginning of the year. Demand for business credit increased more slowly, whereas large numbers of consumers continue to apply for auto loans.

Hiring picked up in the manufacturing and freight transport sectors. Reports by staffing-firm representatives on the number of job openings and placements, primarily in the service industries, were mixed. Wage pressures are contained. Input and finished goods prices were stable, apart from increases in construction materials and natural gas.

Manufacturing
Reports from?District factories indicated that new orders and production were largely stable or increased during the past six weeks. Domestic sales were stronger than those to offshore customers, with declines in Europe being more acute than in China. Companies seeing the strongest activity were suppliers to the oil and gas, residential construction, and transportation industries. Defense contractors and suppliers to the coal industry experienced weakening activity. Compared to a year ago, production levels were mixed. Steel producers and service centers reported that shipping volumes were stable but remain below levels seen early in the first quarter. Several contacts expressed concern about the quantity of steel produced in China and Europe that is now being imported into the United States. Motor vehicle production at District plants rose at a robust pace during April on a month-over-month and year-over-year basis. Looking forward, many of our contacts believe that business conditions will continue to slowly improve during the second half of the year.

Capacity utilization rates stood within their normal ranges. Several manufacturers noted that they have considerable excess capacity. For the most part, finished goods inventories are in-line with demand. Capital expenditures are on plan for the fiscal year. Outlays are primarily allocated for productivity enhancements and equipment replacement. Little capacity expansion is planned due to lingering uncertainty about future demand. Raw material and finished goods prices were flat or trended lower. Our respondents said that their ability to raise prices during 2013 is likely to be limited. We heard numerous reports from manufacturers who intend to increase payrolls at a modest to moderate pace during the next few months. Wage pressures are contained, while premiums for healthcare insurance spiked higher.

Real Estate
Sales of new and existing single-family homes trended higher and they were above year-ago levels. Our contacts attributed this trend to low interest rates, favorable prices, and an improving labor market. One builder commented that young people are less inclined to buy a house than were their parents due to a perceived lack of value and a desire for mobility. He believes that this reluctance may put downward pressure on the housing industry for years to come. New home contracts were found mostly in the mid- to higher-price-point categories. Demand for multifamily housing remains strong. Builders expressed confidence that the turnaround in the housing market will persist in the upcoming months. However, they cited difficulty in obtaining financing and low inventory as barriers to more robust growth in their industry. List prices of new homes increased by as much as 10 percent in certain markets this year due primarily to rising construction costs. Builders have cut back on discounting.

Nonresidential builders told us that while inquiries have weakened, there were still a large number of projects in the development phase. However, backlogs are lower than what most builders would like. The strongest activity was in multifamily housing, energy, and manufacturing. The office and large-footprint retail segments were relatively weak. Our contacts are cautious about near-term activity. While they expect some growth, especially in the second half of the year, many of their clients are not in a rush to move projects into the construction phase. A substantial rise in commercial and industrial leasing is seen as a positive indicator by builders. They believe that some of their clients may commit to new building in the upcoming months.

There were many reports about large price increases for building materials, especially lumber (softwoods) and drywall. Residential builders felt the brunt of these increases. Little change in payrolls or wages was reported. Hiring for the prime construction season is expected to be limited. Subcontractors are having difficulty obtaining working capital and attracting skilled labor.

Consumer Spending
Most retailers reported that April sales fell short of expectations. Some of our contacts cited colder-than-normal weather for holding down consumer spending. Others saw a pickup in purchases of large home goods such as furniture and exercise equipment. On a year-over-year basis, volume was up slightly. Going into summer, sales are projected to be modestly higher, when compared to the same time period last year. Vendor and shelf prices held steady. A food retailer commented that his customers remain sensitive to changes in gasoline prices, with any hike in gas prices negatively impacting his sales. Capital expenditures were on plan for the fiscal year. Monies are allocated primarily for improvements to distribution systems and new store construction. No hiring is anticipated, except for staffing new stores.

Year-to-date sales of new motor vehicles showed a moderate increase during April compared to the same time period a year ago. Buyers preferred smaller, fuel-efficient cars, crossovers, and SUVs, and the number of customers opting to lease continued to trend higher. Large pickup trucks were big sellers in regions with significant shale gas activity. New vehicle inventories are rising, but a majority of dealers said that they are satisfied with their inventory positions. Our contacts are cautiously optimistic about sales prospects for the year, with a few projecting 5 percent growth over 2012. Used vehicle purchases declined in April on a month-over-month basis. Several dealers commented that it is difficult to find a quality used car. However, they believe that as lease rollovers start to come in this year, the availability of low mileage used cars will improve. Two of our contacts noted that financing activity in the subprime market is starting to pick up. Dealers want to hire a small number of sales and technical personnel, but they are having a difficult time finding qualified workers.

Banking
Demand for business credit has increased, but at a slower rate, since our last report. Although loan requests originated from many sectors, commercial real estate and industrial production stood out. A few bankers commented that insufficient collateral was the primary reason behind small business owners being denied credit. Consumer credit demand rose slightly, especially for auto loans. Installment loans are growing in popularity, whereas drawdowns on home equity lines of credit trended lower. Residential mortgage activity was stable. The shift in applications from refinancing to new purchase grew. Delinquency rates declined across consumer and commercial loan categories. No substantive changes were made to loan-application standards. Aggregate core deposits grew at a steady pace, with a movement from CDs to demand deposits still taking place. Customer preferences for online banking, rising use of ATMs, and shrinking net interest margins were factors cited by some of our contacts for cutting payrolls and reducing the number of branches.

Energy
Coal production continued to trend down across the District, although lower production numbers are showing signs of stabilizing. One producer noted that demand from domestic utility companies is up slightly, while offshore demand is slowing or stagnant. Spot prices for steam-coal rose slightly, whereas metallurgical coal prices were flat. The number of drilling rigs across the District was little changed over the past six weeks but has fallen since the beginning of the year. Ohio and West Virginia issued shale gas drilling permits at a robust pace. Output from conventional and unconventional oil and natural gas wells was flat during the past couple of months. In the wet gas regions of Ohio and West Virginia, output should begin to increase later in the year as newly constructed gas processing units come on line. Well-head prices for natural gas are trending higher, but not to the point that would encourage aggressive drilling. Capital expenditures were at targeted levels, with little change expected. No change in production equipment and material prices was reported. Energy payrolls held steady. Labor costs were stable except for increases in health insurance premiums.

Freight Transportation
Our contacts described shipping volume as robust and higher than expected. Demand was particularly strong from motor vehicle and energy-related customers. Freight executives are optimistic about growth prospects for the remainder of the year. Diesel-fuel prices trended lower, and costs associated with equipment and maintenance items were stable. The biggest concern facing trucking companies at this time is the potential impact on operations (number of trucks and drivers, productivity, and pricing) due to the new hours of service (HOS) rules that go into effect on July 1. Capital spending is on plan for the fiscal year. Two of our contacts reported that they will be investing heavily in equipment that will service their energy customers. Another commented that his firm will order more trucks than originally budgeted to add capacity. Hiring is for replacement and capacity expansion. The industry is still experiencing a shortage of drivers and skilled mechanics. The former may worsen under the new HOS regulations.

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Fifth District--Richmond

Economic activity strengthened modestly across the District, however growth was constrained by softness in manufacturing, federal spending limits, and unusual weather conditions. Retail sales flattened, although auto sales generally remained strong. Business was also strong at most non-retail services firms, but tourism in some areas fell below expectations as a result of an unseasonably cool spring. Banking conditions were mixed; residential mortgage demand increased, commercial lending varied, and competition for business was sharp. Residential real estate prices strengthened. Commercial real estate construction also improved, with positive reports across the District. Heavy rainfall and fluctuating temperatures delayed spring plantings, but forage crops were developing well. In the energy sector, demand continued to shift from coal to natural gas. Labor markets were uneven, although many employers plan to increase hiring in the months ahead. Reports on prices and wages were mixed.

Manufacturing
Fifth District manufacturing activity softened since our last report, although there were scattered reports of improvement. A machinery producer said that his company was struggling to hit the break even mark again this month and that the volume of new orders was down considerably. Impacts of sequestration and tax changes were noted by several firms. A manufacturer of automobile convertible tops reported that the uncertainty of tax issues had slowed investment at his firm. Moreover, a producer of defense equipment cited government sequestration and orders being canceled or delayed as major concerns facing his company. In contrast, a lumber producer mentioned that, because of the improvement in the housing market, his company had earned a profit in the first four months of this year, and a flooring manufacturer also reported improving business. Price growth in raw materials slowed in recent weeks and finished goods prices grew at a somewhat quicker pace.

Ports
Shipments increased at District ports, especially for container exports. Specialty chemicals were particularly strong, and one contact noted that pharmaceutical manufacturers were changing from air to ocean transport as rising fuel costs drive up air freight rates. Both auto exports and imports were robust. Furniture and flooring imports were up overall, and imports of auto parts remained solid. Port administrators commented that more manufacturers were evaluating plans for moving product through the ports as they plan to shift production to this country. Some port officials are considering how to better accommodate large container ships coming to the East Coast via the Suez Canal. Those ships have nearly double the container capacity of ships that could pass through the Panama Canal. However, one port contact expressed concern that the current truck driver shortage could slow container shipping.

Retail
Retail sales varied by category but were flat overall since our last report. Several contacts told us the unusually cool spring weather held down sales. Retailers commented that their labor costs were rising as a result of the healthcare legislation, leading them to change employees' hours. The manager at a discount chain store in the Tidewater region of Virginia noted that her store was "struggling" to make sales goals. In contrast, a central Virginia retail contact observed "less of a roller coaster" in retail sales than a year ago, noting stability and even strength in categories related to home building and home sales, such as furnishings and decorative accessories. Auto dealers reported that availability of used cars improved since our last report. Auto sales remained generally strong for both domestic and imports. Surveyed contacts indicated that retail price increases slowed in recent weeks.

Services
We received reports of renewed vigor at non-retail services firms. Architectural and technology services were among the firms noting increased revenues. A financial services contact commented that his clients were "feeling good" as asset values rose and real estate improved, leading them to free up and move cash. Although healthcare organizations reported stable demand, executives in some areas remarked on financial pressure from the decline in their Medicare and Medicaid reimbursement under the Affordable Care Act. Prices at non-retail services firms edged up slightly faster.

Reports from the tourism industry were mixed. Resorts in Virginia and North Carolina had good growth in bookings, and business was up for full-service conference space. However, unseasonably cool weather reduced weekend stays at a West Virginia resort and lessened weekend traffic on the Outer Banks of North Carolina. A contact in Washington, D.C. said visitor traffic remained consistent, but that some summer activities could be affected by reductions in security staffing under the federal budget cuts. Hoteliers anticipated a solid finish to the summer months, and most had raised rates slightly.

Finance
Reports on banking conditions varied since our last assessment. Demand increased for residential mortgages. Refinancing was strong in North Carolina, whereas lending in Virginia went primarily to new home purchases. Across the District, the limited increase in commercial mortgage activity was generally confined to refinancing existing loans from other institutions. Nevertheless, a bank official in North Carolina noted a pick up in demand from home builders, and said that his bank was reconsidering whether their credit standards were too tight given the improving economy. The demand for commercial and industrial loans was weak, according to lenders in South Carolina and West Virginia, due to customers' high cash balances and low confidence. However, bankers in North Carolina and Virginia saw an uptick in activity. Several lenders commented that competitors continued to offer very low rates that "made no sense" in an attempt to take away business.

Real Estate
Residential real estate activity strengthened in recent weeks. A contact in Hampton Roads, Virginia reported that contracts were up twenty-two percent over a year ago and that inventories were low. She added that buyers were looking for owner-occupied homes in good condition and noted that multiple offers were driving up prices. Similarly, a Realtor in the Washington, D.C. area described the market as "accelerating," noting that decreasing inventory had led to multiple offers and higher selling prices. A Richmond Realtor mentioned that new construction demand had increased, which had pushed up the prices of building lots. A homebuilder in South Carolina reported an increase in lot shortages. His company raised prices on single family homes this year to offset supplier price increases.

Commercial real estate and construction markets tightened slightly in recent weeks. A commercial Realtor in Charleston, South Carolina said that activity had improved and that he expects nonresidential construction to increase significantly in the next twelve to eighteen months. He also stated that the region is on the precipice of strong growth but will be limited by infrastructure. A source in Richmond expected further improvement in commercial real estate activity during the next year, noting a rise in construction in the Richmond and Hampton Roads regions. According to a contact in West Virginia, more hotels have come online and retail space was absorbed at a faster pace.

Source: http://www.businessinsider.com/federal-reserve-beige-book-june-2013-6

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