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phil
April 16th, 2014 at 2:46 pm

Summary of Commentary on Current Economic Conditions by Federal Reserve District


Prepared at the Federal Reserve Bank of Atlanta and based on information collected before February 24, 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.

 

Reports from most of the twelve Federal Reserve Districts indicated that economic conditions continued to expand from January to early February. Eight Districts reported improved levels of activity, but in most cases the increases were characterized as modest to moderate. New York and Philadelphia experienced a slight decline in activity, which was mostly attributed to the unusually severe weather experienced in those regions. Growth slowed in Chicago, and Kansas City reported that conditions remained stable during the reporting period. The outlook among most Districts remained optimistic.

?Here's my issue with "most" – there are 12 districts, 8 "moderately" good and 4 in decline.  Weather excuses or not – is that the kind of report you expect to be paying all-time market highs for?  Where would the S&P be if all 12 districts had strong growth?  2,000?  3,000?  Don't all-time market highs assume STRONG growth – especially when the S&P is already up 35% from last year.  On weak growth?  On 8 of 12 districts weak growth with 4 contracting (for whatever reason)?  REALLY?
 

Retail sales growth weakened since the previous report for most Districts, as severe winter weather limited activity. However, Richmond, St. Louis, and Minneapolis reported modest sales growth since the beginning of the year. Weather was also cited as a contributing factor to softer auto sales in many Districts, with the exception of Cleveland, which saw strong gains. Tourism increased in a number of Districts but declined in Philadelphia and was reported to have been mixed in New York and Minneapolis.

The demand for nonfinancial services was mixed compared with the last report; however, both Boston and San Francisco reported strong demand for technology related services. Manufacturing sales and production in several Districts were negatively impacted by severe winter weather; however, modest improvements were noted in Boston, Atlanta, Minneapolis, and Dallas.

Residential real estate markets continued to improve in several areas, albeit modestly. Boston and New York gave mixed reports on sales, and Philadelphia, Cleveland, Minneapolis, and Kansas City noted a decrease in sales. Many Districts cited low inventories of housing and continued home price appreciation. Commercial real estate leasing expanded, according to most reports, while reports on construction activity were mixed. Demand for commercial real estate loans was solid in Boston, improved slightly in Dallas, and continued to grow steadily in Chicago and Kansas City.

There we go again.  Always remember there are 12 districts, so improved slightly in one and solid growth in 3 leaves 8 districts not so hot.  When you see me use green or red, it's not just a good or bad note, but it has to apply to a significant portion of the Districts (and yes, we have to weight for population as well as specialties).  

Of the Districts that reported on agriculture, conditions softened in Kansas City and Dallas as dry soil adversely affected wheat crops. Districts reported that energy production and demand continued to increase as a result of increased demand due to the unusually cold winter.

Employment levels improved gradually for most Districts, and shortages of specialized skilled labor continued to be reported. Price pressures remained subdued, with the exception of upward cost pressures for some energy and construction products. Wage pressures remained stable for most Districts.

Consumer Spending and Tourism
Most Districts reported sales growth had softened from January to early February. New York reported noticeable weakness; however, Richmond, St. Louis, and Minneapolis reported modest growth since the beginning of the year. The extreme winter weather conditions reportedly contributed to the decline in sales in some markets; however, Richmond, Chicago, and Minneapolis reported that weather-related goods contributed to positive sales growth. Reports from furniture retailers in Boston and Minneapolis indicated strong sales. Contacts in Cleveland, Richmond, Kansas City, Dallas, and San Francisco expected retail spending to improve going forward. Vehicle sales varied across Districts. Severe weather conditions resulted in softer vehicle sales as reported by New York, Philadelphia, Richmond, Chicago, Kansas City, and Dallas. Cleveland noted a modest increase in auto sales compared with a year ago. New York cited upcoming auto shows as an expected boost for future sales, while Chicago anticipates that sales incentives will increase near-term sales.

Short story:  Things really suck now but we HOPE they will get better.  Keep in mind this is an informal, anecdotal survey of friends of the Fed in each district.  It has the same optimistic forward bias as the PMI reports tend to have and then you have to take into account the spin of the particular Fed Governor who is reporting on his district and what they are hoping to "prove" to make their own economic case… 

Travel and tourism was generally strong across most reporting Districts except for Philadelphia who recorded a slight decrease. San Francisco stated that the level of travel and tourism increased in their region. Recent winter weather conditions benefited many ski resorts in Kansas City, Richmond, and Minneapolis. Atlanta and Boston also indicated that hotels fared well from the weather, but that restaurants, museums, and other attractions were negatively impacted. New York reported mixed activity from January to early February. Hotel occupancy rates in Manhattan and New Jersey increased, buoyed by the Super Bowl, while hotel business was down in western New York State due to the harsh winter storms. Airline contacts from Dallas indicated solid to slightly stronger demand, with some temporary disruptions due to severe winter weather across the nation. The majority of Districts reported a solid start in the first quarter for hotel bookings, occupancy, and revenue with an optimistic outlook for the remainder of the year.

Nonfinancial Services
Reports from Districts mentioning nonfinancial business services indicated that activity has been mixed since the previous report. Both New York and Philadelphia reported that severe winter weather reduced demand for services in their region. Activity in Minnesota and San Francisco's professional business service firms improved since their last report. Boston said that demand for software and information technology was stronger than expected, and demand for cloud computing remained strong according to San Francisco's report. Richmond service providers noted flat revenue in recent weeks, while sales were characterized as stable among Kansas City service providers. The outlook among contacts was mixed, as well. Planned activity in St. Louis was described as negative, while contacts in Minneapolis and Dallas noted optimism. Contacts in Kansas City anticipate activity will pick up, while software and IT professionals in San Francisco are cautiously optimistic and anticipate revenue growth will be positive this quarter.

Transportation activity since the previous report was mixed. Severe weather reportedly disrupted supply chains and delayed shipments in several Districts. In Dallas, railroad cargo volumes fell slightly below year earlier levels, with winter weather conditions across the country largely to blame. Port activity in Atlanta and Richmond reflected increases in auto shipments, while Dallas reported declines in container volumes. Atlanta and Dallas indicated air cargo was down, compared with year earlier levels. Kansas City cited increasing optimism about future transportation activity, while Cleveland noted expectations that demand in 2014 will be the same or only moderately higher than a year ago.

BUYBUYBUY!!! Yeah, right….

Manufacturing
Manufacturing activity expanded at a moderate pace from January through early February in most Districts. Several Districts reported that severe winter weather had a negative effect on sales and production during this period, including Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, and Dallas. The weather was cited to have caused utility outages, disrupted supply chains and production schedules, and resulted in a slowing of sales to affected customers. Philadelphia and Richmond reported that shipments and orders declined during the first half of February. Steel producers in Cleveland indicated that they have excess capacity, and San Francisco reported low capacity utilization rates at steel mills. Boston and San Francisco indicated that semiconductor sales had been particularly strong. High-tech contacts in Dallas reported a slight improvement in orders, as demand for memory chips remained strong and demand for logic devices remained weak but stable. San Francisco also cited growth in the commercial aerospace industry due to a backlog in orders for commercial aircraft, while defense-related manufacturers reported sluggish overall conditions and expected sales to trend downward. Auto production was strong in Chicago despite weather-related slowdowns in sales, and Cleveland reported auto production to be higher than a year ago. Most Districts were optimistic about the future and expect manufacturing activity to rise in the coming months.

Let's consider the effect of the weather.  People don't shop, so stores have less money and more inventory.  My brother sells less Toyotas – same problem.  Homes don't get built, money doesn't get transferred to builder, workers don't get paid.   Airlines grounded – lots of people don't get paid.  People miss work, companies miss sales, no one works overtime except the snow-plow guys…  This is not the kind of lost business that bounces back right away.  It's the kind of lost business that drains cash and reduces spending going forward until people catch up.  RICH people think that weather merely "puts off" purchases because missing a few days of work doesn't affect the top 10%, but the bottom 90% are drastically impacted by things like this.    

Real Estate and Construction
Reports on residential housing markets were somewhat mixed. Many Districts continued to report improving conditions but noted that growth had slowed. Most of the Districts indicating otherwise attributed the slowing pace of improvement to unusually severe winter weather conditions. Home sales increased in Richmond, Atlanta, Chicago, St. Louis, and Dallas, while sales were down in Philadelphia, Cleveland, Minneapolis, and Kansas City. Boston and New York reported that the trend in sales for their Districts was mixed. New home construction increased in Richmond, Atlanta, Chicago, St. Louis, and Minneapolis, and remained flat in Kansas City, and was down slightly from the previous period in Philadelphia. Most Districts reported low levels of home inventories and indicated that home prices continued to appreciate. The outlook for sales and residential construction was positive in Boston, Philadelphia, Cleveland, Atlanta, and San Francisco.

Strong multifamily construction was cited in New York, Cleveland, Richmond, Atlanta, and Dallas, while Boston indicated that its pipeline of multifamily construction was declining. Dallas experienced rent growth above its historical average, while New York reported mixed trends in rent growth. Cleveland noted that it expects healthy growth in rents this year.

Many Districts, including New York, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, and San Francisco, indicated that commercial real estate activity had increased and that conditions continued to improve since the previous report. Philadelphia noted that there was very little activity to report in construction or leasing due to severe winter weather. The outlook for nonresidential construction was fairly optimistic in Boston, Philadelphia, Cleveland, Atlanta, Minneapolis, Kansas City, Dallas, and San Francisco.

Well, you can see why the homebuilders and REITs are down.

Banking and Financial Services
District reports of loan demand and volume were mixed. Demand for residential mortgages decreased in New York, Richmond, St. Louis, and Kansas City, and softened in Philadelphia and Dallas. Cleveland and Atlanta noted increased demand for new purchase mortgages, while mortgage refinancing declined in New York, Richmond, Atlanta, and Kansas City. Demand for consumer loans grew slightly in Philadelphia, Cleveland, Chicago, and Dallas, and held steady in Kansas City. Decreased demand for consumer loans was noted by Richmond and St. Louis, and among small to medium-sized banks in New York. Boston reported commercial real estate loans were highly competitive and demand was solid. Richmond businesses looked for shorter-term commercial real estate loans in order to benefit from lower interest rates those loans offered. Chicago and Kansas City reported steady growth in commercial real estate loans, and demand for such loans improved marginally in Dallas. Small to medium-sized banks in New York reported no change in commercial real estate loan demand.

New York noted modest declines in delinquency rates. Cleveland reported delinquencies were stable or trended lower, and St. Louis indicated delinquencies for most types of loans decreased. Loan quality in Kansas City improved compared with a year ago and continued to strengthen in Dallas. Bankers in Cleveland and Atlanta voiced concerns about recently enacted regulations and the potential negative impact on lending.

Agriculture and Natural Resources
Agricultural conditions softened since the previous report. Severe winter weather affected several Districts with some crop damage being reported by Richmond and Atlanta, while Chicago noted disruptions in the flow of agricultural products. Both Kansas City and Dallas cited dry conditions adversely affecting wheat crops, while San Francisco reported concerns about water shortages and water costs. Several Districts noted falling feed prices had a positive effect for cattle and hog producers. Kansas City indicated farmland price appreciation moderated from the rapid pace seen in the past few years. Crop prices received in January by farmers fell from a year earlier for corn, wheat, soybeans, hogs, and chickens; prices increased for cotton, rice, oranges, cattle, milk, eggs, and turkeys.

District reports showed continued strength in energy production and demand for oil and gas; much of the increased demand was driven by unusually cold winter weather. Cleveland, Richmond, and St. Louis reported coal production was down, with steam coal plant closures in Richmond. Cleveland, Atlanta, and Dallas described growth in drilling (both inland and offshore) and refining activity. In contrast, Minneapolis indicated that oil and gas exploration decreased slightly from recent months, primarily due to the extremely cold weather. Inventory drawdowns and supply shortages of natural gas and propane were reported in Atlanta, Chicago, and Dallas due to increased withdrawals that were exacerbated by the severe weather. Nearly all Districts attributed energy price surges to increased demand during the unusually cold weather; yet, Boston reported that natural gas prices were also driven up by pressure on pipeline capacity in New England. Some firms in the Richmond and Chicago Districts indicated that they elected to delay production and/or reduce usage rather than pay high prices. Dallas indicated that increases in the price of West Texas Intermediate (WTI) crude oil were being bolstered by debottlenecking at Cushing, Oklahoma.

Funny how you get the real story here – the benefit of the pipelines is to RAISE the price of WTI.  But we already knew that.  

Employment, Wages, and Prices
Since the previous report, the pace of hiring had reportedly softened in Boston, Richmond, and Chicago, with those Districts attributing at least part of the recent slowdown to unusually bad winter weather. Despite a pickup in hiring in some sectors across New York, Cleveland, Atlanta, and St. Louis, notably in manufacturing, overall employment growth for these Districts remained sluggish. In Philadelphia, as outlooks for long-term overall economic growth improved, firms reportedly continued to expand their headcounts cautiously. In contrast, labor markets in the Minneapolis District tightened slightly. The rate at which temporary employees were converted to permanent hires remained strong across Boston, while contacts in Richmond reported this conversion was happening at a slightly faster pace than previously noted. Many Districts continued to note shortages for particular types of specialized, technical skilled labor, such as healthcare professionals and information technology workers. Atlanta and Dallas also noted shortages for freight truck drivers.

Inflation pressures remained largely unchanged across most Districts. Price pressures were described as minimal or roughly steady in Boston, New York, Philadelphia, Cleveland, Atlanta, Chicago, Minneapolis, Dallas, and San Francisco. There were some mentions of rising raw materials prices passing through to final goods. Boston indicated that higher material costs and rising costs of overseas labor could have an upward influence on apparel prices. Chicago, Minneapolis, and Dallas noted that unseasonably cold weather had pushed up costs for some energy products. Construction materials prices remained a source of upward cost pressure, according to contacts in Atlanta and Kansas City. Retail contacts in New York and Philadelphia reported deep product discounting; however, reports from Dallas indicated that retail prices were stable.

Most Districts noted that wage pressures were largely steady since the last report; however, a few Districts cited upward wage pressures in some highly skilled jobs in industries such as information technology, transportation, and construction. Reports from Cleveland, Kansas City, and San Francisco indicated that businesses were anticipating wage growth to increase from the recent mild pace as the year progresses. Contacts in Chicago indicated that higher healthcare premiums increased non-wage labor costs, while a growing number of employers in Cleveland reported passing through rising healthcare costs to their employees.

All in all, it's not a report that makes me want to pay all-time highs for stocks, is it?  The gist of it is, things would have been better if the weather didn't suck and they expect them to be better next Q.  The really good news is, they will have easy comps to beat.  I guess the weather will also be used to excuse all earnings as well.