Fed Beige Book: Economic Expansion Continues (Includes Regional Breakdowns)

As Federal Reserve Chairman Ben Bernanke carried a message of cautious optimism to Congress on Wednesday on strong manufacturing gains, exporting activity and rising business confidence; the Beige Book economic conditions roundup of the 12 Fed districts told a similar tale.

The March-released Fed Beige Book, summarizing district-by-district economic conditions eight times annually, noted retail sales and manufacturing increases in all districts, except for St. Louis, even as crippling snowstorms blanketed much of the nation during portions of February. The Cleveland, Atlanta, Minneapolis and Kansas City district noted especially "sold expansion" for manufacturing. However, Chicago noted that its rise was more moderate than in past periods.

Meanwhile, about half the districts reported the long-wounded commercial real estate sector "showing signs of gaining traction." Commercial loan demand also was mixed, though financial institutions reported widespread improvements in all other loan segments. Credit standards, however, continued to be tight even as credit quality has improved, the Beige Book indicated.

Agriculture, in the areas of crop yields and production, may have suffered the worst because of the cold and snowy weather conditions. There were, however, some exceptions in areas like in the strong-performing St. Louis district. Additionally, high prices of Ag commodities such as cotton, corn, soybean and wheat, among others, continued to hold firm or improve.

First District - Boston
Manufacturing contacts appeared to start 2011 in celebratory fashion as sales and outlooks demonstrate continued strength. One auto components manufacturer called 2010 his best year to date. Semi-conductor and pharmaceutical industry contacts also did particularly well, the Fed noted. Commercial real estate fundamentals are stable in many areas (Hartford, Boston) or improving. Retail sales remained positive though inventories remain tight.

Second District - New York
Sectors like those in automotive sales reported better ordering and inventory activity. Upstate New Yorkers saw 10% to 20% increases compared to January 2010, for example. Commercial real estate continued to struggle with high office vacancy levels, but stability is creeping in. Even the much-maligned condominium market appears to have steadied, the Fed said. Business lending standards tightened even as commercial delinquency rates continued to show improvement.

Third District - Philadelphia
Strong shipping and new order increases were realized in the district between January and February. Eleven of the largest manufacturing sub-sectors all had positive things to say about demand, the Fed noted. Contacts pontificated that exporting was behind the high demand and will continue to drive it in 2011. Business loan volume reportedly increased slightly though companies largely "are not looking to borrow." Commercial real estate activity hasn't much changed. One contact predicted it will take some office markets "several years to recover the loss of occupancy caused by the recession."

Fourth District - Cleveland
New orders and production were generally up though there were a few expected seasonal declines. Manufacturers expect moderate growth throughout 2011, with particular strength in the energy-related, auto and heavy equipment industries. The district is among those still reporting weaker commercial real estate activity. Commercial lending requests held stable, edging toward slight growth since late 2010. Credit quality of businesses was seen as "stable to improving," said Fed contacts.

Fifth District - Richmond
Manufacturing continues to perform well in the region, though there is concern with raw materials prices because of extreme demand in nations like China and India. Most business loans are coming from larger area businesses in the process or mergers/acquisitions. It appears business confidence is improving, according to Fed contacts' reports; so expect an uptick in lending in the near-term. Commercial real estate saw "broad-based, but moderate improvement. Though vacancy rates remain high, pricing and leasing rates have stabilized for the most part. Agriculture contacts rued cold temperatures that limited crop development and profits alike.

Sixth District - Atlanta
Growth is the name of the game in manufacturing, but more so in new orders than production levels. Shipping experienced particularly high demand though that area faced weather problems in January and could face fuel cost issues in the coming Fed tracking period. Credit conditions are a mixed bag in the district: improving for those outside of commercial real estate, and worsening for those in it. Cold temperatures and drought conditions have hit Ag businesses in the district, particularly Florida, hard. The spot of optimism comes in global demand elevating prices of commodities such as cotton and soybeans.

Seventh District - Chicago
While manufacturing continued to expand, Fed contacts quipped that they were surprised that the gains were more moderate than in previous months. The worry might be unfounded though, as new orders and backlogs continued to rise at strong levels. Steel, automotive and heavy equipment continue to lead the pack in the sector. Rental vacancy rates stabilized, though pressure on pricing remained. Businesses, especially in agriculture and energy, again appeared more free to spend and invest here than in other districts. Credit availability and use of lines showed improvement.

Eighth District - St. Louis
Dubiously, the district was the only one to show a decrease in manufacturing activity, with many plants planning to close up shop or reduce operations (employment) soon. This includes the wood products, auto, aircraft and primary metal industries. Commercial property demand remained anemic. Like District Six, credit availability depended on the industry, with commercial real estate drawing the short straw, so to speak. Agriculture saw total production on the rise, though there were certainly yield winners (cotton) and losers (corn, soybeans).

Ninth District - Minneapolis
Manufacturing increased, notably in the less populated markets. One of the areas with reports of production weakness was Minneapolis. Still, certain industries there (metal fabricators, semiconductor chip producers) continue to expect significant production gains in 2011. Commercial construction permits rose noticeably, giving hope to those in the industry despite flat vacancy rates. Agriculture conditions improved on the strength of commodities prices. Recent Department of Agriculture rulings on using certain genetically modified products proved helpful to some.

Tenth District - Kansas City
Though slowing was noted in the high-tech and transportation sectors, overall manufacturing grew. Concern did grow over input, raw materials costs though. Commercial real estate has stabilized; but credit conditions for the sector still were considered "constrained" and worsening. Credit conditions were stable for other industries, said Fed contacts. Weather and supply issues hurt crops badly, but lifted prices considerably for those whose yields survived the double-whammy.

Eleventh District - Dallas
Manufacturing's growth in the district depended on the industry: growth in orders for high-tech, petrochemical, food and aviations products but less so for those in the construction game. Agriculture had a virtual horror show on its hands as "exceptionally dry conditions along with extended periods of below-freezing temperatures adversely affected the vegetable crop in Texas [and] greatly stressed livestock..." Commercial and industrial loan activity was mixed, though credit quality improved in many cases.

Twelfth District - San Francisco
The manufacturing rebound continued with strength in areas including technology, semiconductor, commercial aircraft and petroleum refinery production. Commercial real estate was generally weak, but vacancy levels have stopped rising for now. This is tied to a recent increase in commercial rental space demand. Unlike most districts, District 12 did not experience much extreme weather, so most crop production was solid, and "robust" demand continued.

Brian Shappell, NACM staff writer, can be reached at brians@nacm.org

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