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 firstname.lastname@example.org
This month's Credit Managers' Index (CMI) from the National Association of Credit Management (NACM) reveals a tale of two economies and two strategies. There is continued good news in the index with sales and credit availability, but there is some very bad news as far as the toll this economy has had on business thus far. An impressive growth in sales pushed the number well into the 60s with a reading of 66.3-the highest since the recession started in 2008. Credit applications experienced the same growth, rising to 60.3 after having slipped to 58.6 in January. This number is also the highest since 2008, suggesting that companies still expect growth and are taking steps to get ready. The good news continued with dollars collected, which improved from 60.9 to 63.4. And, finally, there was good progress in the level of credit extended-an increase from 64.8 to 66.5.
The sum total of all this positive trending is an improvement from 62 to 64.1 in the favorable factor index. "What then is the problem?" asked Chris Kuehl, PhD, managing director of Armada Corporate Intelligence and NACM economic advisor. "Why is overall growth in the CMI non-existent? The 56.4 reading this month is the same as last month despite the good numbers."
This is the vexing part of a transition economy, said Kuehl. This is the time that companies move aggressively to capture market share due to the sense that the consumer is starting to engage-an assumption reinforced by overall economic numbers. The retail sector finished 2010 stronger than expected and the last set of data from the Purchasing Managers Index (PMI) show substantial gains in both the manufacturing and service sectors. Consumer confidence is up as well. These are the signs everyone has been waiting for, but they are not the signs of a fully recovered economy.
This situation creates the same pattern every time. The strongest competitor in a given market, the market leader, starts responding to anticipated demand with more capital investment, some hiring and additional marketing. That provokes the market challengers in that sector to respond in kind to maintain their edge. Right behind them are the market followers that also have to react to the moves of those in the dominant position. It is a chain reaction driven by the need to hang on to market share-a race that some companies are better positioned to enter. They are the ones that can wait for the recovery. Those that are not sitting on enough cash have no choice but to make investments and hope that the timing is right.
One of two things will happen to these companies. If the timing is right, the investment will pay off. The anticipated demand will manifest itself, and the cash flow will be there to handle the investment and credit requests. If the timing is off or if the company is forced to respond to the competition sooner than preferred, the debt soon becomes brutal and business failures ramp up. This is the signal sent by this month's index. The two negative factors showing the biggest increase were bankruptcies (falling from 59.1 to 56) and accounts placed for collection (moving from 52.5 to 49.9). Other indicators deteriorated as well. In the end, the declines in the unfavorable factors dragged down the combined index and left the CMI flat for the month.
This part of the transition out of a recession can be the most brutal. Companies barely hanging on could survive if there is little additional pressure. Now with the competition starting to heat up, these struggling companies are left with poor options. They either just accept the loss of their market or they gamble on their ability to hang on. If they guess wrong, they get into trouble soon. It is now a matter of how patient creditors can be and the point where credit managers must really show their skill at reading businesses. If they restrict an account to reduce exposure, they strain the relationship and may lose that customer should it rebound. If they give too much and the company goes under anyway, they have lost a lot of money and could put their own company in some peril.
Analysis of the recently released statistics, including those of the Commerce Department, demonstrates just how tricky this process can be from month to month. The headlines are encouraging enough as they indicate a gain in durable goods orders of 2.7%. That is good news, right? It would be if the hike in orders was better distributed. However, once again, the transportation sector throws the numbers off.
The airplane manufacturing sector is a huge part of the industrial community, and it is a business that is not known for its smooth patterns. If Boeing has a good month, as they did this time, the durable goods numbers look pretty swell; and if they have a bad month in sales, the numbers look grim. Step one, therefore, is to strip out those airplane numbers to see what else is happening in the sector.
The first blush look at the data is depressing. The numbers suggest a pretty profound decline of 3.6% from last month, and some of the detailed reports on new orders look even worse. That assessment might be premature as this is the time of year that creates problems for statistical analysis. The system used by the Commerce Department is subject to some serious criticism by economists for the way it handles seasonality. This means that what looks like a real collapse in the durable goods numbers may not really be all that awful. This creates some consternation and confusion -- 'what is really happening here?'
Analysis: This is when other pieces of information become critical. The Purchasing Managers Index is a much better month to month gauge as far as the overall manufacturing sector is concerned, but it doesn't necessarily strip out the durable goods makers. For what it's worth, the PMI has been pointing in a pretty confident direction for the bulk of the year.
The manufacturing community is once again between a rock and a hard place. The growth over the last few months has been largely propelled by the anticipation of more robust economic growth and, given the data over the last couple of months, it is a good bet that there will be growth. It is not easy to determine just how much growth there will be, however, and that means that some manufacturers will have overproduced in anticipation of consumer response.
Source: Armada Corporate Intelligence
Manufacturing was one of few bright spots for the economy in 2010, and it's expected to be much of the same story this year. However, while results were still positive, market-watchers got a surprise Thursday when an index tracking the sector actually declined from December.
The Federal Reserve Bank of Philadelphia's January 2011 Business Outlook Survey, generally seen as somewhat of a bellwether indicator for manufacturing, predicted the sector will remain in a growth mode for much, if not all, of 2011. However, it was notable and somewhat unsettling that the survey's future general activity index fell five points, to 49.8 from 55.4 in January. Similarly, the indexes for future new orders and shipments "remained at relatively high levels but also declined, falling 7 and 3 points, respectively."
Still, Philly's Fed branch assured that indicators such as long-term demand, new orders and shipments, among others, point to continued manufacturing growth. And though the index declines raised a few eyebrows, the Fed maintained "firms remain quite confident that an expansion of manufacturing activity will continue through the first half of the year."
Brian Shappell, NACM staff writer