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Fed's Beige Book from Sept. 7, 2016: Full Statement

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Reports from the twelve Federal Reserve Districts suggest that national economic activity continued to expand at a modest pace on balance during the reporting period of July through late August. Most Districts reported a "modest" or "moderate" pace of overall growth. However, Kansas City and New York reported no change in activity, and Philadelphia and Richmond noted that, while still expanding, activity slowed from the previous period. Contacts across the twelve Districts generally expect moderate economic growth in coming months. Overall consumer spending was little changed in most Districts, and auto sales declined somewhat but remained at high levels. Tourism activity was flat from the previous report but above year-earlier levels. Sales of nonfinancial services gained further momentum. Manufacturing activity rose slightly in most Districts. Activity in residential real estate markets grew at a moderate pace, but the pace of sales was constrained in a few Districts by shortages of available homes. Commercial real estate activity expanded further. Demand for business and consumer credit varied across Districts but appeared to expand at a moderate pace overall, with stable credit quality. Agricultural conditions were mixed, with price declines largely offsetting growing volumes. Overall demand for energy-related products and services weakened.
Labor market conditions remained tight in most Districts, with moderate payroll growth noted in general. Upward wage pressures increased further and were moderate on balance, with more rapid gains reported for workers with selected specialized skill sets. Price increases remained slight overall.

Consumer Spending and Tourism
Retail sales volumes appeared little changed since the prior reporting period, although the Boston, Cleveland, and San Francisco Districts suggested modest gains on balance. Respondents in Boston reported a pickup in retail sales due in part to increased customer traffic, while contacts in the Philadelphia District reported that decreased foot traffic did not reduce sales volumes. Retail sales declined in the Dallas and Kansas City Districts, and Chicago reported that consumer spending "slowed notably." Sales "softened" according to Richmond and Atlanta, but contacts in the latter District expect the usual seasonal boost in sales during the Labor Day weekend. Inventory levels were in line with retailer expectations in the Boston, Dallas, and San Francisco Districts, but higher than desired in the Chicago District.

The pace of auto sales declined somewhat but remained at high levels in general. The Atlanta, Chicago, New York, Cleveland, and San Francisco Districts all noted a slowdown or reduction in sales, with New York pointing to a reduction in dealer incentives as a factor. Only Dallas reported strong growth in auto sales. Vehicle sales in the Philadelphia District were unchanged from last period, and contacts reported narrower profit margins. Inventory levels varied across Districts, with dealers in St. Louis reporting an elevated level, while dealers in Richmond kept inventories of new vehicles tight.

Tourism activity was mostly flat relative to the prior reporting period, although the reports suggested that it was above year-earlier levels. Contacts in Chicago reported that the tourism industry continued to perform well, and demand for air travel in the San Francisco District remained strong. Demand for hotel rooms ticked down in Dallas, St. Louis, and New York. The elevated dollar did not slow international arrivals in Boston but did slow tourism activity in Minneapolis and San Francisco. Contacts in the Atlanta District also observed fewer international arrivals relative to the previous reporting period and were monitoring the potential impact of the Zika virus on international travel.

Nonfinancial Services
The pace of demand growth for nonfinancial services picked up slightly from the prior reporting period, and contacts generally expect moderate growth to continue in the sector. Only the New York District reported a broad decline in demand for services. Contacts in Richmond reported that demand for health-care services remained strong, particularly for outpatient care. Demand for restaurant services increased in Dallas and Kansas City. Activity in the information technology industry expanded in Minneapolis and St. Louis, and contacts in the Kansas City District expect moderate growth in that sector to continue over the coming months. Freight volumes picked up in Philadelphia, Richmond, and San Francisco but declined in Cleveland, Dallas, and St. Louis. Staffing services businesses in most Districts reported a moderate increase in activity, with Boston contacts reporting revenue increases of 3 to 30 percent over last year. By contrast Philadelphia reported slower growth in staffing demand since the prior reporting period. Transportation firms in the Atlanta District reported mixed results, with contacts in the rail industry reporting no change in volumes, but port contacts noting a year-over-year increase in shipping volumes.

Manufacturing
Activity in the manufacturing sector was flat to slightly up in general, with Chicago in particular reporting a moderate pace of growth. Activity in technology manufacturing was up modestly in Dallas, but contacts in San Francisco noted that production of semiconductors was flat and that capacity remained somewhat underutilized. Several transportation equipment and industrial machinery manufacturers reported plans to expand facilities in the St. Louis District. Pharmaceutical manufacturers in the San Francisco District reported that sales continued at a strong pace despite increased regulatory burdens and negative media coverage around industry pricing decisions. Weakness in the oil and gas extraction sector combined with competitive foreign supply to depress demand and production of steel products in several Districts. In contrast, contacts in the Chicago District noted that demand for steel was steady and declining imports have helped domestic producers gain market share. Manufacturers in Richmond are optimistic about growth prospects, and contacts in Philadelphia expect growth to pick up over the next six months.

Real Estate and Construction
Activity in residential real estate markets expanded further in most Districts. Growth in residential construction activity was moderate across many Districts but robust in San Francisco, where contacts reported that contractors are bumping up against capacity constraints for new projects. In Minneapolis, strong growth in the construction of single-family units was offset somewhat by a slowdown in the construction of multifamily units. Contacts in Dallas reported that demand for low- to mid-priced homes remained strong, while demand for higher priced homes softened in Dallas and New York, and was flat in Chicago. By contrast, sales in Cleveland were equally skewed toward the entry-level and high-end segments of the market. Boston, Richmond, Philadelphia, and St. Louis noted that home sales slowed in some areas of their Districts due to shortages of available units. Recent house price appreciation was reported to be modest in general. Contacts in several Districts were optimistic about future growth prospects, except in Kansas City, where respondents expect further declines in sales and inventories in the months ahead.

Commercial real estate activity expanded further in most Districts. Construction and sales rose only slightly in Boston, Kansas City, and St. Louis but grew at a faster clip in Cleveland and Dallas. In the Atlanta District, construction activity expanded moderately, but contractors reported tight supply conditions, with construction backlogs of one to two years. Contacts in Richmond and New York noted strong growth in industrial construction, and vacancy rates for industrial space fell to 10-year lows in the latter District. Commercial leasing activity strengthened in New York, Richmond, and San Francisco, but grew at a softer pace in Philadelphia, where contacts described the market as in a "lull, not a retreat." Vacancy rates on commercial properties increased along with completions in the Kansas City District. Commercial rents edged up in various Districts, including in Dallas and San Francisco. Contacts in several Districts cited only modest expectations for sales and construction activity moving forward, due in part to economic uncertainty surrounding the November elections.

Banking and Finance
Demand for business and consumer credit varied widely but grew at moderate pace overall. Bankers in San Francisco reported strong demand for loans, while demand for loans in Dallas remained soft. Commercial and industrial lending activity slowed in some Districts, but Philadelphia reported that most loan categories grew at a faster pace than in the previous report. Small to medium-sized banks in the New York District noted strong demand across all loan categories. According to the Dallas and Kansas City Districts, some oil and gas companies reported challenges obtaining credit.

Credit quality remained favorable for most Districts. However, contacts in the Richmond District noted that credit quality deteriorated slightly. Bankers in the St. Louis District reported that creditworthiness was largely unchanged for most loan applicants but declined somewhat for commercial and industrial lending. Contacts in the Atlanta District noted a drop in delinquencies and charge-offs. In the San Francisco District, financial institutions in states with a legal marijuana industry reported increased operational costs related to regulatory constraints.

Agriculture and Natural Resources
Agricultural producers faced mixed conditions during the reporting period, as contacts in many Districts reported that lower prices pushed down revenue despite growth in volumes. In the Chicago District, already low expectations for farm incomes deteriorated further, as the potential for a record national harvest pushed down crop prices further. Above-average water availability translated into record yields for almonds and walnuts in the San Francisco District. Contacts in several Districts reported strong yields for corn and soybeans. Severe flooding in parts of the Atlanta District lowered harvests somewhat, but cotton production is expected to expand relative to last year. Excess inventories of selected crops contributed to weak pricing trends. Growth in the price of agricultural products was flat to declining in many Districts, and contacts in Chicago reported that ample supplies of wheat, dairy, and some meat products resulted in price declines. In contrast, dairy producers in the Dallas District benefited from a price rally over the past six weeks. In Kansas City, bankers reported that, while agricultural loan delinquencies remained low, requests for loan extensions increased and loan repayment rates weakened.

Overall, demand for energy-related products and services continued to decline, albeit with some signs of stabilization. Oil extraction activity fell further, and contacts in the Atlanta District noted that inventories remained near historical highs despite a recent drawdown. In contrast, contacts in the Kansas City District reported an uptick in the number of active oil and gas drilling rigs in response to an anticipated increase in oil prices. Demand for natural gas varied across Districts. In the Cleveland District, demand increased as the utility and power generation sectors continue to migrate from coal-fired plants to using natural gas. Contacts in Atlanta reported that the supply of natural gas remained elevated and demand declined further. Coal production declined further in St. Louis. More generally, coal prices fell further, while the prices of oil and natural gas were flat to slightly up. Contacts in the Minneapolis District reported a slight uptick in mining activity, and noted that an idled iron ore mine resumed production and broke ground on an expansion. Contacts in Dallas remained optimistic for modestly improving conditions in the energy sector through the end of the year and into 2017.

Employment, Wages, and Prices
Employment expanded at moderate pace since the previous report. Conditions in the labor market remained tight in the Boston, Chicago, New York, San Francisco, St. Louis, and Minneapolis Districts. In Boston, contacts reported an unusually high number of job openings, and in the Richmond District turnover rates increased for entry-level positions. Employment gains were only modest in Cleveland, and contacts in Philadelphia reported an increase in part-time employees and longer workweeks along with a reduction in full-time hires. In many Districts, businesses reported trouble filling job vacancies for high-skilled positions, especially those aimed at technology specialists, engineers, and selected construction workers. Overall, employment declined in the carbon extraction industry; however, contacts in the Atlanta District reported an uptick in hiring at petrochemical refining companies.

Wage growth ranged from flat to strong across the Districts, but most reported that wage pressures remained fairly modest. Contacts in Minneapolis reported moderate wage pressures, while contacts in St. Louis and San Francisco reported strong wage growth. On balance, wage pressures increased for highly skilled workers in many Districts, and contacts in San Francisco reported continued strong wage growth for technology specialists. In Cleveland, wage pressures were most evident in the construction and retail sectors. In Philadelphia, wage pressures were modest, but contacts reported upward pressure to employee benefit expenses from rising health-care costs. In general, expectations of wage growth for the coming months were modest.

Overall price inflation was modest. The Boston, Chicago, Cleveland, and Dallas reports suggested that prices were largely unchanged from the previous period. St. Louis reported modest price pressures. Businesses in the Atlanta and Kansas City Districts reported slight increases in input prices, while reports on selling prices were mixed. The prices of finished goods rose at a somewhat slower pace in Richmond, compared with the previous reporting period. Contacts in several Districts expect prices to increase modestly in the coming months, and manufacturers in Philadelphia are expecting smaller price increases than nonmanufacturers.

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First District--Boston
Economic activity continues to increase in the First District, although there are scattered signs of slowing growth rates. Most responding retailers and manufacturers cite increased sales and revenues from a year ago, as do staffing firms. A tourism contact indicates Boston-area hotels have shaved their expectations for 2016, but still expect high occupancy and good revenue growth. Commercial real estate activity is flat or up slightly in regional markets. Residential real estate markets are said to be constrained by limited supply, with year-over-year declines in closed sales in five of the six New England states mostly attributed to shrinking inventories. Respondents in several sectors cite tight labor markets, with staffing firms reporting short supply and strong demand. Firms report little action on prices. Looking forward, contacts generally expect "more of the same."
Retail and Tourism
Retail contacts report that since early July, comparable-store sales have ranged from down slightly to up between 2 percent and 4 percent on a year-over-year basis. Respondents offer various reasons for these results. One retailer attributes their positive results to increased customer traffic, while another reports that lower customer traffic was offset by higher ticket orders. Adult apparel and footwear are reportedly selling well, but demand is lower for furniture and household wares. Inventory levels are variously described as lean to higher than planned, with the latter attributed to slower sales. One retailer hypothesizes that sales may have been negatively affected by Massachusetts not holding its usual tax-free weekend in mid-August. Prices remain unchanged or just slightly up. Hiring is "as needed," although contacts say labor markets are tight in a few areas. Expectations vary a bit--those retailers experiencing slower sales are waiting to see if the pattern reverses in the next couple months, while others continue to expect moderate growth to continue for the foreseeable future, unless some unanticipated event occurs.

A travel industry contact reports that Boston area hotels have revised their expectations for 2016 slightly downward--from an 80.4 percent room occupancy rate to 80.0 percent, and room revenues up 4.0 percent instead of the original forecast of a 6.5 percent increase over 2015. While realization of these lower expectations would still represent very good results, the revision is driven by lower spending on business travel in recent months, counterbalanced by a modest increase in leisure travel, both domestic and international. Museum attendance is up 10 percent year-to-date, providing further evidence of an increase in leisure travel. So far, the area has seen no slowdown in Asian, British, and European visitors, despite the strength of the U.S. dollar. However, since foreign travelers tend to plan and pay for their trips months in advance, this contact says it remains to be seen how U.K. bookings might be affected by the Brexit vote and the depreciation of the pound.

Manufacturing
Of seven manufacturing firms contacted this cycle, only one reports significant negative results. That firm spans aerospace, which has done very well, and industrial distribution, which was hit hard by the weakness in the oil, gas, and mining sector; sales were down 35 percent year-on-year in the second quarter but about level with the first quarter. A contact in the medical device business says their sales growth slowed significantly due to an inability to find and retain salespeople. A manufacturer of furniture that has struggled recently reported sales growth and an optimistic outlook for the first time in several years. The remaining manufacturing respondents say that growth is at a pace typical of recent years.

Overall, firms report no major pricing pressure. A dairy producer says raw milk prices are down. A manufacturer of tools reporting a price rise attributes it to innovative new products, not rising costs.

Only one contact, in the industrial distribution business, reports reducing headcount; they carried out a restructuring in the last few quarters that resulted in a 5 percent staff reduction. As noted above, one contact reports that the inability to hire and retain salespeople is constraining revenue growth; however, the hiring problems are confined to salespeople and otherwise, he says, the labor market is not very tight.

None of our contacts reports any major revisions to capital spending plans. Similarly, none reports major revisions to their outlook. The industrial distribution firm indicates that their decision to lay off employees reflects their conviction that the oil and gas sectors will not come back any time soon.

Staffing Services
Business activity in the New England staffing services industry has been "mixed" through August: year-over-year revenues are up for a majority of responding firms; increases range from 3 percent to 30 percent. Several contacts report seasonally slow business in the summer months. All respondents observe a tight labor market with short labor supply and strong demand, the latter evidenced by an usually high number of job postings. Contacts point to a dearth of skilled candidates to fill positions in property and corporate law, information technology, engineering, medicine, and welding, among others. They attribute the lack of labor supply to the low unemployment rate and skills mismatch in the labor market, as well as attractive salaries in permanent positions causing people to hold on to existing jobs or leave temp jobs after short tenure. Both bill and pay rates increased or remained flat for all firms, with increases driven by higher paying positions. Looking forward, most firms remain optimistic; some cite concern over the upcoming November election. They expect continued labor shortages and strong labor demand in the coming months, and say they will have to employ creative techniques to secure qualified candidates faster than their competition.

Commercial Real Estate
Commercial real estate activity in the First District is flat or improving modestly, depending on the location. In the Hartford area, office leasing activity remains limited and office rents are unchanged, while industrial leasing activity continues to show relative strength. Office leasing activity is steady at a healthy pace in greater Boston, where office rents are up slightly in recent weeks and up roughly 5 percent since last year. In the Providence area, office leasing activity increased modestly in August after a seasonally slow July; office absorption is positive so far in 2016. In the sales market, demand for commercial properties in Boston remains robust, especially among foreign investors, while in Hartford investment demand is somewhat softer than it was six months ago. Office construction activity is mixed, with little to no activity in the Hartford and Providence areas and moderate activity in the Boston area. However, the pace of office construction in Boston is said to be slightly below the national pace. The outlook for commercial real estate is neutral-to-pessimistic in Hartford and modestly optimistic for Providence and Boston. Across the District, the key downside risks cited by contacts include an aggregate economic slowdown and political uncertainty in the face of the November elections.

Residential Real Estate
Residential real estate markets in the First District began to show signs of moderation in July following a very busy spring and early summer. For single-family homes, closed sales decreased year-over-year in July in every state except Rhode Island. In Massachusetts, July represents the first year-over-year decrease in 14 months after a year that included several records highs. A contact in Boston similarly notes that although closed sales fell, volume is still well above average. Many contacts cite increasing prices as one reason for declines in closed sales; median sales prices increased year-over-year in every state except Connecticut. Pending sales were generally at higher levels than in July last year although the increases were more moderate than in the preceding months; a contact in Rhode Island notes that these figures "indicate a more tempered market heading into the fall." The market for condominiums showed similar trends, with closed sales decreasing in every state except Vermont and median sales prices increasing or decreasing only slightly. Pending sales data, however, were softer in the condominium market, decreasing in every state except Massachusetts and Maine.

Low inventory persists as an issue in the First District. For both single-family homes and condos, inventory decreased in every reporting region. All reporting states also saw a decreased number of months of available supply, further indication that the number of houses for sale is insufficient to meet buyer demand. Contacts consistently reference the inventory situation as the other explanation for softer closed sales data in July. The press release for Vermont and New Hampshire notes that "Many areas are falling behind last year's closed sales totals simply because of lack of available inventory." Putting together the two explanations, a contact in Massachusetts says "we know some buyers are getting priced out of the market, and the only way we can fix this is with more inventory."

Although sales activity has decreased from preceding months, contacts remain optimistic. A more temperate market is generally expected in the fall, as many point out that the levels of activity are still above average. Increasing prices and low inventories are the main areas of concern. Contacts are adamant that demand is healthy and that these price and inventory issues are hindering buyers who want to take advantage of "record-low mortgage rates and an unemployment rate under 5.0 percent."

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Second District--New York
There has been little to no economic growth in the Second District since the last report, though labor markets remain tight. Contacts note continued moderate pressure on input prices and wages but little change in selling prices. Manufacturers report that business activity has been flat, on balance, while service-sector businesses note that activity has declined. Consumer spending was little changed, on balance, while tourism activity showed further signs of weakening. Residential real estate markets continued to be mixed with further weakening at the high end; however, commercial real estate markets strengthened. Residential and office construction has tapered off, while industrial construction has picked up. Banks report further strengthening in loan demand and continued improvement in delinquency rates across the board.
Consumer Spending
Retail merchandise sales were mixed but generally little changed in July and August. One major chain reports that sales were above plan in July but weakened substantially in August and were below plan; however, another major chain reports that sales, though below plan in both months have improved gradually. In contrast, retailers in upstate New York characterize sales as solid in both July and August and up from a year ago. More generally, retailers report steady prices on net; some contacts note more discounting than a year ago, while some indicate less. Inventories are widely described to be at satisfactory levels.

New vehicle sales in upstate New York are reported to have softened further in July and August. Part of the general weakness is attributed to reduced incentives from manufacturers. Inventories of new vehicles are reported to be mixed. The used car market has generally been soft, though there has been some pickup in demand for lower priced models. Retail and wholesale credit conditions generally remain favorable.

Tourism activity has been steady to softer since the last report. Hotels report that business has been flat to declining moderately. Attendance at Broadway theatres weakened in July and August and was running slightly below 2015 levels. Moreover, with average ticket prices down modestly, overall revenues have been running roughly 5 percent lower than a year ago. Consumer confidence in the Middle Atlantic states (NY, NJ, PA) slipped in July.

Construction and Real Estate
The District's housing markets have been mixed since the last report, with ongoing weakening at the high end. New York City's rental market has softened further in both Manhattan and the outer boroughs: rents on larger and luxury units have continued to slip and more landlords are offering concessions (e.g., free month's rent, waived fees), while rents on smaller units have been essentially flat. Vacancy rates across the city have remained steady near six-year highs. However, rental markets are still described as strong in areas of New Jersey close to New York City.

New York City's co-op and condo resale market has been mixed. There is a sizable overhang of unsold new developments--mostly luxury units--and prices of these, as well as high end resale units, have declined. However, sales activity has been robust in the lower and middle segments of the resale market, especially in Brooklyn and Queens, where inventories remain low and prices continue to climb. In Manhattan, resale inventory has risen in recent months, while prices have increased modestly. Realtors across New York State report that the market for existing homes remained robust in July, as sales activity was fairly solid and prices were up more than 8 percent from a year earlier. A Buffalo-area contact notes that prices have risen moderately, inventories remain tight, bidding wars remain fairly common, and real estate agents are extremely busy. In northern New Jersey, however, market conditions have been more sluggish, for both new homes and existing properties--particularly at the high end--as an overhang of distressed properties continues to hamper the market in many areas.

Commercial real estate markets have strengthened since mid-year. In Manhattan, office availability rates were little changed, but asking rents picked up in July and August. Elsewhere, office availability rates fell to new multi-year lows in northern New Jersey, Long Island, Westchester and across upstate New York, while asking rents in those areas were generally steady to up modestly. The industrial market has strengthened across the District: vacancy rates have fallen to 10-year lows, while asking rents have accelerated and are up roughly 10 percent over the past year. Much of this strength has been in northern New Jersey.

New residential construction has slowed somewhat, with multi-family activity tapering off and the single-family segment remaining sluggish. New office construction has slowed in New York City and remains moribund elsewhere; still there is a large volume of office space currently under construction across New York City and a moderate amount in northern New Jersey. In contrast, new industrial construction has been increasingly robust--particularly in northern New Jersey.

Other Business Activity
Contacts across the District generally report that business activity has weakened since the last report. Manufacturers report that activity has been essentially flat, on balance, while service-sector contacts indicate that it has declined. Both manufacturing and service-sector contacts continue to report little change in selling prices but continued upward pressure on input prices.

The labor market has remained tight since the last report. Both manufacturers and service firms report little change in staffing levels; service firms have scaled back hiring plans in recent weeks, while manufacturers expect staffing levels to be steady to lower in the months ahead. One major New York City employment agency reports that hiring activity has remained brisk during the usually slow summer months. However, two other agencies in the District report that demand for workers has been steady, albeit at strong levels. Wage pressures have picked up somewhat but remain modest. A trucking industry analyst notes that there remains a shortage of drivers, as firms do not have enough pricing power to enable them to afford raising salaries.

Financial Developments
Small to medium-sized banks in the District report stronger demand for all categories of loans--particularly residential mortgages. Bankers report that credit standards remained unchanged across all loan categories. Contacts report that spreads of loan rates over cost of funds narrowed across all loan categories--most notably for residential as well as commercial mortgages. Bankers indicate declining delinquency rates across all loan categories, with the most widespread declines reported for consumer loans.

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Third District--Philadelphia
Aggregate business activity in the Third District grew slightly during the current Beige Book period--a bit slower than the modest pace reported last period. Similarly, overall hiring slowed to a slight pace of growth. Staffing firms reported a modest increase in activity, while manufacturers continued to report job cuts, and other sectors noted mixed trends. On balance, firms reported that prices continued to rise slightly over the current period, as did home prices. Other than health-care costs and wages for certain skilled positions, banking and staffing contacts reported that wages continued to rise modestly. Overall, firms expect moderate growth over the next six months--a little higher than they reported last period.
Third District contacts reported moderate growth for general services and lending volumes, modest growth for staffing services and tourism, and slight growth for homebuilders and commercial leasing agents. Little or no change in activity was noted by manufacturers, auto dealers, nonauto retailers, residential brokers, and commercial contractors. Most of the contacts have noted changes in the direction or pace of growth since the prior period; three sectors improved a bit, while growth in six sectors slowed, as noted in their respective sections below.

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