Businesses are expecting inflation to rise in the coming months, Fed's Beige Book says

AP

Business are expecting prices to rise modestly in the coming months, according to the Federal Reserve's latest Beige Book released on Wednesday.

The Fed's preferred measure of inflation — personal consumption expenditures — rose 1.7% in January, Commerce Department data released earlier on Wednesday showed. The Fed has a 2% target. 

The Beige Book repeated that the economy continues to expand at a moderate pace, amid promises from the new administration to return the economy to 3% growth. 

It has been a busy week for Fed news. William Dudley of the New York Fed and Dallas Fed President Kevin Kaplan earlier spoke with a hawkish tone on interest rates, prompting the forward market to review its forecast for the number of times the Fed would hike this year.

On Wednesday, traders priced in an 80% chance of a rate hike at the Fed's March meeting, up from 50% at the start of the week. However, the sluggish rate of inflation amid slow wage growth has prompted the Fed to be patient up till now. 

Fed Chair Janet Yellen will speak on Friday before officials go into the blackout period leading up to their March 14-15 meeting.

To help compile the Beige Book, the Fed's 12 districts collect anecdotes from their contacts in industries ranging from real estate to tourism. 

Here's the full text:

Overall Economic Activity
Reports from all twelve Federal Reserve Districts indicated that the economy expanded at a modest to moderate pace from early January through mid-February. Consumer spending expanded modestly since the last report. Retail sales increased at a subdued pace across most of the nation, with a number of Districts noting an ongoing shift from in-store to internet purchasing. Auto sales varied widely, but were said to be up in most Districts. Tourism activity was mixed but mostly stronger. Manufacturing activity accelerated somewhat, with most Districts characterizing the pace of growth as moderate. The energy sector showed modest growth in early 2017, and transportation activity was steady to somewhat higher across the nation. Home construction and sales continued to expand modestly in most Districts, while residential rental markets were mixed. Home prices were steady to up modestly in most Districts, and a number of Districts noted low inventories of existing homes. Commercial real estate construction grew modestly, and sales and leasing activity grew moderately. Lending activity was steady to somewhat higher. Businesses were generally optimistic about the near-term outlook but to a somewhat lesser degree than in the prior report.

Employment and Wages
Labor markets remained tight in early 2017, with some Districts noting widening labor shortages. Employment grew moderately in most of the nation, though three Districts characterized growth as modest and two reported that it was little changed. A number of Districts noted that staffing firms were seeing brisk business for this time of year, and one noted more conversions from temporary to permanent workers. In general, wages in most Districts rose modestly or moderately, with a few reporting some pickup in the pace of wage growth. A number of Districts noted that shortages of skilled workers--particularly engineers and IT workers--were driving up their wages, and there were also some reports of labor shortages in the leisure and hospitality, construction and manufacturing industries.

Prices
Pricing pressures were little changed from the prior report. Most Districts reported that selling prices were up modestly or moderately, though four indicated that prices had largely leveled off. Input prices were up modestly, on balance. Energy prices and farm prices were mixed but mostly steady, on balance, while prices for construction materials climbed in a number of Districts. Overall, businesses said they expected both input prices and selling prices to increase modestly in the months ahead.

Highlights by Federal Reserve District

Boston
Business contacts in most sectors reported modest to moderate year-over-year increases in activity in recent weeks. Staffing firms, by contrast, cited modest declines in revenues. Some respondents expressed concern about policy changes in the new administration and associated uncertainty. Most contacts nevertheless cited a positive outlook.

New York
Economic activity has accelerated to a modest pace. Labor markets have strengthened, hiring has picked up, and wages continued to rise modestly. Input cost increases have become more widespread, and selling prices have accelerated somewhat. Housing markets have continued to weaken at the high end, while commercial real estate markets have picked up.

Philadelphia
Overall, economic activity continued to rise modestly with pickups to growth emerging from manufacturers and homebuilders. However, activity was essentially flat in several other sectors. Many contacts remained cautiously optimistic even as their uncertainty increased. In general, employment, wages, and prices continued to rise at a modest pace.

Cleveland
Economic activity, which had picked up some after the election, continued to rise at steady pace into February. The expansion was attributed to rising consumer and business confidence, although this confidence is only reflected in a limited increase in business spending. Retaining high-skilled workers is increasingly difficult. Product pricing pressures diminished slightly.

Richmond
Economic activity grew moderately since the previous Beige Book. Manufacturers reported increased shipments, along with stronger growth in new orders and greater capacity utilization. Additionally, record volumes of container traffic passed through the ports in recent weeks. Commercial leasing increased, particularly for industrial and retail space. In commercial construction, multi-family and mixed use development dominated.

Atlanta
Economic activity expanded modestly. The labor market remained tight. Overall, wages and non-labor cost pressures were subdued. Retailers cited flat sales, while auto sales increased. Home prices increased modestly. Demand for commercial real estate continued to improve. Manufacturers noted an increase in new orders and production.

Chicago
Growth picked up to a moderate pace. Employment, wages, business spending, and manufacturing production all grew at moderate rates, consumer spending increased modestly, and construction and real estate activity rose slightly. Financial conditions were little changed, prices increased modestly, and farm incomes improved slightly.

St. Louis
Economic conditions have continued to expand at a modest pace. Manufacturing contacts reported an uptick in activity in the first quarter, while auto dealers reported a slight decline in sales. The general outlook for 2017 among business contacts remained optimistic, even improving slightly since mid-November.

Minneapolis
Economic activity grew modestly. Employment rose, but certain retail sectors saw significant closures and layoffs. Activity in North Dakota slowed, though activity in the Bakken was improving. Winter tourism conditions were spotty. Manufacturing activity and outlook improved. Commercial construction slowed, but residential construction had a strong January. Home sales were mixed across metro regions.

Kansas City
Economic activity continued to expand modestly, and contacts in most sectors expected additional gains in the months ahead. Retailers and auto dealers anticipated a pickup in sales in the next few months, and manufacturers' expectations for future activity were at their highest levels in over twelve years. The energy sector continued to expand, but the agriculture sector remained weak.

Dallas
Economic activity grew moderately, and outlooks remained optimistic. The energy sector noted improved demand and signs of a pickup in hiring. Manufacturing and service-sector activity continued to expand, although there was increased uncertainty surrounding the new administration's policy changes. Loan activity increased and housing demand remained solid.

San Francisco
Economic activity continued to expand at a moderate pace. Sales of retail goods picked up, and activity in the consumer and business services sector slowed slightly to a moderate pace. Manufacturing conditions remained mixed, and activity in the agriculture sector was largely unchanged. Activity in the housing market was unchanged from the prior period, but remained strong.

First District--Boston

Summary of Economic Activity

First District businesses contacted in early February reported modest to moderate increases in activity from a year earlier. Retailers cited flat or single-digit increases in sales, while two-thirds of responding manufacturers saw revenue gains. Staffing firms mostly saw slight year-over-year declines in revenues, attributable in part to tight labor supply. Commercial real estate markets in the region were steady, with "good but not great" office leasing activity in Boston, Portland, and Providence. Residential real estate markets across the region saw increased median sales prices and mixed sales results, partially attributable to ongoing inventory shortages. Across most sectors, input and selling prices were stable, although staffing firms have raised bill and pay rates. While some responding firms expressed concern about increased uncertainty, most continued to say they were upbeat about 2017.

Employment and Wages

Retail firms cited a continuing tight labor market for positions involving information technology. Retailers planning to open new stores expect to hire sales associates and front-office personnel in line with that growth. Manufacturing respondents reported that employment was up, although for most it was a very minor change. Manufacturers continued to say they had difficulty finding skilled engineers and one added that the shortage of engineers was a problem overseas as well. No manufacturers reported any significant wage pressure. Among responding staffing firms, all observed strong overall labor demand and tight labor supply. Two firms mentioned lower demand from the manufacturing sector; sectors with particularly low labor supply were IT, accounting, and healthcare. Staffing firms indicated that bill and pay rates had increased since the previous quarter; most reported little pushback to increasing bill rates.

Prices

Retailers indicated that selling prices and vendor prices were level or up 1 percent to 2 percent. Manufacturers reported no exceptional pricing pressure from either customers or suppliers. A manufacturer of milk products said that it was the most stable pricing environment in the industry in 10 years. A chemical manufacturer noted that increased global production of olefins had driven down the price.

Retail and Tourism

Retail contacts consulted for this round reported that year-over-year sales growth in January to mid-February ranged from flat to low single-digit increases. One furniture retailer reported that its January sales were up 4 percent year-over-year, but severe winter weather in the Northeast during the first two weeks of February deterred shoppers. Demand for footwear, outerwear, women's apparel, and outdoor goods was reportedly strong, but there was some softness in sales of men's and children's apparel. Contacts expect to see modest growth (in the low single digits) in 2017.

Boston area hotels posted an 81.1 percent occupancy rate and another consecutive record high daily average room rate for 2016. Based on advance hotel bookings, projections for 2017 were similarly upbeat. However, some hotel and restaurant groups feel that the executive order limiting travel from certain countries may have adverse business effects as the United States may not be perceived as a welcoming country. Adding this worry to other concerns raised by a strong U.S. dollar, the possible effect of Brexit on the British exchange rate, and the outcomes of upcoming elections in key European countries creates some significant uncertainty about how the tourism sector will fare in 2017.

Manufacturing and Related Services

Of nine manufacturing contacts, six reported sales gains versus the same period a year earlier, two noted little change and one reported lower sales. For those reporting growth, it was generally stable. One of the firms reporting no growth said it reflected an exceptionally strong start to 2016.

Although contacts were generally positive about the near-term outlook, many expressed concerns about policy changes from the new administration. Three mentioned that the border adjustment tax would present a problem for them. A manufacturer of semiconductor equipment said that restrictions on the H1B visa program would affect its ability to staff positions. Another said that uncertainty about policy was the problem; for example, a border adjustment tax would have a big effect on where they located future production facilities and they would be reluctant to commit to new investment without some resolution of the issue. One contact noted that a risk in the coming year was that a plateauing of sales in the auto industry would lead to discounting of new cars and resulting pricing pressure on suppliers.

Staffing Services

New England staffing services contacts reported mixed changes in year-over-year revenue. Unlike recent reports, most firms saw declining year-over-year revenue; nonetheless they said that the economy remained strong and they were optimistic about the future of their firms. Facing supply shortfalls, most contacts were trying out new ways to fill their open positions, including partnering with local non-profits, offering sign-on bonuses, and increasing their social media presence. While all firms expressed optimism about the next few months, several were concerned about policy uncertainty with the new administration. One healthcare staffing firm, for example, lost a substantial number of listings a few weeks ago when one of its clients issued a hiring freeze in Boston, waiting to see what happens with Obamacare.

Commercial Real Estate

Commercial real estate activity was mostly unchanged in the First District. In Connecticut, office leasing activity was limited while industrial leasing was steady if not robust, and one contact expects further development of large retail fulfillment centers in the state in 2017. Demand for industrial property appeared to increase more broadly across the District, driving new build-to-suit construction in numerous locations. In Boston, Portland, and Providence, office leasing activity was described as good but not great, and vacancy rates remained low to very low. A Boston contact says that the city's office absorption pace slowed in recent months, a fact attributed partly to a longer-term trend among employers of reducing the space allotted per worker. Office construction remains limited across the First District, and contacts cite high building costs and a modest demand outlook as restraining factors. Boston's investment sales market saw steady demand and prices remained high by historical standards, but investors continued to express caution over the future direction of prices, especially in light of rising interest rates. Construction activity continued to increase in Rhode Island but was concentrated in multifamily, hospitality, and infrastructure projects. Investment sales remained strong in Portland but continued to cool in Connecticut. Contacts offered mixed reports on the retail leasing environment: the region's mid-market malls saw increased store closings while demand for core urban retail and high-end mall space remained strong. Contacts are cautiously optimistic that fundamentals will hold steady or improve in 2017.

Residential Real Estate

The end of 2016 continued recent trends for residential real estate markets in the First District. Closed sales for single-family homes increased in three of the six First District states and decreased, though only moderately, in the other three and in the Boston metro area. (Five of the six First District states and Boston reported changes from December 2015 to December 2016, while Maine reported year-over-year changes to January 2017). For condos, closed sales increased in four states and decreased modestly in Massachusetts, New Hampshire and the Boston metro area. Despite sales being down year-over-year, a Boston contact reported that the optimism going into 2017 is "overwhelming." Record numbers of homes were sold in December in Rhode Island and in 2016 as a whole in Maine. Pending sales were also generally up, which indicated a good outlook going into 2017. Many contacts again cited low inventory as a strain on the market. Inventory decreased for single-family homes and condos in every reporting region.

Median sales prices rose year-over-year for single-family homes and condos in every reporting state and the Boston metro area. A Rhode Island contact commented that "as prices rise, more people will see gains in home equity which will give them more freedom to move. That should provide some relief to our supply shortage." Overall, contacts were optimistic about housing markets going into 2017.

Second District--New York

Summary of Economic Activity

Economic activity in the Second District has picked up since the last report, expanding at a modest pace, and labor markets have strengthened. Increases in both input costs and selling prices have become more widespread. Manufacturers noted a brisk pickup in business activity in early 2017, while service-sector contacts have continued to report steady to moderately expanding activity. Consumer spending has been subdued in recent weeks, despite a surge in consumer confidence. Housing markets have been mixed, with weakness continuing at the high end, while commercial real estate markets were steady to stronger. Residential construction has remained sluggish, though office construction has picked up slightly and industrial construction remains fairly robust. Banks reported that loan demand retreated and that delinquency rates rose modestly.

Employment and Wages

The labor market has strengthened in early 2017. Hiring activity has picked up--especially among service firms. In particular, businesses engaged in education and health, information, professional and business services, and wholesale trade reported that they have increased staffing levels. On the other hand, manufacturers report steady employment, and leisure and hospitality firms mostly indicated steady or declining employment. Businesses in almost every industry sector plan to add staff in the months ahead, on net.

Contacts at employment agencies reported that the labor market has remained tight and that hiring activity has been fairly brisk for this time of year. One contact in upstate New York noted a recent pickup in hiring at manufacturing and tech firms, while an agency in New York City reported brisk hiring from small to medium sized financial firms.

Contacts in most industries reported continued modest wage growth, though contacts in the leisure and hospitality sector noted a more significant pickup. Contacts at major employment agencies across the District report that starting salary offers have generally been steady to rising modestly, though they have risen more noticeably for some high-skill workers that are in short supply. While it is too early to assess any overall effects on wages and employment resulting from the January 1 increase in New York State's minimum wage schedules, a couple of contacts in the leisure and hospitality industry indicated that they have faced some challenges.

Prices

Business contacts in all major industry sectors reported widespread increases in input prices--generally more so than in the last report. Contacts in most industries anticipate further increases in the months ahead, except in the transportation sector, where input costs are expected to remain steady. Selling prices are reported to be rising in the wholesale trade and leisure and hospitality industries but generally stable in other sectors, notably retail trade.

Consumer Spending

Retail merchandise sales were generally characterized as sluggish in January and early February. However, on-line sales have reportedly been robust, with one major chain noting double-digit percentage growth over the past year. Two contacts attribute some of the recent weakness in seasonal merchandise to unseasonably mild weather. Despite the disappointing sales performance, inventories were said to be at satisfactory levels. Retail contacts continued to express concern about the near term sales outlook, with one noting that a number of store closings are in the works across the District.

Auto dealers in upstate New York reported that sales of new vehicles were steady at a strong level in early 2017, while sales of used vehicles picked up further. Inventories of new vehicles have come down but remain somewhat elevated. Retail and wholesale credit conditions were reported to be in good shape.

Consumer confidence in the Middle Atlantic states (NY, NJ, PA) continued to climb in January, reaching its highest level in more than a decade.

Manufacturing and Distribution

Manufacturers reported that business activity has picked up sharply in early 2017, with new orders, unfilled orders, and shipments rising noticeably. Manufacturing contacts also continued to express widespread optimism about the near-term outlook. Businesses in the wholesale trade and transportation industries reported more modest improvement but remain widely optimistic about future business conditions.

Services

Service-sector businesses continued to report mixed but, on balance, steady business conditions in early 2017. Contacts in both the finance and health & education sectors noted a pickup in activity, while those in leisure and hospitality and information sectors reported some softening. Looking ahead, service-sector businesses remained generally optimistic about the outlook--particularly those in the professional & business services industry. Tourism activity has shown signs of continued softening, with Broadway theaters reporting sharp declines in attendance in January and especially February, and hotels generally reporting lower occupancy rates.

Real Estate and Construction

Housing markets have been mixed across the District since the last report, with the high end of the market continuing to lag. New York City's rental market has weakened further. Rents on larger apartments have continued to decline, while rents on smaller units have been flat; moreover, landlords have been offering more generous concessions in early 2017. Apartment rents have been flat in the areas around New York City but have continued to edge up across upstate New York. Rental vacancy rates have edged down in New York City, reportedly due, in part, to the increased concessions. Across the District overall, vacancy rates have been mostly steady.

New York City's co-op and condo resale market has been flat in early 2017. There was a pickup in activity in January, but that has subsided in the first half of February. Prices on larger units--especially new development--have continued to slip, while prices on smaller apartments have been steady to up slightly. The inventory of newly developed units has continued to rise; the inventory of resale units has risen but remains exceptionally low. Bidding wars have largely subsided.

Elsewhere across the District, market conditions have been more favorable. Home sales in the suburbs around New York City have been quite robust; prices have remained flat in northern New Jersey and Westchester but have begun to pick up on Long Island. In upstate New York, the market has continued to strengthen, with brisk sales activity, rising prices, and extremely tight inventory.

Commercial real estate markets have been steady to somewhat stronger in the first few weeks of 2017. Office markets were little changed--both in and around New York City, as well as in upstate New York--and asking rents have mostly been stable. However, the market for industrial space has continued to strengthen. Across the New York City metro area, industrial vacancy rates have declined further and rents have continued to rise. In upstate New York, vacancy rates have been steady, while rents have moved up noticeably.

New home construction--both single-family and multi-family--has been sluggish across most of the District. New office construction has picked up somewhat but remains fairly subdued. However, there continues to be a good deal of office construction in progress in New York City. Industrial construction has been fairly strong.

Banking and Finance

Small to medium sized banks in the District reported weaker demand for consumer loans and residential mortgages, but no change in demand for commercial mortgages or C&I loans. Bankers reported that credit standards were unchanged across all loan categories. Spreads of loan rates over cost of funds were unchanged across all loan categories except residential mortgages, for which bankers reported widening spreads. Respondents also reported an increase in the average deposit rate. Finally, bankers reported higher delinquency rates across all loan categories except commercial mortgages, for which bankers reported no change in delinquency rates.

Third District--Philadelphia

Summary of Economic Activity

Aggregate business activity in the Third District continued at a modest pace during the current Beige Book reporting period. Notable shifts in activity included manufacturing and homebuilding, which improved to a moderate pace of growth. Four sectors -- nonauto consumer spending, lending, and nonresidential construction and leasing -- were essentially unchanged, after growing at a modest pace in the prior period. Existing home sales appeared to have declined. According to most contacts, employment, wages, and prices continued to grow at a modest pace. Expectations for firm growth have risen recently; however, the anticipated pace of growth over the next six months remains moderate on average.
Employment and Wages
Employment has continued at a modest pace of growth since the prior report. Manufacturing firms continued to note increases in employment and in the length of average hours worked. Employment indicators from nonmanufacturing firms remained positive overall, but with smaller net increases as a growing percentage of firms reported a decrease in full-time and part-time workers.

Staffing firms described themselves as busy. In some cases, activity picked up immediately following the holiday lull and continued at a steady pace.

Wage pressures continued to be modest with little shift in reporting on wage levels or labor market tightness. Staffing contacts noted little change in overall wage pressures. A somewhat lower percentage of nonmanufacturing contacts reported wage increases than during the prior period.

Prices

On balance, price levels continued to rise modestly. About two-thirds of firm contacts reported no change at all in prices paid and prices received. Of the remaining firms, more reported increases than decreases with the exception of prices received by nonmanufacturing firms, which were almost evenly balanced. Contacts in banking and other large service-sector firms noted no signs, nor fear of inflation. Homebuilders continued to note the greatest price pressures for their inputs, especially for subcontracted labor. Overall, the sales prices of existing homes decreased slightly, if at all, although this varies across markets and price categories.

Looking ahead one year, manufacturers anticipate a 2.0 percent increase in prices received for their own goods and services, and nonmanufacturers expect a 2.5 percent increase. Manufacturers also reported expectations of 2.2 percent annual inflation for consumers -- slightly higher than last fall, while nonmanufacturers continue to expect 2.0 percent inflation.

Manufacturing

A greater percentage of firm contacts in a broader range of sectors reported increased manufacturing activity than in the previous period, suggesting moderate growth overall. Contacts reported that new orders picked up to a moderate pace of growth, while shipments continued at a modest pace.

Overall, gains in activity were indicated by most major sectors, including the makers of lumber products, paper products, chemicals, primary and fabricated metal products, industrial machinery, and electronic products.

More than half of the manufacturing contacts were optimistic that orders, shipments, and general activity would grow over the next six months, similar to the prior Beige Book period. About one-third of the contacts expressed expectations for increased capital expenditures, although this was a bit lower than the prior period.

Consumer Spending

Nonauto retail sales grew slightly at best during the period, according to several analysts. One area chain reported that sales were a little lower than the prior two months, and a bit below expectations but the contact was not yet worried about a changing trend.

Auto dealers noted concern this period, as sales only slightly increased over last year after adjusting for much milder weather (sales were hurt last year by a significant January 2016 snowstorm). Dealers worry about too much inventory and getting squeezed between manufacturers' ongoing supply and slightly slumping demand.

Tourism contacts generally indicated a continuation of modest growth and positive prospects for the year ahead. A Poconos contact indicated that the snow season had opened early and that there was a good base of snow for Presidents' Day, which coincides with the area's biggest winter week because so many schools have vacations. Meanwhile, area water parks continue to attract an increasing number of visitors year-round. Contacts at the Jersey Shore indicated that peak summer bookings are filling up earlier each year. Even casino revenues in Atlantic City have finally begun to register some year-over-year gains on a more consistent basis.

Nonfinancial Services

Overall, Third District service-sector firms continued to report moderate growth in general activity; moreover, the pace was somewhat faster than the prior period. Specifically, contacts noted a pickup in the moderate pace of sales and new orders. A transportation analyst reported that truck freight was growing a bit better than the prior period, as its market tightened at year-end. Spot rates for hiring trucks had increased, so contract rates will likely follow, according to the analyst. Along with steady growth, one contact noted that the incidence of consumers not paying their monthly bills continues to fall. Generally, the high expectations of future growth reported in the prior period were tempered this period -- retreating to more average levels.

Financial Services

Third District financial firms reported little or no change in overall loan volumes, after posting modest increases during the prior Beige Book period. This excludes the typically large seasonal decrease observed in credit card volumes, which follows the annual holiday season.

Consumer lending (other than for credit cards and autos) was the only loan category to grow significantly during the period. Commercial real estate loan volume grew a bit, but less so than the same period last year. Home equity loans and auto loans decreased slightly, while volumes of home mortgages and of commercial and industrial loans were mostly unchanged.

Most contacts continued to note the increased optimism of Wall Street investors and larger Main Street businesses but also noted increased uncertainty, especially for consumers and small businesses. In general, banking contacts continued to express cautious optimism for slow, steady growth.

Real Estate and Construction

On balance, homebuilders were pleased to report that the new year began with moderate increases in traffic, contract signings, and construction backlogs. Mild winter weather helped year-over-year comparisons, but activity has also outperformed firms' expectations.

Brokers in most major Third District housing markets reported a modest decline in existing home sales following moderate growth last period. They report no signs yet that the very low inventory levels will be replenished in time to boost sales this spring.

Nonresidential real estate contacts covering much of the Third District reported little change overall to the relatively high levels of construction and leasing activity. Contacts reported strong growth for projects associated with energy and pipelines and some ongoing growth for the office market in and around Philadelphia. However, contacts have begun to voice concerns as to whether the industrial/warehouse market might be near a peak, as they have previously said for multifamily construction.

Fourth District--Cleveland

Summary of Economic Activity

Economic activity grew moderately on balance across the Fourth District during the current reporting period. Labor markets continued to show signs of tightening, with moderate wage gains. Upward pressure on prices paid and prices received dampened slightly. Consumers continued to favor Internet and mobile shopping over brick and mortar. Motor vehicle sales spiked higher in January. Production picked up at manufacturing plants. Nonfinancial services firms experienced slight revenue growth overall, but demand was strong for IT and data analytics services. The housing market improved, with higher unit sales and higher prices. Commercial builders believe 2017 will be a solid year for their industry, though some expect that 2017 will also be the peak of the current construction cycle. Lending pipelines remain relatively strong.

Employment and Wages 

Reports indicated continued tightening in labor markets. Staffing increases were prevalent in the nonfinancial services and the real estate and construction industries. Manufacturing saw a pickup in hiring after reporting flat or lower payrolls since late last summer. Attracting and retaining qualified employees in the skilled trades and technical positions such as engineering and data analytics remain challenging and are fueling wage and benefit increases across industry sectors. One large manufacturer noted that the average time required to fill skilled production or professional job openings has risen from two months to six months. Reports of average wage increases during 2017 are generally expected to fall within the 2 percent to 3 percent range, but there were a few reports of 3 percent to 5 percent increases.

Prices

Upward pressure on prices paid and prices received has dampened over the period. Several nonfinancial services providers reported that they are holding their billing rates in check, excluding inflation adjustments, because of pushback from clients when they attempted to raise rates. Similarly, suppliers of healthcare products sold to hospitals indicated that they are holding their prices in check until potential changes in the Affordable Care Act are clearer. A data analytics firm reported that brick-and-mortar retailers generally are experiencing 1.5 percent to 3 percent price declines. One factor driving the declines is competition from their Internet counterparts. An auto dealer noted that the average transaction price is approaching a historic high mainly because of the popularity of light trucks, which have higher sticker prices than cars. He believes that rising interest rates will help temper further sticker price increases. Manufacturers are seeing modest increases in raw material prices, which they attributed to the rising cost of steel products and suppliers finally raising prices after having delayed such increases during the past few years. Wellhead prices for natural gas continue to trend slowly higher, but they remain below the threshold that would significantly boost upstream activity.

Consumer Spending

Reports indicated that Internet retailers are experiencing strong revenue growth, while same-store sales were flat. Although traditional brick-and-mortar retailers are investing in ecommerce, their combined sales have increased at a slower pace than the sales of Internet specialists. That said, a furniture chain reported a significant boost in post-election consumer confidence, which when combined with low interest rates contributed to fourth quarter revenues at a historic high. Strong sales continued into January. Similarly, car dealers reported a spike in unit sales of new and used vehicles during January when compared to those of the same time period a year earlier and when compared to December's transactions. One dealer attributed the increase in sales to an ongoing post election boost in consumer confidence and to rising OEM incentives. Unit sales increases are reportedly around 12 percent, with light trucks dominating sales.

Manufacturing

Factory output picked up slightly since our last report. Activity for suppliers to the aerospace, construction, and motor vehicle industries remains elevated. Manufacturers of food service and warehouse automation equipment cited strong growth during 2016. Factors tempering output growth for other manufacturing industries include ongoing weakness in the oil and gas industry and the strong dollar. The auto industry is concerned about the possible impacts of a border-adjustment tax. Auto parts cross borders multiple times prior to final assembly. A border tax policy would likely result in higher sticker prices and an increase in OEM incentives.

Nonfinancial Services

Activity in the nonfinancial services sector grew slightly over the period. Strongest demand was seen in the IT and data analytics, commercial real estate services, and management consulting segments. Several contacts observed that clients were in a wait-and-see mode prior to the presidential election and that demand for services picked up post election. An engineering design firm reported that through much of 2016, clients had been hesitant to move forward with projects, especially large projects. That said, there was a noticeable pickup in project feasibility studies since the presidential election. Similarly, a law partner noted that demand for legal services was stable through most of 2016. However, in the fourth quarter, his firm saw a broad-based uptick in demand. A landscape architecture firm reported a large spike in RFPs during December, especially for nontraditional services. The firm indicated that many of these projects had been postponed for years and that property owners are now feeling confident about the economy.

Real Estate and Construction

Unit sales of new and existing single-family homes for all of 2016 increased almost 7 percent compared to those of a year earlier. The average sales price rose 4.5 percent. Realtors reported that rising consumer confidence and the likelihood of higher interest rates are factors motivating buying decisions. Low inventory of existing homes for sale is helping boost prices. Estimates of single-family construction starts for 2016 were higher in Ohio and eastern Kentucky, compared to those of a year earlier.

Overall activity in the commercial construction market remains elevated. Contacts expect that 2017 will be a solid year for their industry, though some noted that 2017 may be the peak of the current construction cycle and that they anticipate uncertainty surrounding business activity in 2018. General contractors are seeing strong demand from healthcare and industrial customers. The latter group's demand is especially pronounced for warehousing and distribution facilities. An Internet retailer announced plans to construct a major hub in the District. A commercial real estate services contact noted a large post election spike in commercial property transaction fees after business had been flat for most of 2016. General contractors cited two issues that may be dampening multifamily construction: First, uncertainty about the administration's tax policies is causing worry among sellers of affordable housing tax credits. Even though no new tax policies are in place, firms are holding off on purchasing tax credits because of speculation that they won't need to offset their taxes as much as in the past. Second, banks are moving more cautiously when considering financing multifamily developments out of concern that some hotter markets may be overbuilt. As a result, developers are being required to hold equity positions that are about 10 percentage points higher compared to requirements of a couple of years ago.

Financial Services

Bankers reported that lending pipelines remain relatively strong. The outlook is more positive since the presidential election because of an increase in consumer and business confidence that bankers believe will fuel increased demand for their products and services. However, the boost in demand may not occur until after midyear 2017. In contrast, potential changes in US trade policies could restrain the business activities of corporate clients with large global business models. Another reported concern is that non amortizing loans issued to commercial developers prior to the financial crisis are coming due. Already there are some developers turning over collateral rather than repaying loans because many retail properties are worth less than the loan value.

Fifth District--Richmond

Summary of Economic Activity

Economic activity in the Fifth District grew moderately since the previous Beige Book report. Labor demand continued to increase and there were more reports of employees being converted from temporary to permanent workers. Prices rose somewhat more rapidly at services firms, while increases in manufacturing prices received were modest. Manufacturing input price growth moderated slightly. Manufacturing strengthened, and producers anticipated continued improvement during 2017. Retail sales rose on balance. Tourism grew at a normal seasonal pace. Residential real estate activity increased slightly, while commercial leasing rose moderately. In banking and finance, commercial loan demand rose and residential mortgage demand softened to typical seasonal levels. At non-financial services firms, revenues continued to rise at a modest pace. Energy markets strengthened modestly and agricultural conditions were largely unchanged at seasonal levels.

Employment and Wages

Labor demand remained moderate, although hiring increased at a slightly slower pace since the previous Beige Book because of usual seasonal slowing at the beginning of the year. District contacts reported modest increases in wages in recent weeks. Recruiters continued to report tight labor markets, with strong demand, particularly for higher-level skilled workers. Staffing firms reported that the volume of worker conversion from temporary to permanent increased modestly. Tourism and hotel contacts were planning typical levels of seasonal hiring but were experiencing shortages of applicants; some businesses were offering higher wages or incentives to fill those positions.

Prices

Services firms' prices rose at a moderately faster pace in recent weeks while retail prices grew more robustly, according to our most recent surveys. Manufacturers reported modest growth in prices received and a slight slowdown in average input price growth. Home prices inched up, on balance. Residential home builders reported a modest increase in lot prices in some areas. Grain, livestock, and poultry prices rose marginally but remained below historical averages. Beef prices, however, continued to decline slightly. Coal prices remained at the slightly elevated levels previously reported, while natural gas prices edged lower in recent weeks.

Manufacturing

Manufacturers reported increased shipments, along with stronger growth in new orders and greater capacity utilization since the prior Beige Book. Food producers and metals fabricators were among those indicating greater strength. A steel producer reported double-digit growth in quotes. Additionally, an executive from a paper products company said demand had increased for pulp and specialty products. A producer of aerospace products expected his output to double in 2017. Surveyed manufacturers anticipated stronger business conditions during the next six months.

Ports and Transportation

Port officials reported record strength in container volume since the previous Beige Book. At one port, volume was described as "off the charts," and another had its best month ever for loaded containers. Imports of furniture, building supplies, and auto parts were strong. Auto imports remained at high levels, but exports of used cars to oil producing regions softened, which was attributed to falling oil prices in those destinations. Exports of construction and agricultural equipment remained weak.

Executives at trucking firms in the District said that demand for freight hauling services was somewhat softer in recent weeks, but one contact noted that expectations were for an improvement in the second half of the year. A railroad industry source commented that capacity had begun to tighten in freight transportation.

Retail, Travel, and Tourism

Retail sales rose on balance, particularly for building supply and home and garden establishments, as well as hardware stores. In contrast, sales at convenience and grocery stores were lower. Auto sales remained strong. Low fuel prices continued to spur sales of pick-up trucks and reduce demand for compact cars. A large auto dealer said that unit sales were down but gross profit per unit was up.

Tourism grew at a normal seasonal pace in recent weeks. A Virginia ski resort reported strong weekend bookings and few cancellations, even during warm weather, because of available alternate activities. A contact on the outer banks of North Carolina said tourism was little changed at usual off-season levels. According to sources at coastal locations, advance bookings were at typical levels for this time of year.

Real Estate and Construction

Residential real estate sales increased modestly since the previous report. Contacts reported good levels of buyer traffic in recent weeks; however some sources said snow storms reduced buyer traffic in affected areas. Brokers reported that inventories generally remained at low levels, although a few contacts noted slight increases for some price ranges. Nonetheless, new listings sold quickly. Residential builders reported that home starts and closings increased to moderate levels.

Commercial leasing increased moderately in recent weeks and was stronger than a year ago according to contacts. Rents rose moderately while vacancy rates edged down. Real estate agents said that industrial and retail leasing remained robust, and available space was limited. Meanwhile, office leasing increased modestly. Overall, commercial construction remained steady at modest levels, although a large general contractor reported the largest backlog in his firm's history. Multi-family and mixed used developments continued to dominate new commercial construction projects.

Banking and Finance

Since our previous beige book, loan demand grew moderately. Overall, bankers said that consumer and commercial demand was increasing at a healthy rate with the exception of some small rural areas throughout the District and in coal regions of West Virginia. In the District on the whole, residential mortgage demand softened slightly to a typical seasonal level. Commercial loan demand grew at a moderately faster pace. Demand for small business loans and lines of credit continued to rise at a modest pace. Credit quality was unchanged on balance but varied by region; a West Virginia banker said credit quality remained at an acceptable level while a South Carolina lender said quality was at an all-time high. Interest rates rose slightly in recent weeks. A lender in Virginia noted a sense of urgency from business to borrow before interest rates increase further. Competition among banks remained fierce. The trend in mergers and acquisitions continued. Bankers expressed optimism that regulatory changes under the new administration would be more favorable.

Non-Financial Services

Revenues at services firms increased at a modest pace. Entertainment venues, accountant services, and trades associated with home-building reported increases. Healthcare organizations reported robust demand since the previous Beige Book. An executive at a large healthcare organization said capital projects were being considered to handle the growth. One hospital reported the opening of many new physician practices associated with the facility.

Agriculture and Natural Resources

Energy markets strengthened modestly in recent weeks. Coal production picked up marginally as the pricing and regulatory environment improved for them. Natural gas production was unchanged. A utility executive in Maryland reported a modest increase in energy demand from commercial customers but a slight decline in residential connections. Agriculture conditions were largely unchanged at typical seasonal levels. Demand for poultry rose moderately. Some expansions were reported at poultry farms in North Carolina.

Sixth District--Atlanta

Summary of Economic Activity

Business contacts indicated that economic activity in the Sixth District continued to expand, albeit modestly, from the previous report. The outlook among contacts for the next three to six months remains positive.
The labor market remained tight and wage pressures were mostly subdued. Overall, non-labor input costs remained modest. Retailers cited steady sales since the previous report. Automobile dealers indicated sales were better than expected. Tourism activity improved. Residential real estate builders indicated that construction activity was up, and new home sales and inventory levels were flat to slightly up compared with a year ago. Residential real estate brokers reported that existing home sales increased and inventory levels were down from a year earlier. Home prices continued to modestly improve. Demand for commercial real estate continued to improve and commercial construction activity increased. Manufacturers noted increases in new orders and production.

Employment and Wages

Contacts reported ongoing tightening in the labor market since the previous report. Firms continued to struggle finding workers across various fields and skill levels. Firms continued to note growing partnerships with area workforce development organizations, community colleges, and universities to develop customized training programs to help develop larger pipelines of talent. Additionally, many firms continued to increase investment in internal training programs to develop existing personnel, rather than seek qualified labor across a limited pool of external candidates. Turnover picked up in banking and finance, manufacturing, and construction, where some industry contacts indicated they had to evaluate and adjust compensation structures, such as, increasing bonuses and incentive pay, to retain high-quality workers. There were scattered reports of plans to increase employee headcounts over the next 12 months, though overall, contacts indicated that they intend to keep employment levels steady. Wage growth continued to be evident in select geographic locations and particular occupations.

Prices

Most contacts reported modest non-labor input cost pressures, except for manufacturing purchasing managers who noted greater increases in commodity prices. According to the Atlanta Fed's survey of business inflation expectations, year-over-year unit costs were up 1.7 percent in February. The survey respondents indicated they expect unit costs to rise 2.0 percent over the next 12 months.

Consumer Spending and Tourism

On balance, District retailers reported that sales levels grew at a steady pace since the last report. Merchants noted that on-line sales levels continued to rise, while brick and mortar sales remained sluggish. Automotive dealers reported stronger-than-expected sales in December.

Hospitality contacts across the District reported growth in business, leisure, and group travel since the last report. Georgia contacts stated that business travel and convention bookings continued to be strong. The total number of visitors to the state of Florida increased over the reporting period, however, there continued to be a slow-down in the number of international visitors. Louisiana reported increases in hotel occupancies, average daily rates, and revenue per available rooms since the last report. The outlook remains optimistic with healthy advanced bookings through the first quarter of this year.

Construction and Real Estate

Reports from District residential real estate contacts continued to indicate slow but steady growth in January. Most builders noted that construction activity was up from the year-ago level. Builders continued to indicate that home sales were flat to slightly up relative to the year-earlier level, while brokers reported an increase in home sales over the same period. The majority of builders and brokers noted that buyer traffic was equal to or higher than the previous year's level in January. Brokers reported that inventory levels were down relative to a year ago, while most builders indicated that inventory levels were flat or rising. Builders and brokers continued to note modest gains in home prices. Home sales expectations improved in January, with most brokers and builders anticipating sales to increase slightly over the next three months relative to the year-earlier level. Most builders anticipate construction activity will hold steady at the current pace or increase slightly over the next three months.

Most commercial real estate contacts noted improvements in demand, resulting in rent growth and increased absorption, but continued to caution that the rate of improvement varied by metropolitan area, submarket, and property type. Many commercial contractors indicated that the pace of nonresidential construction activity had increased from a year ago, with many reporting backlogs greater than one year. Reports on the pace of multifamily construction continued to be mixed, with roughly half indicating that the pace had increased from the year-earlier level and the rest suggesting that the pace had leveled off or slowed. Looking forward, the majority of District commercial real estate contacts expect the pace of nonresidential and multifamily construction activity to increase slightly over the next quarter.

Manufacturing

District manufacturing contacts indicated that overall business activity expanded since the last report. New orders and production levels continued to increase. Supply delivery times were slightly longer, while finished inventory levels fell. Expectations for future production rose with nearly two-thirds of firms expecting higher production levels over the next six months.

Transportation

Transportation activity in the District was relatively unchanged since the last report. District ports cited continued growth in shipments of containers, autos, and machinery. Trucking freight volumes declined further since the previous report, and carriers indicated they are working to reduce capacity to improve pricing. Rail contacts, however, reported that total traffic was flat compared with year-earlier levels following several months of declines. Intermodal traffic was down slightly.

Banking and Finance

Credit remained readily available for most qualified borrowers. However, some small and medium-sized businesses continued to have difficulty obtaining credit. Some contacts noted that development projects were being funded by hedge funds and private equity sources, rather than banks.

Energy

Reports from District energy contacts indicated that liquefied natural gas exports from the Gulf Coast region increased. Refinery contacts reported that interstate pipeline reversals have eased some of the transportation costs for moving oil and gas to Gulf Coast refiners. Contacts noted crude oil inventories remain at historically high levels. Utility industry contacts continued to upgrade power generation plants to natural gas, and there has been continued activity to expand wind generation power.

Agriculture

Agriculture conditions across the District were mixed. By early February, rain brought some improvement to drought conditions. However, much of the District continued to experience varying degrees of drought with small areas of north central Alabama and northeastern Georgia categorized in extreme drought. Florida's February orange forecast was down from January, remaining below last season's production. On a year-over-year basis, prices paid to farmers in December were up for cotton, soybeans, and broilers, but down for corn, rice, beef, and eggs.

Seventh District--Chicago

Summary of Economic Activity

Growth in economic activity in the Seventh District picked up to a moderate pace in January and early February, and contacts expected activity to continue rising at a moderate pace over the next six to twelve months. Employment, wages, business spending, and manufacturing production all grew at moderate rates, consumer spending increased modestly, and construction and real estate activity rose slightly. Financial conditions were little changed, prices increased modestly, and farm incomes improved slightly.

Employment and Wages

Employment growth picked up to a moderate rate over the reporting period, and contacts expected it to continue to rise at a moderate rate over the next six to twelve months. Contacts continued to indicate that the labor market is tight and that they are experiencing difficulty filling positions at all skill levels. A staffing firm again reported little change in billable hours and ongoing difficulty filling orders at the wages employers were willing to pay. Wage growth remained at a moderate pace. Some contacts noted larger wage increases for high-skilled occupations, while a number indicated that they raised wages nearly equally for all employees. Many contacts als