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Burgundy Book A report on economic conditions in the Memphis zone Third Quarter 2013 The Memphis zone of the Federal Reserve comprises northern Mississippi, northeastern Arkansas, and western Tennessee and a total population of approximately 3.1 million people, including the 1.3 million who live in the Memphis MSA. Even as Unemployment Rates Inch Up, Business Outlook Remains Positive Data Snapshot County unemployment rates (SA, Q2-13) By Kevin L. Kliesen, Business Economist and Research Officer 10.1% The pace of economic activity in the Memphis zone appeared to weaken in the second quarter compared with three months earlier. However, the slowing was not uniform across cities or industries. Weak employment growth in the service-producing sector continued to overshadow healthy job gains in the good-producing industry. Once again, job growth remained weak in the Memphis area’s largest industry. A majority of our Memphis business contacts expect little change in their employment levels over the next three months. After dipping below 10 percent in the first quarter, the Memphis zone’s unemployment rate edged back above 10 percent in the second quarter. Of the 73 counties in the Memphis zone, 69 counties had unemployment rates that exceeded the nation’s second-quarter average (7.6 percent). Memphis’s commercial retail market continued to strengthen in the second quarter, as seen by falling vacancy rates and increasing asking rents. Household balance sheet repair continued apace in the Memphis zone. This is seen by falling loan delinquency rates and reductions in nonautomotive debt balances. Profitability rose in the second quarter at Tennessee and Mississippi commercial banks because of slight increases in net interest margins and slight declines in loan loss provisions. Our quarterly survey revealed that agricultural bankers expect greater loan demand and capital expenditures in the third quarter relative to the same period a year earlier. less than 5 % 7% to 8% 5% to 6% over 8% 6% to 7% Nonfarm payroll employment by industry Percent change from one year ago (Q2-13) -4 -2 0 Total NonFarm (100%) Trade, Trans, and Utilities (27%) Education and Health (14%) Government (14%) Prof. and Business Services (14%) Leisure and Hospitality (11%) Manufacturing (7%) Financial Activities (4%) Other Services (4%) Nat. Res, Mining, and Construction (4%) Information (1%) Memphis This Report is published by the Federal Reserve Bank of St. Louis US 2 4 6 Third Quarter 2013 How to read this report Table of Contents Unless otherwise noted, city names refer to the metropolitan statistical areas (MSAs), which are geographic areas that include cities and their surrounding suburbs, as defined by the Census Bureau. Labor Markets ........................................................................... 3 Statistics for the Memphis zone are based on data availability and are calculated as weighted averages of either the 73 counties in the zone or the three MSAs. As of 2012, approximately 53 percent of the zone’s labor force was located in an MSA. Specifically: 44 percent in Memphis, 4 percent in Jackson, and 4 percent in Jonesboro; 47 percent of the zone’s labor force was located in non-metropolitan areas. Banking and Finance ................................................................. 7 Arrows in the tables are used to identify significant trends in the data. The direction of the arrow indicates the sign (up/ down) and the color indicates the economic significance (green = good, red = poor). Arrows appear only when the change from the previous quarter is greater than 1 standard deviation. For example, the standard deviation of the change in the U.S. unemployment rate is 0.4 percent. If the U.S. unemployment rate declined from 8.4 percent to 8.2 percent, no arrow would appear; but if it declined from 8.4 percent to 7.9 percent, a green down arrow would appear in the table. Selected variable definitions are located in the appendix. Manufacturing........................................................................... 4 Real Estate and Construction .................................................... 5 Household Sector ...................................................................... 6 Agriculture and Natural Resources ........................................... 8 Appendix ................................................................................... 9 Join our Panel of Business Contacts The anecdotal information in this report was provided by our panel of business contacts, who were surveyed between August 1 and August 15. If you’re interested in becoming a member of our panel, follow this link to complete a trial survey: http://research.stlouisfed.org/beigebooksurvey/ Selected quotes from business contacts are generally verbatim, but some are lightly edited to improve readability. Or email us at beigebook@stls.frb.org. For more information contact the St. Louis office: Charles Gascon charles.s.gascon@stls.frb.org Media inquiries: mediainquiries@stls.frb.org Views expressed do not necessarily reflect official positions of the Federal Reserve System. Federal Reserve Bank of St. Louis — Memphis Zone 2 Labor Markets Third Quarter 2013 Employment Growth Slows in Memphis and Jackson By Charles S. Gascon, Regional Economist After hovering above 1.25 percent during most of 2011 and 2012, employment growth in Memphis has slowed to less than 1 percent during the first two quarters of 2013. Net job losses in the trade, transportation, and utilities sector have been the key driver of this trend (see bar chart on cover). Employment growth in Jackson also slowed to around 1 percent in the second quarter. This slowdown was due to declines in the goodsproducing sector (see table). Anecdotal reports suggest mild employment gains during the third quarter; 25 percent of contacts expect to increase payrolls during the next three months. However, the remaining contacts expect their payrolls to remain unchanged. Slow employment growth has resulted in a noticeable uptick in local unemployment rates. In Memphis the unemployment rate is at 9.4 percent, after ending the year at 8.8 percent. Similarly, in Jackson, the unemployment rate has increased from 8.1 percent to 8.4 percent (see figure and table). “There are no plans for additional hires in the next three months, perhaps in the long run.” Jonesboro continues to be the bright spot in the region, where nonfarm employment growth of 3.7 percent was over twice the national rate and significantly faster than the 2.2 percent growth during the first quarter. Despite these gains, the unemployment rate remained unchanged at 6.9 percent (see table). — Northeast Arkansas banker “Sentiments across all sectors have improved and people are being better compensated.” — Southwest Tennessee banker Unemployment rates tick up across zone's metro areas Unemployment rate (SA) 12.0 10.0 8.0 6.0 US Jackson Jonesboro Memphis 4.0 2.0 0.0 2006 2007 Source: BLS. 2008 2009 2010 2011 2012 2013 Memphis Jackson Jonesboro, AR Unemployment rate (Q2-13) (%) 9.4 8.4 6.9 Nonfarm employment (Q2-13) 0.9 1.1 3.7 Goods-producing sector 2.6 -1.5 Private service-providing sector 1.1 2.0 3.3 -1.5 1.1 3.0 Government sector ▼ US 7.6 ▲ 5.7 1.6 1.2 ▲ 2.2 -0.3 Note: Unl es s otherwi s e noted, va l ues a re percent cha nge from one yea r a go. Arrows i ndi ca te a s i gni fi ca nt (± 1 s ta nda rd devi a ti on) cha nge from the previ ous qua rter. See a ppendi x for notes a nd s ources . Federal Reserve Bank of St. Louis — Memphis Zone 3 Manufacturing Third Quarter 2013 Manufacturing Activities Increased Slightly By Yang Liu, Senior Research Associate Compared with one year ago, Memphis and Tennessee both reported moderate job growth in manufacturing, over three times the national rate. Mississippi experienced a reduction in manufacturing jobs in the second quarter, as year -over-year growth declined by 0.6 percent (see table). According to anecdotal information, the new auto plants and a growing supplier network have kept Tennessee in a great position in the automotive industry. Tennessee’s and Mississippi’s manufacturing labor input, measured as average weekly hours worked multiplied by employment, both reached a 4-year peak in early 2013. Thereafter, labor input declined slightly in Tennessee and dropped moderately in Mississippi. As of July, Tennessee’s manufacturing labor input remained above the national average while Mississippi's labor input fell behind the national pace (see figure). Tennessee, Mississippi, and the nation all saw manufacturing earnings decline significantly in the first quarter of 2013 (see table). “Capital expenditures should increase because a lot of activities have picked up and consumer confidence is on the rise.” On a year-over-year basis, Tennessee’s and Mississippi’s manufacturing earnings outpaced the nation, primarily driven by the durable goods sector (see table). — Memphis area manufacturer “Many new projects are in the works in several different sectors of manufacturing and will be announced soon.” — Northeast Mississippi retailer Labor input indicates marginally slower manufacturing growth in Memphis Index of total hours (Jan 2008 = 100) 105 Tennessee 100 Mississippi US 95 90 85 80 75 2008 2009 Source: BLS. 2010 2011 2012 2013 Memphis Manufacturing employment (Q2-13) Tennessee Mississippi US 1.7 2.0 -0.6 0.4 Durable goods 1.7 3.1 -1.0 0.6 Nondurable goods 1.8 0.3 0.4 0.1 -- 8.1 ▼ 6.6 ▼ 6.0 ▼ Durable goods -- 12.4 ▼ 10.0 ▼ 7.4 ▼ Nondurable goods -- 1.8 ▼ 0.2 ▼ 3.4 ▼ Manufacturing earnings (Q1-13) Note: Values are percent change from one year ago. Arrows indicate a significant (± 1 standard deviation) change from the previous quarter; see appendix for notes and sources. Federal Reserve Bank of St. Louis — Memphis Zone 4 Real Estate and Construction Third Quarter 2013 Market Is Slowly Moving in the Right Direction By Li Li, Research Associate With strong June sales, residential real estate conditions further improved through the quarter. According to a contact in northeast Arkansas, sales of residential homes in the Jonesboro and Paragould areas remained strong. In Memphis, home prices increased steadily over the past four quarters. Realtors are forecasting an increase in activity in the last half of 2013. Residential construction is gradually coming back (see figure). One contact pointed out that Shelby County is one of the fast-growing areas for new home construction. The multifamily outlook remains strong. Vacancy rates in the second quarter dropped by 30 basis points from a year ago, and have declined for 3 years. Meanwhile, asking rents continued to climb. Currently, there are apartment buildings under construction or to be constructed. Memphis’s retail market showed strong growth. Vacancy rates dropped by 50 basis points from a year ago as asking rents moved upward significantly (see table). “The real estate market was fairly steady, even during the financial crisis. The area has not seen rapid growth. There was never an overabundance of vacant homes on the market.” “Over the next three months, [real estate] conditions should improve somewhat. The trend is expected to continue.” — Northern Mississippi banker Commercial and industrial real estate construction continued to show improvement. There are plans for a speculative industrial project in Marshall County, MS, and a speculative industrial developments is ongoing in DeSoto County, MS. — Northeast Arkansas banker Home prices trend up; so do building permits Single-family building permits, SA thous 7 Memphis 6 Jackson 5 Jonesboro 4 3 2 1 0 Q1-01 Q1-03 Q1-05 Source: Census Bureau. Q1-07 Q1-09 Q1-11 Non-residential market (Memphis, Q2-13) Q1-13 Apartment Office Retail Industrial 8.2 24.3 12.5 14.0 2.3 1.0 1.3 Vacancy rate (%) Asking rent Percent change from one year ago Note: Apartment, office, and retail values are from Reis.com. Industrial values are estimates from Cassidy Turley. Residential market (Q2-13) Memphis CoreLogic Home Price Index Jonesboro Jackson ▲ 9.3 ▲ ▲ 0.8 US 3.5 1.0 11.6 Single-family building permits 23.6 14.2 -44.2 25.4 New and existing home sales 8.5 -- -- 11.4 Note: Va l ues a re percent cha nge from one yea r a go. Arrows i ndi ca te a s i gnfi ca nt (±1 s ta nda rd devi a ti on) cha nge from previ ous qua rter. See a ppendi x for notes a nd s ources . Federal Reserve Bank of St. Louis — Memphis Zone 5 Household Sector Third Quarter 2013 Auto Debt Continues Its Strong Growth Across the Zone By Bryan Noeth, Policy Analyst Across the zone, families continued to repair their balance sheets. Mortgage and credit card balances were down. Auto debt showed strong growth, continuing a trend starting since the market hit bottom in the middle of 2010. Delinquencies are down across most forms of debt. In particular, the percentage of mortgage and credit card balances in severe delinquency continued to trend downward. Anecdotal evidence suggests that recent retail sales were up in the zone, with retailers reporting that sales growth was up. Additionally, businesses said they had significant boosts during the sales -tax-free weekend. “Household budgets are tight...Don’t have any idea how healthcare will our affect consumers yet.” — Memphis area auto dealer Per capita incomes grew at an average rate of about 2 percent, a rate similar to that of the nation (see table). The sluggish growth coincided with the expiration of the payroll tax holiday. “We’ve been real pleased...We’ve had real heavy traffic.” — North Mississippi furniture wholesaler Borrowers were still paying down home equity lines of credit (HELOCs). However, a considerable amount of variation exists across the zone (see figure). Tennessee borrowers had large growth rates in HELOC balances prior to the crisis, although zone states had much lower per capita balances than the nation. Borrowers slowly paying back HELOC loans Average HELOC balance (indexed to 1 in 1999) 25 20 15 US Arkansas Mississippi Tennessee 10 5 0 1999 2001 2003 2005 2007 2009 2011 2013 Source: FRBNY Consumer Credit Panel, Equifax, and Haver Analytics. Memphis Zone Arkansas Mississippi ▼ 2.0 -2.7 -4.5 ▼ -5.4 -1.6 -0.4 -1.8 -2.3 8.5 8.6 9.7 7.9 7.3 Mortgage 3.0 2.3 Credit card 9.2 8.3 8.1 Auto loan 4.3 2.4 4.6 -- 2.3 Mortgage -4.5 -2.5 Credit card -1.3 Auto loan 2.0 ▼ US 1.6 Per capita personal income (Q1-13) ▼ Tennessee ▼ Per capita debt balances (Q2-13) 90+ day delinquency rates (Q2-13) (%) ▼ ▼ 3.1 ▼ 2.4 ▼ 8.4 ▼ 3.4 4.2 ▼ 9.4 ▼ 3.3 ▼ Note: Unless otherwise noted, values are percent change from one year ago. Arrows indicate a significant (±1 standard deviation) change from the previous quarter. See appendix for notes and sources. Federal Reserve Bank of St. Louis — Memphis Zone 6 Banking and Finance Third Quarter 2013 Banking Conditions on the Upswing in the Memphis Zone By Michelle Neely, Economist Return on average assets (ROA) increased 4 basis points between the first and second quarters in both Tennessee and Mississippi. In Tennessee, ROA was up 46 basis points from its year-ago level. ROA declined slightly in Arkansas, but at 1.24 percent, it remains well above that of its neighboring states and the District and U.S. peer averages. ROA rose in the second quarter in Tennessee and Mississippi thanks to slight increases in net interest margins (NIMs) and slight declines in loan loss provisions. In Arkansas, the small dip in ROA can be traced to a drop in noninterest income and an increase in noninterest expense. Despite the increases in the second quarter, net interest margin compression remains a significant concern in the District and nationally. “During the past three months, agriculture loans have increased, construction has also increased due to more houses being built, and, finally, consumer lending has picked up.” — Western Tennessee banker Bankers surveyed in the Memphis zone expect loan demand to stay the same or improve during the next three months. “Loan volume has increased somewhat, mainly due to an increase in consumer confidence. A few commercial customers have taken out loans to add on or build new buildings.” — Northern Mississippi banker Nonperforming loans continued their downward trend in the second quarter. The ratio of nonperforming loans to total loans declined by more than 10 basis points in each of the three states of the Memphis zone. In all three states, however, the average nonperforming loan ratios remain above the District and U.S. averages of 2.12 percent and 2.17 percent, respectively. “The credit standards of competitors have gone down, thus creating competition for customers. — Memphis area banker The squeeze is on Net interest margin at commercial banks, percent 4.4 4.2 4.0 3.8 3.6 3.4 US TN MS AR 3.2 3.0 2.8 2.6 2004 2005 2006 2007 2008 2009 2010 2011 2012 Source: FRED. Banking performance (Q2-13 ) Tennessee Return on average assets 0.86 Net interest margin Nonperforming loans / total loans Loan loss reserve coverage ratio ▲ Mississippi Arkansas 0.88 1.24 3.61 3.85 2.49 2.20 69.48 74.09 ▲ 8th District US Peer Banks 0.99 4.07 ▼ 1.01 3.72 3.80 2.62 2.12 2.17 72.52 79.89 80.65 ▼ Note: Values are percentage points. Arrows indicate a significant ( ± 1 standard deviation) change from the previous quarter. See appendix for notes and sources. Federal Reserve Bank of St. Louis — Memphis Zone 7 Agriculture and Natural Resources Third Quarter 2013 Corn Harvest Expected to be Bountiful; Coal Production Drops Further in TN By Lowell R. Ricketts, Senior Research Associate Coal production in Tennessee declined in the second quarter relative to the same time last year (see left table). The rate of the decline in production has significantly increased since our previous report. Data on mining and logging employment was not available for the state. At the same time, coal production for the nation has stabilized from consistent declines seen in our previous reports. 2013 corn production across the zone is expected to be considerably higher than last year’s harvest (see left table). In contrast, this year’s cotton harvest will be at least a third smaller across the zone. The Arkansas rice harvest is expected to be significantly smaller than last year. Cooler growing temperatures have contributed to the shortfall as well as flooding in the northern part and drought in the southern part of the state. Northwest Mississippi farmer Agricultural bankers surveyed expect greater loan demand and capital expenditure in the third quarter relative to the same time last year (see right table). “Corn and soybean prices continue to be very profitable for growers. Cotton, on the other hand, is not profitable due to low market prices and expensive labor-intensive harvest costs.” Total spending on feed has reached recent historical highs for several of the zone states (see figure). Spending increased around the middle of the last decade and has remained elevated the past few years. Farmers are hopeful that the promising harvest will draw feed costs down in the coming year. “Many area farmers are being forced to borrow additional funds on their operating lines of credit to compensate for the replanting of their crops due to the wet planting season.” — Northeast Arkansas farmer Spending on feed has climbed to new heights Inflation adjusted index (2000=100) 225 200 175 Mississippi Tennessee US 150 Arkansas 125 100 75 50 2000 2002 2004 Source: USDA/NASS. 2006 2008 Arkansas 2010 2012 Mississippi Tennessee US Natural resources (Q2-13) Mining and logging employment -7.9 Coal production 190.4 Production (2013) Corn 33.3 Cotton -47.6 Rice -20.9 ▼ Sorghum 16.4 Soybean -0.4 1.1 10.3 ---18.9 ▼ 1.8 0.0 ▲ 13.2 -34.5 16.4 -13.0 -9.1 57.5 ▲ -30.0 ----19.5 27.7 ▲ -24.6 -9.1 45.3 8.0 Note: Va l ues a re percent cha nge from one yea r a go. Arrows i ndi ca te a s i gni fi ca nt (± 1 s tanda rd devi a tion) cha nge from the previ ous qua rter or yea r. See a ppendi x for notes a nd s ources . Federal Reserve Bank of St. Louis — Memphis Zone Memphis zone Ag. banker's expectations Q3-13 vs. Q3-12 Loan demand Available funds Loan repayments Farm income Capital expenditure 129 100 100 100 113 Note: Va l ues reported us i ng a di ffus i on i ndex. See a ppendi x for notes a nd s ources . 8 Appendix Third Quarter 2013 Cover Page Manufacturing); and 326 (Plastics and Rubber Products Manufacturing). Sources Manufacturing earnings is the sum of wage and salary disbursements, supplements to wages and salaries, and proprietors’ income less contributions for government social insurance. Bureau of Labor Statistics Unemployment rate, nonfarm payroll employment. Labor Markets In the contributions to employment chart, bars represent the respective contribution of each sector to the area’s total employment as a percent change from one year ago, while the line represents the net percent change from one year ago in total employment. Table Sources Bureau of Labor Statistics Unemployment rate. Nonfarm employment and contributions by sector. Notes Goods-producing sector comprises the manufacturing and natural resources, mining, and construction sectors. Real Estate and Construction Table Sources CoreLogic Home price index, including distressed sales. Census Bureau Private service providing sector includes the following sectors: Trade, Transportation, and Utilities; Information; Financial Activities; Professional and Business Services; Education and Health Services; Leisure and Hospitality; and Other Services. National Association of Realtors Unemployment rate data are seasonally adjusted. Notes Manufacturing Year-to-date single-family building permits. Year-to-date new and existing home sales. Asking rent is the publicized asking rent price. Data are in current dollars. Table Sources Vacancy rate is the percentage of total inventory physically vacant as of the survey date, including direct vacant and sublease space. Bureau of Labor Statistics New and existing home sales consists of single-family home sales. Manufacturing employment: total, durable, and nondurable goods. Bureau of Economic Analysis Manufacturing earnings: total, durable, and nondurable goods. Notes Manufacturing labor input is defined as the average weekly hours worked by production and nonsupervisory employees in the manufacturing industry multiplied by the monthly average of total number of production and nonsupervisory employees in the manufacturing industry. Durable goods manufacturing sector is defined by the Bureau of Labor Statistics as industries with a NAICS classification code of 321 (Wood Product Manufacturing); 327 (Nonmetallic Mineral Product Manufacturing); 331 (Primary Metal Manufacturing); 332 (Fabricated Metal Product Manufacturing); 333 (Machinery Manufacturing); 334 (Computer and Electronic Product Manufacturing); 335 (Electrical Equipment, Appliance, and Component Manufacturing); 336 (Transportation Equipment Manufacturing); 337 (Furniture and Related Product Manufacturing); and 339 (Misc. Manufacturing). Nondurable goods manufacturing sector is defined by the Bureau of Labor Statistics as industries with a NAICS classification code of 311 (Food Manufacturing); 312 (Beverage and Tobacco Product Manufacturing); 313 (Textile Mills); 314 (Textile Product Mills); 315 (Apparel Manufacturing); 316 (Leather and Allied Product Manufacturing); 322 (Paper Manufacturing); 323 (Printing and Related Support Activities); 324 (Petroleum and Coal Products Manufacturing); 325 (Chemical Federal Reserve Bank of St. Louis — Memphis Zone Household Sector Table Sources Equifax based on authors’ calculations All figures are based on a 5 percent sample of individual credit reports. Balances are geographical averages of various debt categories. The mortgage category includes first mortgages and home equity installment loans, but home equity lines of credit are omitted. Auto loans include those financed by finance company or bank loans. Credit cards are revolving accounts at banks, bankcard companies, national credit card companies, credit unions, and savings and loan associations. Haver Analytics Per capita income. Census Bureau Homeownership rates. Notes The CredAbility Index is a quarterly measure of the financial condition of the average consumer. The scores are defined as follows: 90-100 implies excellent or secure, 80-89 implies good or stable, 70-79 implies weakening or at risk, 60-69 implies distressed or unstable, and 59 or below implies emergency or crisis. Delinquency rates are calculated as the percentage of payments past 9 Appendix Third Quarter 2013 due by more than 90 days, weighted by the dollar value of the loan. Homeownership rates are the proportion of households in each area that are owners. It is calculated by dividing the number of households that are owners by the total number of occupied households. Banking and Finance Table Sources Federal Financial Institutions Examination Council Return on average assets: USL15ROA. Net interest margin: USL15NIM. Nonperforming loans: USL15NPTL. Loan loss reserve/ Total loans: USL15LLRTL. Net loan losses/Average total loans: USL15LSTL. Note: The data available in the table can be found in FRED. Notes Loan loss provisions are expenses banks set aside as an allowance for bad loans. Nonperforming loans are those loans managers classify as 90 days or more past due or nonaccrual, which means they are more likely to default. Loan loss coverage ratio is loan loss reserves divided by non performing loans. US peer banks are those commercial banks with assets of less than $15 billion. Due to the seasonal nature of bank return on average assets and net interest margin, the arrows in the table denote significant changes from one year ago. Agriculture and Natural Resources Table Sources Federal Reserve Bank of St. Louis Survey of Agricultural Credit Conditions Agriculture Bankers’ expectations of loan demand, available funds, loan repayment rates, farm income, and capital expenditures are relative to one year ago. Respondents can answer “increase,” “decrease,” or “no change.” The diffusion index was created by subtracting the percent of bankers that responded “decrease” from the percent that responded “increase” and then adding 100. Index values from 0 to 99 indicate overall expectations of decreasing values; index values from 101 to 200 indicate overall expectations of increasing values; and an index value of 100 indicates an even split. Energy Information Administration (EIA) Coal production. Bureau of Labor Statistics (BLS) Mining and logging employment. USDA Crop production, August forecast Federal Reserve Bank of St. Louis — Memphis Zone 10
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