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Burgundy Book A report on economic conditions in the Louisville zone First Quarter 2014 The Louisville zone of the Federal Reserve comprises southern Indiana and western Kentucky and a total population of approximately 3.4 million people, including the almost 1.3 million who live in the Louisville MSA. Louisville Experiences Healthy Growth; Business Contacts Remain Optimistic Data Snapshot County unemployment rates (SA, Q4-13) 7.5% By Kevin L. Kliesen, Business Economist and Research Officer Business contacts in the Louisville zone remain an optimistic bunch. A February survey suggests 60 percent of contacts expect economic conditions in 2014 to be somewhat better or better than last year; only 12 percent expect that conditions will be worse or somewhat worse. In the fourth quarter of 2013, nonfarm employment in the Louisville MSA exceeded the nation’s growth for the seventh consecutive quarter. Owensboro registered both stronger employment growth and a lower unemployment rate than Louisville and the nation. The Louisville zone’s unemployment rate averaged 7.5 percent in the fourth quarter, down modestly from its third-quarter average (7.7 percent). less than 5% 7% to 8% 5% to 6% over 8% Nonfarm payroll employment by industry Percent change from one year ago (Q4-13) -2 0 2 Total NonFarm (100%) Residential construction activity and home sales posted solid gains in most areas. However, house price growth lagged the national rate; increasing by about 3 percent in Louisville and Evansville in 2013 and declining in both Clarksville and Elizabethtown. Indiana’s per capita income growth slowed modestly in the third quarter, while Kentucky’s growth picked up at a healthy rate from a year earlier. Indiana and Kentucky households reduced their credit card balances at a rapid rate in the fourth quarter. Trade, Trans, and Utilities (21%) Education and Health (14%) Prof. and Business Services (13%) Government (13%) Manufacturing (12%) Fourth-quarter profits (return on average assets) at Kentucky and Indiana banks were essentially unchanged from the third quarter. Although Indiana banks were more profitable than their Eighth District peers in the fourth quarter, Kentucky banks were less profitable. Lower commodity prices have put pressure on farm incomes. Indiana and Kentucky coal production in the fourth quarter was up sharply from a year earlier. This report is published by the Federal Reserve Bank of St. Louis 6% to 7% Leisure and Hospitality (10%) Financial Activities (7%) Nat. Res., Mining, and Construction (4%) Other Services (4%) Information (2%) Louisville US 4 6 First Quarter 2014 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 Louisville zone are based on data availability and are calculated as weighted averages of either the 88 counties in the zone or the five MSAs. As of 2012, approximately 60 percent of the zone’s labor force was located in an MSA. Specifically: 39 percent in Louisville, 11 percent in Evansville, 4 percent in Bowling Green, 4 percent in Owensboro, and 3 percent in Elizabethtown; 40 percent of the zone’s labor force was located in nonmetropolitan 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 previous quarter is greater than 1 standard deviation. For example, the standard deviation of the change in the US unemployment rate is 0.4 percent. If the US 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 February 1 and February 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 — Louisville Zone 2 Labor Markets First Quarter 2014 Employment in the Louisville Zone Remains Above National Average By Brian Greaney, Research Associate “Still unsure about the housing recovery. Is it really recovering in our area? Additionally, still unsure how health care costs are going to impact us.” —Louisville area construction company owner “Business spending remains somewhat tepid amidst continued concerns over tax policies, government spending, debt ceiling negotiations, and government regulations on businesses both large and small. The inability to comprehend the full impact of health care costs in the future has sidelined business expenditures in the near term.” —Louisville area real estate broker The unemployment rate in four of the zone’s five MSAs decreased relative to the previous quarter. The exception was Elizabethtown, where the unemployment rate remained unchanged. The decline in the zone’s unemployment rate was at least partially driven by an increase in economic activity, as reflected in employment (see table). Evansville had the largest decline in its unemployment rate (0.5 percent) and was the only MSA to experience a significant decline. While there was mixed employment growth relative to the national average across MSAs, the zone’s overall labor market continues to outpace the national average (see figure). Anecdotal evidence suggests modest employment growth is likely during the next year: 36 percent of business contacts expect employment to increase, while 55 percent of contacts expect it to remain unchanged. Year-over-year growth in average hourly earnings of employees was below the national average of 2.1 percent in all of the MSAs except for Evansville, where it was 2.5 percent. Wages declined moderately in the Louisville MSA by 2.1 percentage points. Anecdotal evidence suggests that this trend may reverse in the upcoming year: 55 percent of business contacts expect wages to increase in the next 12 months, while only 3 percent of contacts predict a decline. Local labor market still stronger than the nation Nonfarm payroll employment, SA (Index 2007=100) 106 104 102 100 98 Louisville zone 96 US 94 2008 2009 2010 2011 2012 2013 Source: BLS. Louisville Evansville Unemployment rate (Q4-13) (%) 7.7 6.8 Nonfarm employment (Q4-13) 1.9 Goods-producing sector ▼ Bowling Green Elizabethtown Owensboro US 7.2 7.7 6.8 7.0 -0.4 1.5 0.1 2.6 1.8 3.0 -1.4 0.0 2.6 -0.3 1.7 Private service-providing sector 1.8 0.3 1.3 0.1 3.6 2.2 Government sector 1.0 -2.4 3.5 -1.4 2.2 -0.2 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 — Louisville Zone 3 Manufacturing First Quarter 2014 Automotive Sector Continues To Drive Manufacturing Growth By Yang Liu, Senior Research Associate “I expect to see continued localization of vehicles and parts. This will help keep the local automotive suppliers’ business robust and aggressive through 2015.” Anecdotes suggest automobile manufacturers are expanding in the Louisville area. According to government statistics, each new automotive job generates 0.9 spin-off jobs in the Louisville area (see appendix). Our contacts suggest that cold weather disrupted production in south central Kentucky in January and February. For example, a food manufacturer lost a significant amount of inventory due to a power outage. Other manufacturers saw the cost of natural gas rise significantly. Manufacturing employment has grown for 3 years in a row. The growth slowed since mid2012, but it bounced back a little in the fourth quarter of 2013. Louisville’s nondurable goods sector contracted 2.3 percent, but the durable goods sector remained strong (see figure). Kentucky’s manufacturing employment dropped slightly during the fourth quarter. A contraction in the nondurable goods sector was the driving factor. Indiana’s manufacturing employment grew 0.6 percent, just below the national rate (see table). Kentucky’s manufacturing exports increased 23.7 percent, significantly higher than the previous quarter and the national average (see table). Exports of transportation equipment were the major contributor. Indiana’s manufacturing exports dropped by 2 percent compared with a year ago (see table). Declines in chemical and nonelectrical machinery exports were the driving factors. — Louisville area maintenance service executive “The new demand for aluminum [from automotive sectors] will catalyze a series of investments which will be substantial for the region and state.” — South central Kentucky manufacturer Manufacturing employment remained strong despite recent slowdown Louisville MSA, percent change from one year ago 16 Nondurable goods contribution 12 Durable goods 8 contribution Total 4 0 -4 -8 -12 -16 2006 2007 Source: BLS. 2008 2009 2010 2011 2012 2013 Louisville Manufacturing employment (Q4-13) Durable goods Nondurable goods Manufacturing exports (Q4-13) Kentucky Indiana US 3.5 -1.2 0.6 0.7 6.5 0.3 0.6 1.1 -2.3 -3.8 ▼ 0.7 0.0 -- 23.7 ▲ -2.1 3.2 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 ta nda rd devi a ti on) cha nge from the previ ous qua rter; s ee a ppendi x for notes a nd s ources . Federal Reserve Bank of St. Louis — Louisville Zone 4 Real Estate and Construction First Quarter 2014 2013 Ended with Gains but Snow Mitigated Home Sales in the Start of 2014 By Li Li, Senior Research Associate “The weather has definitely impacted December and January sales, so I am expecting a spring bounce.” The residential housing market finished with gains in 2013. Home sales in Louisville were up by about 16 percent compared with 2012—the best sales volume since 2006 (see table). A contact noted that the rise in prices was driven by low inventories. At the same time, home buyers and investors are cautious because of the concern over higher interest rates in 2014. The growth of single-family building permits stabilized in 2013. However, current construction activity is weak. With the severe weather in the beginning of the year, homebuilder confidence for new single-family homes dropped in February. The industrial market performed well in 2013: Leasing activities have increased. Over the past year, vacancy rates declined significantly compared with nation (see figure). Positive growth of existing companies in Louisville was said to be the leading factor. Contacts predict that 2014 will be another great year for this segment. As future growth is expected, contract and speculative construction activities have increased. Construction showed activity in both multifamily commercial sectors. South central Kentucky saw new construction for multifamily units. Hardin County, Kentucky, also enjoyed a busy commercial construction season. — Louisville area builder “Spec home loans are still very soft and our standards are still tight for any new builders. Refinancing has slowed down and competition for purchase financing is strong.” — Louisville area banker Industrial vacncy rates drop below national rates in 2013 Vacancy rates, percent 10 9 8 7 6 Louisville US 5 Q4-12 Q1-13 Q2-13 Q3-13 Q4-13 Source: Ca ssidy Turley. Non-residential market (Louisville, Q4-13) Apartment Office Retail Industrial 4.5 15.7 9.6 6.3 2.3 1.3 1.1 19.7 Vacancy rate (%) Asking rent Percent change from one year ago Note: Apa rtment, offi ce, a nd reta i l va l ues a re from Rei s .com. Indus tri a l va l ues a re es ti ma tes from Ca s s i dy Turl ey. Residential market (Q4-13) Louisville Clarksville Elizabethtown Evansville US CoreLogic Home Price Index 3.2 -8.8 -1.1 3.0 11.5 Single-family building permits 8.2 -10.7 17.6 0.8 20.1 New and existing home sales 16.3 -- -- -- 9.0 ▼ 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 — Louisville Zone 5 Household Sector First Quarter 2014 Households Shedding Credit and Mortgage Debt While Buying Cars By Elise A. Marifian, Research Associate “There is a substantial upswing in the Bowling Green area, with major retailers opening in the past few months and more nearing completion. Numerous new restaurants are nearing completion and job fairs have been held to support needed hiring.” Per capita personal income grew slightly in the third quarter in Indiana and Kentucky. Relative to one year ago, incomes are up 1.9 percent in Indiana and 2.8 percent in Kentucky, which is just below the national rate. However, other information suggests that some households may be in worse financial condition in 2013 than in 2012; for instance, a contact reported a significant increase in the number of delinquent water/sewer customers whose service was shut off in the Louisville metro area. Credit card and mortgage debt continued to decline across the zone (see table). Year-over-year auto loan debt balances, although positive, are slightly lower than in the previous quarter. Dealers noted good sales in December and January and reported consistently low inventories, partly due to a weather-related slowdown in parts deliveries to manufacturers. Holiday season retail employment growth was strong in most zone MSAs relative to 2012 (see figure). The exceptions were Bowling Green and Elizabethtown; however, anecdotal evidence indicates a possible turnaround in Bowling Green for the upcoming year. – Louisville zone contact Holiday retail employment growth strong in zone MSAs Percent change from one year ago -2.0 -1.0 0.0 1.0 2.0 3.0 4.0 US Louisville Bowling Green Clarksville Elizabethtown Evansville Owenboro Nov-13 Dec-13 Source: BLS. Louisville Zone Per capita personal income (Q3-13) Indiana Kentucky US -- 1.9 2.8 2.9 Mortgage -4.1 -3.7 -4.1 -4.8 Credit card -4.7 -5.6 Auto loan 3.3 3.8 2.5 4.4 Mortgage 2.2 2.4 2.2 3.5 Credit card 6.5 7.3 7.0 9.1 Auto loan 2.8 3.2 3.1 3.2 Per capita debt balances (Q4-13) ▲ -5.3 ▲ ▲ -4.9 90+ day delinquency rates (Q4-13) (%) ▼ 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 tanda rd devi a tion) cha nge from the previ ous qua rter. See a ppendi x for notes a nd s ources . Federal Reserve Bank of St. Louis — Louisville Zone 6 Banking and Finance First Quarter 2014 Louisville Zone Bankers See Some Uptick in Economic Activity By Michelle Neely, Economist “Overall economic activity seems to be increasing slowly. Automotive orders have picked up significantly across the board, which has helped many of our local industries that support automotive.” Most Louisville zone bankers surveyed expect loan demand and the creditworthiness of borrowers to be unchanged in the first half of 2014. Earnings ratios changed little, on average, at Indiana and Kentucky banks between the third quarter and year-end 2013. Indiana banks’ average return on average assets (ROA) exceeds District and US peer levels, while Kentucky banks’ average results are lower than District and US peers (see table). The trend in ROA largely reflects movements in net interest margins (NIMs). After declining for much of the past two years, margins are steadying or rising slightly (see figure). The average NIM for Kentucky banks at year-end 2013 essentially matched the average for US peers, while Indiana’s average NIM was just above the US peer average. Nonperforming loans as a percentage of total loans fell sharply between the third and fourth quarters in both Indiana and Kentucky. The nonperforming loan ratio declined 10 basis points to 2.07 percent in Kentucky in the last quarter. In Indiana, the ratio fell 17 basis points to 1.48 percent, an average that is well below the District’s average of 1.77 percent and the nation’s average of 1.82 percent (see table). —Western Kentucky banker “We have seen some loan growth, but the banks are taking business from each other. Not many new projects are going through planning and zoning meetings.” —Southern Indiana banker “Bankers are hearing from customers regarding flood insurance premiums due to changes in the Flood Insurance Program. Flood insurance premium shocks continue to be felt by borrowers whose homes require flood insurance.” —Louisville area banker Net interest margins inching up Net interest margin at commercial banks, percent 4.6 4.4 4.2 4.0 3.8 3.6 US 3.4 Kentucky Indiana 3.2 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: FRED. Kentucky Indiana 8th District US Peer Banks Return on average assets 0.88 1.09 1.03 1.01 Net interest margin 3.86 3.78 3.77 3.85 Nonperforming loans / total loans 2.07 1.48 75.36 103.38 Banking performance (Q4-13 ) Loan loss reserve coverage ratio ▼ 1.77 79.89 ▼ 1.82 ▼ 89.01 Note: Va l ues a re percenta ge poi nts . 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 — Louisville Zone 7 Agriculture and Natural Resources First Quarter 2014 Record Harvest Slashes Commodity Prices; Decline of Mining Industry Slows By Lowell R. Ricketts, Senior Research Associate “Those in our region are faced now with a contracted market and prices that are predicted to be below the cost of production. We are looking at an extraordinarily tight situation for 2014.” Following a remarkably strong harvest, December 2013 corn inventories almost doubled their size relative to the same time in 2012 (see figure). In response, the average corn price in January for Kentucky and Indiana declined 36.2 percent from a year ago. Inventories may remain high as some farmers have decided to hold on and wait for higher prices. Agricultural bankers surveyed in the zone expect mostly positive developments in the first quarter of this year relative to the same time in 2013 (see right table). Bankers surveyed expect farm income, as well as the rate of loan repayment and the supply of loanable funds, to increase. In contrast, more respondents expect loan demand to fall relative to the same time last year. Kentucky coal production increased relative to a year ago for the first time since the third quarter of 2011 (see left table). However, payroll employment in the industry continued to decline in the fourth quarter of 2013, albeit at the slowest rate since the second quarter of 2012. Annual red meat production in Kentucky was close to 30 million pounds less than in the previous year (see left table). Indiana has over three times the total production of Kentucky and the two states combine for around 5 percent of total U.S. production. — Central Kentucky Farmer “Corn prices got too high a couple of years ago, and that wasn’t good for anybody. The biggest problem is that our input costs have gone up. We’ll just have to figure out how to make a living at $4 per bushel.” — Southern Indiana Farmer Corn supplies swell as price hits rock bottom Percent change from one year ago 120 $/BU 8.0 100 7.5 80 7.0 60 40 6.5 20 6.0 0 5.5 -20 -40 -60 -80 IN: Corn stock (Left) 5.0 KY: Corn stock (Left) 4.5 Avg. price (Right) Q1-12 Q3-12 Source: USDA/NASS. 4.0 Q1-13 Q3-13 Indiana Q1-14 Kentucky US Louisville zone Ag. bankers' expectations Q1-14 vs. Q1-13 Lower Higher Loan demand 17 0 Available funds 0 17 Loan repayments 0 33 Farm income 0 33 Capital expenditure 17 17 Natural resources (Q4-13) Mining and logging employment 5.3 -4.2 ▲ 4.3 Coal production 7.2 7.0 ▲ 0.5 Red meat production (2013) Share of national production Winter wheat, area planted (2014) 0.5 3.6 -8.5 ▼ -5.4 -0.5 1.1 -14.3 100 -2.8 Note: Va l ues (except for producti on s ha res ) 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 or yea r. See a ppendi x for notes a nd s ources . Federal Reserve Bank of St. Louis — Louisville Zone Net -17 17 33 33 0 Note: Percenta ge of res pons es . See a ppendi x for notes a nd s ources . 8 Appendix Cover Page Sources Bureau of Labor Statistics Unemployment rate, nonfarm payroll employment. Labor Markets 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. 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. Unemployment rate data are seasonally adjusted. Manufacturing Table Sources First Quarter 2014 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 Manufacturing); and 326 (Plastics and Rubber Products Manufacturing). Real Estate and Construction Table Sources CoreLogic Home price index, including distressed sales. Census Bureau Year-to-date single-family building permits. National Association of Realtors Year-to-date new and existing home sales. Notes Asking rent is the publicized asking rent price. Data are in current dollars. Vacancy rate is the percentage of total inventory physically vacant as of the survey date, including direct vacant and sublease space. New and existing home sales consists of single-family home sales. Bureau of Labor Statistics Manufacturing employment: total, durable, and nondurable goods. World Institute for Strategic Economic Research Manufacturing exports: dollar value, and metric tons. Notes Manufacturing exports are defined as the total dollar amount of exports by the manufacturing industries. Bureau of Labor Statistics RIMS II multipliers show that each additional job in the motor vehicle, body, trailer and parts manufacturing industry will generate 0.9235 new jobs in the Louisville MSA. 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). Federal Reserve Bank of St. Louis — Louisville 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 geographic 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. Notes Delinquency rates are calculated as the percentage of payments past due by more than 90 days, weighted by the dollar value of the loan. 9 Appendix First Quarter 2014 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.” Energy Information Administration (EIA) Coal production. Bureau of Labor Statistics (BLS) Mining and logging employment. USDA National Agricultural Statistics Service (USDA/NASS) Red meat production and winter wheat plantings. Federal Reserve Bank of St. Louis — Louisville Zone 10
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