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Burgundy Book A report on economic conditions in the Memphis zone Third Quarter 2014 The Memphis zone of the Federal Reserve comprises northern Mississippi, eastern 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. Data Snapshot County unemployment rates (SA, Q2-14) Rising Manufacturing Employment Helps Boost Job Growth By Kevin L. Kliesen, Business Economist and Research Officer In an August survey, slightly less than half of Memphis zone business contacts expected economic conditions to improve over the second half of 2014. The Memphis zone’s unemployment rate declined from 8.8 percent in the first quarter to 8.4 percent in the second quarter. Although labor market conditions remained the strongest in the Jonesboro, Arkansas, MSA, the unemployment rate fell to 7.8 percent in the second quarter in the Memphis MSA. Growth of nonfarm payroll employment strengthened modestly across the zone. However, employment in the transportation industry in the Memphis MSA fell by 2.6 percent in the second quarter. Manufacturing employment growth in the second quarter was especially strong in Mississippi (2.9 percent). House prices were up strongly in the Memphis MSA for the second consecutive quarter, but single-family building permits and total home sales declined. Housing market conditions, on balance, were stronger in Jonesboro and Jackson,. 8.4% 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 (Q2-14) -4 -2 0 2 Total NonFarm (100%) Trade, Trans., and Utilities (27%) Education and Health (14%) Government (13%) Households in the Memphis zone reduced their credit card and mortgage balances in the second quarter at a faster rate than that seen nationally. Contacts across the zone generally reported improving consumer sentiment. Mortgage and credit card delinquency rates fell significantly in the second quarter in Tennessee. Prof. and Business Services (14%) Commercial bank profitability (return on average assets) improved at Tennessee banks but remained essentially unchanged at Mississippi banks in the second quarter. A sizable minority of bankers (40 percent) expect loan demand to remain unchanged over the next three months. Financial Activities (5%) According to the USDA, the 2014 cotton and soybean crops are expected to be appreciably larger than last year’s crop. This report is published by the Federal Reserve Bank of St. Louis Leisure and Hospitality (11%) Manufacturing (8%) Other Services (4%) Nat. Res., Mining, and Construction (3%) Information (1%) Memphis US 4 6 8 Third 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 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 and Transportation ........................................... 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 8 and August 16. 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 2014 Employment Growth Picked Up, Unemployment Remained Elevated in Memphis By Maria A. Arias, Research Associate The unemployment rate in Memphis remained elevated, though it continued to decline significantly from the previous quarter in all of the zone's MSAs (see table). Most of the decline in unemployment rates throughout the zone was due to an increase in employment. In Memphis, employment grew 0.5 percent faster year-over-year than in the previous quarter; preliminary data suggest this momentum is continuing into the third quarter (see figure). Growth in Jonesboro continues to outpace the nation’s growth (see table). Business contacts in the Memphis zone expect labor market conditions to improve somewhat toward year-end. Just over half of the contacts expect employment to stay about the same as it was last year, while over one-third expect employment to increase. Wage growth differed across the zone's MSAs in the second quarter. Average hourly earnings in Memphis increased 2.2 percent from the previous year, while increasing only 0.1 percent in Jonesboro and decreasing 3 percent in Jackson. "Very few new office tenants [are] moving into the city. Unemployment is still very high." — Memphis area real estate broker For the third and fourth quarters, about half of business contacts expect wages to remain unchanged, while 43 percent expect wages to be somewhat higher or higher than the same time last year. The remaining contacts expect average wages to decrease. Employment growth picked up in Memphis Payroll employment, percent change from year ago 3 2 1 0 -1 -2 -3 -4 US -5 Memphis -6 2010 2011 2012 2013 2014 Source: BLS. Memphis Unemployment rate (Q2-14) (%) 7.8 Nonfarm employment (Q2-14) ▼ 0.7 Jackson 6.7 Jonesboro, AR ▼ 6.1 ▼ US 6.2 0.7 ▲ 3.6 1.8 0.9 1.6 ▼ 1.9 Goods-producing sector 1.1 Private service-providing sector 1.3 0.8 4.5 2.1 -3.3 0.3 2.3 0.1 Government sector 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 and Transportation Third Quarter 2014 Manufacturing Activity in Memphis Shows Marked Improvement By Sean P. Grover, Senior Research Associate Tennessee’s manufacturing employment remained steady. The 1.3 percent increase was led by an increase in durable goods manufacturing employment. Mississippi’s manufacturing employment increased 2.9 percent, also on the strength of durable goods. Both states showed positive transportation employment changes but were below the national average. Aggregate weekly manufacturing hours among production employees in Tennessee have risen above the national and Mississippi numbers in 2014. “We are responding positively to our customers’ demands for specialty, large-scale fabrication and field construction.” —Memphis area manufacturer Memphis manufacturing employment increased 1.9 percent in the second quarter, led by a significant increase in durable goods manufacturing employment of 3.9 percent, well above the national average. Transportation employment in Memphis decreased 2.6 percent, substantially lower than the national average. “Manufacturing has been steady with increased employment over the last quarter.” —Western Tennessee manufacturer Compared with the national average, both Tennessee and Mississippi saw large swings in manufacturing exports in the second quarter. With a 7.2 percent increase, Tennessee saw strength from wood products, textiles, and primary metals. The large 11.5 percent decrease in Mississippi came from weakness in textiles and electrical equipment. Aggregate manufacturing hours in Tennessee steadily increase in 2014 Production and nonsupervisory employees, Jan 2008 = 100 105 Tennessee 100 Mississippi 95 US 90 85 80 75 2008 2009 Source: BLS. 2010 2011 2012 2013 2014 Memphis Transportation employment (Q2-14) -2.6 Manufacturing employment (Q2-14) 1.9 3.9 Tennessee US 1.0 1.9 2.7 ▲ 1.3 2.9 0.9 ▲ 3.1 4.0 1.4 -0.5 -1.7 0.9 0.1 -- 7.2 -11.5 1.4 Durable goods Nondurable goods Mississippi Manufacturing exports (Q2-14) 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 — Memphis Zone 4 Real Estate and Construction Third Quarter 2014 Home Sales Are Down in Memphis, but the Market Is Still Competitive By Diana Cooke, Research Associate Contacts noted that the Memphis housing market is competitive, but the lack of developed lots is affecting new home construction and sales. In the majority of MSAs across the zone, single-family building permits displayed negative yearly growth rates (see table). Total home sales are down 4.3 percent in Memphis. The multi-family outlook remains stable. Asking rents increased 60 basis points compared with the previous quarter. Contacts noted that new supply is pushing up vacancy rates. Contacts in Memphis report a tight office space market in the Poplar/240 Corridor. Tenants are widening their search to include class-B space and other submarkets. Home prices in Memphis outperformed other MSAs The Memphis residential housing market showed signs of improvement in the second quarter of 2014. Home prices continued to increase in Memphis. In Jackson, home prices, while lower than a year ago, significantly improved (see figure). “It’s easier to build 200 apartment units than to qualify for a home loan. We are in the new norm. Developers are more comfortable building apartments than new housing developments.” — Memphis area banker “Although total sales were off a little, pricing remains solid and inventory reflects the fact more people are looking to make a move.” — Memphis area realtor There continue to be new plans for commercial construction projects in Memphis. A building in uptown Memphis is being redeveloped. A new class-A medical space is under construction in the Germantown Parkway/Wolf River Boulevard area. Percent change from one year ago 12 US Jonesboro Jackson Memphis 8 4 0 -4 -8 Q2-2010 Q2-2011 Q2-2012 Q2-2013 Q2-2014 Source: CoreLogic. Non-residential market (Memphis, Q2-14) Apartment Office Retail Industrial 8.8 23.8 11.6 14.6 2.5 0.5 0.7 1.6 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 (Q2-14) Memphis CoreLogic Home Price Index Jonesboro Jackson 5.6 -0.2 Single-family building permits -2.9 New and existing home sales -4.3 ▲ US -3.4 8.3 -4.4 20.3 0.3 -- -- ▼ -5.8 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 2014 Delinquency Rates Recover More Slowly Than National Average By Peter B. McCrory, Research Associate Per capita income growth in Arkansas, Mississippi, and Tennessee ticked up in the first quarter. However, all three states trailed the rate of income growth in the nation. Prior to the recession, households in the zone tended to be more delinquent on mortgage, auto, and credit card debt than those across the nation. During the downturn, these long-run ratios in mortgage and credit card delinquency rates reversed dramatically (see figure). In recent quarters, national delinquency rates have recovered more quickly than in the Memphis zone— revealing that even as the economy recovers, zone households face financial struggles likely more longer-lasting than those temporarily faced across the country. Contacts across the zone reported modestly improving consumer sentiment, luxury retail openings, and mixed auto sales activity. “Our unemployment rate continues to slowly decrease. Cost of food, fuel, and healthcare are the primary drivers in consumer purchasing decisions.” —Memphis area banker Relative to one year ago, households in the Memphis zone reduced mortgage and credit card debt balances at a faster rate than the nation and accumulated auto debt balances at a slower rate. Poor credit history might explain the lower auto debt demand in the zone, as one auto dealer contact suggested. “The economy is stable and the stock market has created a mental wealth increase... [But consumers] are still burdened by ... distressed credit.” — Memphis area auto dealer Trend reversals in delinquency ratios Ratio, zone delinquency to national delinquency 2.5 Mortgage 2.0 Credit Card 1.5 1.0 0.5 Mar-00 Mar-03 Mar-06 Mar-09 Mar-12 Source: FRBNY Consumer Credit Pa nel and Equifax. Memphis Zone Per capita personal income (Q1-14) Arkansas Mississippi Tennessee US ▲ -- 0.6 2.2 2.3 2.8 Mortgage -4.7 -1.9 -3.2 -1.5 -1.8 Credit card -6.7 -3.5 -6.8 -4.7 -4.6 Auto loan 3.6 7.0 5.1 4.7 5.5 Mortgage 2.5 1.9 ▼ 2.4 1.8 ▼ 3.0 ▼ Credit card 7.9 7.1 ▼ 6.8 7.0 ▼ 7.5 ▼ Auto loan 4.2 2.3 4.7 3.2 Per capita debt balances (Q2-14) 90+ day delinquency rates (Q2-14) (%) 3.1 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 — Memphis Zone 6 Banking and Finance Third Quarter 2014 Loan Demand on Upswing in Memphis Zone By Michelle Neely, Economist About 40 percent of bankers surveyed expect loan demand to remain unchanged during the next three months. Return on average assets (ROA) improved on average at both Arkansas and Tennessee banks in the second quarter, while it remained the same in Mississippi. ROA increased 11 basis points to 1.03 percent in Tennessee in the second quarter, while it rose 5 basis points to 1.25 percent in Arkansas. Average ROA in all three states is above year-ago levels and is on par with or higher than the national peer average. Net interest margin (NIM) results were once again uneven in the Memphis zone. The average NIM was up slightly at both Arkansas and Tennessee banks, but fell 14 basis points at Mississippi banks as a strong result from one large Mississippi bank in the first quarter did not carry over to the second quarter. In all three states, average NIMs remain above their year-ago levels. “Loan volume has improved slightly this quarter. The bank has experienced fewer loan declines in the last year because credit scores are better.” —Northern Mississippi banker Nonperforming loan ratios fell again in all three states, the District, and the nation. The ratio of nonperforming loans to total loans at Mississippi banks declined to 1.35 percent, well below the District and U.S. peer averages. In contrast, the nonperforming loan ratios in Arkansas and Tennessee, while declining, remain above their District and U.S. peer levels. “Loan demand continues to improve and competition for solid credits remains fierce. Terms continue to be relaxed regarding covenants, pricing and the length of fixed-rate loans.” —Memphis area banker “Agriculture banks are beginning to have concerns about overall cash flows of their borrowers as commodity prices, especially for corn and cotton, have seen a significant decline over the past few months.” —Northeast Arkansas banker Profit ratios converging in Memphis zone Return on average assets at commercial banks, percent 2.0 1.5 1.0 0.5 US 0.0 TN MS -0.5 AR -1.0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: FRED. Banking performance (Q2-14 ) Tennessee Mississippi Arkansas 8th District US Peer Banks Return on average assets 1.03 0.98 1.25 1.10 1.00 Net interest margin 3.65 4.05 4.20 3.77 3.82 Nonperforming loans / total loans 1.81 1.35 1.84 1.54 1.60 85.08 94.81 91.30 79.89 Loan loss reserve coverage ratio ▼ 95.63 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 — Memphis Zone 7 Agriculture and Natural Resources Third Quarter 2014 Record Crop Production Expected in 2014 By Lowell R. Ricketts, Senior Research Associate Agricultural bankers surveyed in the Memphis zone expect more available loanable funds and faster rates of loan repayments in the third quarter of 2014 compared with a year earlier. However, bankers also expect loan demand, farm income, and capital spending to be lower relative to the same period (see right table). According to current USDA estimates, Arkansas and Mississippi soybean production will set new records in 2014. Additionally, estimated Arkansas rice production levels will also set a new record in 2014. Cotton production in 2014 increased substantially across all zone states, although levels remain below historical averages. Expected corn production across the zone declined significantly from 2013 levels. Coal production in Tennessee and Mississippi declined for the second consecutive quarter (see left table). Despite declining production, mining and logging employment increased slightly over the same period in 2013 for Mississippi. “We are currently seeing much lower commodity prices.” Falling commodity prices reported by zone contacts are reflected in the latest state-level data provided by the USDA (see figure). Soybean prices in both Arkansas and Tennessee fell 10 percent in July from the previous month. — Northern Mississippi farmer “Crops will be very good due to plentiful rain during July and August, but prices are forecasted to be down.” — Western Tennessee agricultural banker “Our increasing operating costs stem mostly from seeds and capital equipment. Paired with below-cost commodity prices we have some tight conditions.” — Eastern Arkansas farmer Already-low corn and soybean prices start to fall again 3-Month MA of $/BU, indexed value (Jan. 2012=100) 135 125 115 105 95 AR: Soybeans 85 MS: Soybeans 75 TN: Soybeans TN: Corn 65 Q1-12 Q3-12 Q1-13 Q3-13 Q1-14 Source: USDA/NASS. See a ppendix regarding missing data. Q3-14 Arkansas Mississippi Tennessee Natural resources (Q2-14) Mining and logging employment Coal production Production (2014) Corn Cotton Rice Sorghum Soybean 0.7 --36.9 20.8 ▲ 45.1 ▲ -12.1 9.7 1.8 -1.1 -36.6 29.3 ▲ 28.9 40.0 19.0 --28.8 -3.8 ▼ 6.3 ▲ -----0.6 US 5.0 0.8 0.8 35.6 ▲ 20.5 ▲ 10.3 16.0 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. bankers' expectations Q3-14 vs. Q3-13 Loan demand Available funds Loan repayments Farm income Capital spending 50 125 125 80 60 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 2014 Cover Page Sources Bureau of Labor Statistics Unemployment rate, nonfarm payroll employment. Labor Markets 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). 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. Real Estate and Construction Table Sources CoreLogic Home price index, including distressed sales. Census Bureau Year-to-date single-family building permits. Memphis Area Association of Realtors Year-to-date new and existing home sales. Notes Manufacturing and Transportation 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 Transportation employment: includes transportation and warehousing industries. New and existing home sales consist of single-family home sales. Manufacturing employment: total, durable, and nondurable goods. Household Sector World Institute for Strategic Economic Research Manufacturing exports: dollar value. 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. 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. Transportation employment in Memphis covers transportation, warehousing, and utility industries. About 90 percent of the reported jobs are contributed by transportation and warehousing industries. Haver Analytics Manufacturing exports are defined as total dollar amount of exports by the manufacturing industries. Notes 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 — Memphis Zone Per capita income. 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 Third 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 nonperforming 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 spending 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. United States Department of Agriculture (USDA) Commodity prices. June and July observations for Mississippi soybean prices were withheld by the USDA to avoid disclosing data for individual operations. Federal Reserve Bank of St. Louis — Memphis Zone 10
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