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Burgundy Book A report on economic conditions in the Louisville zone Second Quarter 2015 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. Labor Market Conditions Remain Exceptionally Healthy in the Louisville Zone Data Snapshot County unemployment rates (SA, Q1-15) 5.2% By Kevin L. Kliesen, Business Economist and Research Officer A May survey of business contacts found that about 57 percent of respondents expect local economic conditions in 2015 to be better than they were in 2014, while only about 7 percent expect them to worsen. Total nonfarm payroll employment in the Louisville MSA increased by 4.2 percent in the first quarter of 2015, outpacing the nation’s 2.3 percent gain. Employment growth was also stronger than the nation’s growth in Bowling Green, Elizabethtown, and Evansville, but modestly weaker in Owensboro. Nearly two-thirds of hiring managers surveyed reported they were increasing wages this year to retain employees; a smaller percentage reported that they are not raising selling prices in response. The Louisville zone’s unemployment rate averaged 5.2 percent in the first quarter of 2015, down modestly from the previous quarter (5.5 percent). Unemployment rates were below 5 percent in the Louisville (4.7 percent), Bowling Green (4.6 percent), and Owensboro (4.6 percent) MSAs in the first quarter. Residential real estate activity improved in the first quarter, as house prices and building permits rose in most MSAs. Apartment vacancy rates fell sharply in the first quarter in the Louisville MSA. Credit card delinquency rates rose significantly in the first quarter, although the increase modestly lagged the nation’s increase. Louisville zone residents continued to reduce their outstanding mortgage debt balances in the first quarter. less than 5% 7% to 8% 5% to 6% over 8% Nonfarm payroll employment by industry Percent change from one year ago (Q1-15) -5 0 5 Total Nonfarm (100%) Trade, Trans., and Utilities (21%) Education and Health (14%) Prof. and Business Services (13%) Government (13%) Manufacturing (12%) Leisure and Hospitality (10%) Financial Activities (7%) Despite continued improvement in asset quality, Indiana and Kentucky commercial banks saw a modest decline in profitability in the first quarter of 2015. Nat. Res., Mining, and Construction (4%) Other Services (4%) This spring, Indiana and Kentucky farmers planted fewer acres of corn and more acres of soybeans. This report is published by the Federal Reserve Bank of St. Louis 6% to 7% Information (1%) Louisville US 10 15 20 Second Quarter 2015 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 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 May 8 and May 18. If you’re interested in becoming a member of our panel, follow this link to complete a trial survey: http://research.stlouisfed.org/outlooksurvey 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 Second Quarter 2015 Strong Construction Sector Drives Employment Growth Across Zone By Maria A. Arias, Senior Research Associate Labor market conditions continued to improve during the first quarter throughout the zone as the unemployment rate declined in all MSAs and employment growth accelerated in most MSAs. Strong growth in the goods-producing sector in particular continued to drive private-sector job growth (see table). About three in four of the 45 hiring managers surveyed in the Louisville zone reported they are actively seeking employees, particularly for professional, technical, sales, and administrative positions. However, many indicated they did not have enough qualified candidates to fill such positions and reported increasing starting salaries or wages for some or all job categories to attract candidates. Almost two-thirds reported increasing current pay by more than in previous years to retain employees. Nominal wage growth in Louisville remains at a healthy pace in 2015. Average hourly wages for private-sector employees in Louisville were at $23.2, 6.2 percent higher than one year ago, but slightly lower than the $24.79 national average (see figure). About 45 percent of managers reported they are not changing prices in response to higher labor costs, though almost 40 percent reported they are increasing prices to partially or fully pass-on higher compensation costs to consumers. "Bourbon is king and it is growing. Good employees are harder to get as employment picks up." — Louisville area manufacturer "Because of lower travel costs to go to my clients' locations, I have retained more profit from existing consulting contracts. As a result, I have added one new employee." — Louisville area builder Nominal wages growing faster than national rate Average hourly earnings of private sector employees, SA dollars 26 25 24 23 22 21 20 Louisville 19 US 18 2008 2009 Source: BLS. 2010 2011 2012 2013 2014 Louisville 2015 Evansville Bowling Green Unemployment rate (Q1-15) (%) 4.7 ▼ 5.0 4.6 Nonfarm employment (Q1-15) 4.2 ▲ 2.7 3.5 Goods-producing sector 7.0 ▲ 8.4 5.4 Private service-providing sector 4.1 1.3 3.8 Government sector 1.2 0.6 0.5 Elizabethtown Owensboro US 5.1 ▲ 5.5 2.1 0.5 2.3 7.9 ▲ 4.6 3.4 2.7 3.7 -0.1 2.6 -3.9 -1.4 0.4 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 and Transportation Second Quarter 2015 Louisville Transportation Employment Growth Rate Drops Below U.S. Average By Daniel Eubanks, Senior Research Associate Transportation and warehousing employment growth in the Louisville MSA slowed by over three percentage points and slipped below the national growth rate (see figure). Manufacturing employment growth across the Louisville zone continued to exceed the US average in the first quarter, despite a contraction in nondurable goods employment in Kentucky and a significant slowdown in nondurable goods in Indiana. The value of exports from Kentucky again grew by double-digits, driven by transportation equipment and chemical products. Exports of chemical products have grown by 50 percent over the past year and now make up one-fifth of exports from the state. “[The drop in oil prices] has reduced some of our raw material prices, but these are a relatively small portion of our business.” – Louisville area manufacturer Contacts reported delays in shipping as a result of the West Coast port labor disputes in the first quarter. Many saw minor impacts from the drop in oil prices. Contacts also continued to report difficulty finding qualified applicants (see quote). “Good employees are harder to find as employment picks up.” – Louisville area manufacturer “[The port labor dispute] slowed delivery of packaging material, causing a delay in production.” – Louisville area manufacturer Transportation employment growth slows in Louisville Percent change from one year ago 15 Louisville KY 10 US 5 0 -5 -10 2003 2005 2007 2009 2011 2013 2015 Source: BLS Louisville Transportation employment (Q1-15) 3.1 Manufacturing employment (Q1-15) ▼ Kentucky Indiana US ▲ 4.4 5.4 4.2 2.2 2.8 1.8 Durable goods 6.3 5.3 3.2 2.5 Nondurable goods 0.3 -3.0 -- 11.5 Manufacturing exports (Q1-15) ▼ 1.8 1.8 ▼ 3.6 0.5 -3.8 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 Second Quarter 2015 Louisville’s Industrial Construction Market Advances By Diana Cooke, Senior Research Associate The residential real estate market improved in the first quarter (see figure). Year to date home sales are 10 percent higher than the same period one year ago, and home prices increased in all the major MSAs in the District. Contacts from the Louisville area noted that demand is up but the number of listings is down. The residential construction market exhibits mixed signs of growth. According to the US Census data, permits increased 12.9 percent (see table). However, industry contacts suggest that singlefamily building permits is weak and may be lower than one year ago. The commercial real estate market was strong in the first quarter. The apartment market continued to boom; vacancy rates fell significantly from the previous quarter and asking rents rose over 3 percent. Contacts noted that many tech-oriented companies are moving their offices downtown, where much of the millennial population resides. “New listings are up, but sales are faster.” The industrial construction market is very active; contacts reported that there is currently a little under 3 million square feet of spec space under construction. As a result of the timing of speculative construction completions, vacancy rates are up and rents are down. Contacts anticipate a strong year with more speculative construction projects to satisfy the high demand. —Bowling Green realtor “Apartments, apartments, apartments. It appears the exuberance can’t stop.” —Louisville area banker Home sales and permits rebound in Louisville Percent change from one year ago, year-to-date 20 15 10 5 0 -5 Home Sales -10 Permits -15 -20 Q1-13 Q3-13 Q1-14 Q3-14 Q1-15 Source: See appendix. Non-residential market (Louisville, Q1-15) Apartment Vacancy rate (%) 5.2 Asking rent Office 10.3 6.3 0.2 3.4 Industrial 15.1 ▼ Retail 1.6 ▼ 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 (Q1-15) CoreLogic Home Price Index Louisville Clarksville Elizabethtown 3.6 4.0 ▲ 6.4 ▼ Single-family building permits 12.9 ▲ -34.8 New and existing home sales 10.2 ▲ -- ▲ Evansville -9.9 US 5.5 4.8 34.0 17.7 8.6 -- -- 8.4 ▲ Note: Sa l es a nd permi ts da ta a re yea r-to-da te percent cha nge. Pri ces 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 Second Quarter 2015 Auto Debt Balances on the Rise, Credit Card Delinquency Rate Ticks Up By Joseph McGillicuddy, Research Associate Personal income growth in Indiana continued to accelerate during the fourth quarter of 2014, while in Kentucky personal income grew faster than the nation for a fifth consecutive quarter. The credit card delinquency rate increased within the Louisville zone during the first quarter of 2015 but remained below the national rate, which also rose (see table). Auto loan debt growth continued to climb during the first quarter of 2015. Credit card debt growth was stable at 2.5 percent year-over-year (see figure). Despite improvements in the housing market, households further reduced their mortgage debt at a relatively modest rate (see figure). Business contacts noted that low oil prices were still affecting household spending. Multiple auto dealer contacts reported an increased demand for less-fuel-efficient vehicles. “[We’ve been] selling more low MPG cars and trucks.” Several downtown businesses heavily dependent on tourists have expressed concerns over how the temporary closure of the Kentucky International Convention Center will impact them. — Evansville area auto dealer “In 2017 the closing [of the Convention Center] for the entire year will present serious challenges for all downtown properties…. In 2018 the Convention Center will reopen but most conventions will be hesitant to book until they are certain the Center is complete and fully operational.” — Louisville area hospitality contact Auto debt growth continues to accelerate Percent change in debt balances from one year ago, Louisville zone 15 10 Mortgage Auto Credit Card 5 0 -5 -10 -15 Mar-08 Mar-10 Mar-12 Mar-14 Source: FRBNY Consumer Credit Pa nel and Equifax. Louisville Zone Per capita personal income (Q4-14) Indiana Kentucky US -- 3.8 5.0 3.8 Mortgage -1.8 -1.5 -1.7 -1.4 Credit card 2.5 0.8 1.8 2.0 Auto loan 7.1 7.7 6.4 8.7 Mortgage 1.7 1.9 1.9 2.5 Credit card 6.5 Auto loan 2.9 Per capita debt balances (Q1-15) 90+ day delinquency rates (Q1-15) (%) ▲ 6.6 3.4 ▲ 7.0 3.3 ▲ 8.2 ▲ 3.2 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 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 Second Quarter 2015 Margins Decline, Competition Increases for Business Loans in Louisville Zone By Michelle Neely, Economist, and Hannah Shell, Research Associate Nine of the twelve area bankers surveyed reported no change in loan demand during the second quarter of 2015 relative to one year ago. Slightly more than one-quarter of respondents expect demand to increase in the third quarter, although the majority say demand will be about the same. Competition has intensified for commercial and industrial loans. A majority of area bankers surveyed report demand has been and will remain unchanged to slightly lower in the second quarter relative to last year; most new business has been gained by competing for existing accounts. Almost all bankers expect demand to be about the same or slightly higher in the third quarter. Average net interest margins (NIMs) declined in Indiana and Kentucky as well as the District and the nation in the first quarter. The average NIM at Indiana banks fell the most, dropping 15 basis points to its fourth-quarter level. Despite its decline, the average NIM at Kentucky banks remains above the District average and on par with the U.S. average. “Depressed revenues for clients in the oil business have caused a reduction in lending and deposit opportunities.” Asset quality continues to improve at area banks as the ratios of nonperforming loans to total loans decreased at Kentucky and Indiana banks in the first quarter. Bankers surveyed report that delinquencies have been unchanged to slightly lower in the second quarter relative to one year ago. Bankers expect delinquencies to be about the same in the third quarter as they were last year. —Southern Indiana banker “On the commercial side of our banking business, most new business has come from acquiring new accounts.” —Louisville banker Net interest margins decline at area banks 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 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: FRED. Kentucky Indiana 8th District US Peer Banks Return on average assets 1.05 0.99 0.89 1.03 Net interest margin 3.75 3.68 3.69 3.75 Nonperforming loans / total loans 1.36 1.12 1.23 1.29 102.94 116.96 113.01 110.08 Banking performance (Q1-15 ) Loan loss reserve coverage ratio 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 Second Quarter 2015 Row-Crop Farmers Grapple with Anemic Commodity Prices; Farm Income Falls By Lowell R. Ricketts, Senior Research Associate Row-crop farmers in Indiana and Kentucky finished their plantings this spring with considerable uncertainty on their minds. Corn prices continue to be depressed after falling close to 50 percent over the past two years. In response, farmers have stored a great deal of their production in hopes that prices will turn around (see figure). Diminished farm income is putting farmers in a tough position as they reconcile previous financial agreements. Corn plantings declined modestly in both Indiana and Kentucky, although by a greater margin than the nation as a whole. Because of cost and unusually wet weather during the planting season, farmers have switched from corn to soybeans. “The farmer today is out planting corn but he’s gotta [sic] figure out what to do with all of last year’s crop!” Coal production declined in both Indiana and Kentucky, as well as the nation, in the first quarter as compared with the same time last year. As of the latest release of production data, Kentucky coal production has continually declined for the past three and a half years. Employment in Kentucky’s mining and logging industry has had a similar continual decline over the past three years. —Western Kentucky farmer “Equipment contracts were negotiated a year ago on the basis of prices that no longer exist. The lower commodity prices and the drop in farm income make these terms burdensome.” —Western Kentucky farmer Corn in storage continues to climb given low prices Percent change from one year ago 100 50 0 -50 -100 IN: Corn stock (Left) KY: Corn stock (Left) Q1-13 Q3-13 Source: USDA/NASS. Q4-13 Q1-14 Q3-14 Q4-14 Q1-15 Indiana Kentucky US Natural resources (Q1-15) Mining and logging employment Coal production -0.9 -4.8 -5.4 -5.6 1.7 -3.5 ▼ ▼ Prospective plantings (2015) Corn Cotton Rice Sorghum Soybeans -1.7 ---1.8 -2.6 ---1.1 -1.5 -13.5 -0.8 10.7 1.1 ▼ 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. See a ppendi x for notes a nd s ources . Federal Reserve Bank of St. Louis — Louisville Zone 8 Appendix Cover Page Sources Bureau of Labor Statistics Unemployment rate, nonfarm payroll employment. Second Quarter 2015 turing); 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). Labor Markets Real Estate and Construction Table Sources Table Sources Bureau of Labor Statistics CoreLogic 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. Average hourly earnings are in current dollars. Home price index, including distressed sales. Census Bureau Year-to-date single-family building permits. Greater Louisville 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. Manufacturing and Transportation Table Sources Household Sector Bureau of Labor Statistics Table Sources Transportation employment: includes transportation and warehousing industries. Manufacturing employment: total, durable, and nondurable goods. World Institute for Strategic Economic Research Manufacturing exports: dollar value. Notes Transportation employment in Louisville covers transportation, warehousing, and utility industries. About 90 percent of the reported jobs are contributed by transportation and warehousing industries. Manufacturing exports are defined as the total dollar amount of exports by the manufacturing industries. 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). 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. SNAP participation. 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. 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 Manufac- Federal Reserve Bank of St. Louis — Louisville Zone 9 Appendix Second Quarter 2015 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 Sources Energy Information Administration (EIA) Coal production. Note: Production trends identified in report may be inconsistent with previous reports due to data revisions. Bureau of Labor Statistics (BLS) Mining and logging employment. United States Department of Agriculture (USDA) Prospective plantings (March 2015), corn prices, corn stocks. Notes The results of the Federal Reserve Bank of St. Louis Agricultural Finance Monitor are not reported due to a low response rate for the Louisville zone. Federal Reserve Bank of St. Louis — Louisville Zone 10
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