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Burgundy Book A report on economic conditions in the Memphis zone First Quarter 2016 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, Q4-15) Despite Generally Healthy Labor Markets, Contacts Are Dour on the Near-Term Outlook By Kevin L. Kliesen, Business Economist and Research Officer According to a February survey, Memphis-zone business contacts are less optimistic about local economic conditions compared with three months earlier. Less than 20 percent of contacts expect conditions to improve this year relative to 2015. Nonfarm payroll employment growth accelerated in the Memphis MSA in the fourth quarter of 2015, significantly narrowing the gap with the nation’s growth. Employment gains remained the strongest in the Jonesboro MSA in the fourth quarter, paced by rapid growth of service-providing employment. Revisions released by the U.S. Bureau of Labor Statistics in March 2016 showed much stronger employment growth in the Memphis MSA in 2015 than initially reported. 6.7% 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 (Q4-15) -4 -2 0 Total Nonfarm (100%) The Memphis zone’s unemployment rate averaged 6.7 percent in the fourth quarter of 2015, unchanged from the previous quarter. Commercial real estate activity in the Memphis MSA remained strong, bolstered by several large projects that have recently been completed or are in progress. The industrial sector is a notable exception, as asking rents fell sharply in the fourth quarter of 2015. Residential real estate activity exhibited significant softness in the fourth quarter compared with the nation. Delinquency rates generally fell across most loan segments in the Memphis zone in the fourth quarter. Per capita mortgage debt continued its six-year decline. Commercial bankers reported that loan demand was about unchanged in the first quarter, and they are split on the direction of loan demand in the second quarter of 2016. Because of sharp declines in planted acreage last fall, winter wheat production is likely to be sharply lower in 2016. Trade, Trans., and Utilities (27%) Education and Health (15%) Government (13%) Prof. and Business Services (16%) Leisure and Hospitality (10%) 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 First Quarter 2016 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 February 2 and February 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 First Quarter 2016 Labor Markets Continue To Improve, Albeit at a Tepid Pace By Maria A. Arias, Senior Research Associate “Lack of confidence in the market, job growth, and income affected our sales during the past three months.” —Memphis area residential real estate contact The Memphis zone continued to experience mixed labor market conditions at the end of 2015. In Memphis, employment growth has accelerated over the course of the year, but slowed a bit in the fourth quarter. Unemployment rates across the zone (except Jonesboro) remain elevated compared with the national rate. In Memphis, there are still about two unemployed workers for each job opening advertised, about double the national rate, but well below the recession high of 7 persons per vacancy. Jonesboro was the fastest-growing metro area in the zone, also growing faster than the national rate. This was driven by strong growth in the service-providing sectors, more than offsetting the slower growth in the goods-producing sector (see figure). Average weekly hours worked by private-sector employees during the fourth quarter were slightly higher than the previous year in Memphis, but they were lower in Jackson and Jonesboro. Most business contacts surveyed in the zone expect hours worked will be about the same as last year, with only a few contacts expecting hours to rise. Most contacts also reported employment remained about the same as last year during the first quarter; a few contacts reported slightly higher employment. A majority of contacts expect employment levels will remain about the same through the second quarter. Employment growth stronger in Jonesboro Employment growth, percent change from year ago 5 Government Service-providing Goods-producing Nonfarm employment 4 3 2 1 0 -1 -2 -3 2008 2009 2010 2011 2012 2013 2014 2015 Source: BLS. Memphis Jackson Jonesboro, AR US Unemployment rate (Q4-15) (%) 6.3 6.0 4.3 5.1 Nonfarm employment (Q4-15) 1.7 1.7 3.7 2.0 Goods-producing sector 1.3 ▼ 0.5 1.9 1.0 Private service-providing sector 1.7 ▼ 2.2 4.9 2.5 1.5 1.1 0.4 Government sector -2.0 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 First Quarter 2016 Manufacturing Stalls in Memphis, but Continues To Grow in Surrounding Areas By Daniel Eubanks, Senior Research Associate “[Low oil prices have] reduced our sales to the oil industry.” — Memphis area manufacturer In the Memphis MSA, which includes parts of Mississippi, manufacturing employment was unchanged from one year ago. Gains in the durable goods sector were offset by declines in the nondurable goods sector. While manufacturing employment in Tennessee, Mississippi, and the U.S. as a whole grew at least 5 percent cumulatively over the past five years, manufacturing employment in the Memphis MSA has been flat over the same period (see figure). In Mississippi, nondurable goods manufacturing employment grew 3.7 percent year over year in the fourth quarter, the fastest growth in this sector in over a decade. Manufacturing exports from Tennessee fell slightly in the fourth quarter. The largest contributors to the decline were chemical products, transportation equipment, and food and beverage products. An increase in exports of electronics and machinery offset some of the decline. Manufacturing exports from Mississippi also fell in the fourth quarter, driven largely by declines in the value of exports of petroleum and coal products. Manufacturing contacts reported that falling oil prices have reduced demand from the energy sector. Employment in the transportation sector in Tennessee grew faster than the U.S. average in the fourth quarter, but slowed considerably from the previous quarter. Meanwhile, transportation sector growth in Memphis was revised downward to its slowest rate in over a year. “Investment projects and service have been delayed or canceled [because of low oil prices]” — Jonesboro, AR area manufacturer Manufacturing employment in Memphis has been flat over the past five years Cumulative percent growth since 2010 Q4 10 5 0 -5 -10 2010Q4 2011Q4 Memphis TN MS US 2012Q4 2013Q4 2014Q4 2015Q4 Source: BLS Memphis Tennessee Transportation employment (Q4-15) 3.0 4.0 Manufacturing employment (Q4-15) 0.0 Durable goods Nondurable goods Manufacturing exports (Q4-15) ▼ Mississippi US 2.8 2.8 2.6 2.3 0.4 0.3 2.7 1.6 -0.1 -0.3 2.5 3.7 1.0 -- -2.1 -7.7 -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 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 First Quarter 2016 Real Estate Conditions Show Modest Improvement By Usa Kerdnunvong, Research Associate “Commercial real estate projects are coming.” —Memphis area real estate contact Residential real estate activity continued to grow at a modest pace. Although still lagging the national rate, compared with the same period a year ago, Memphis year-to-date home sales increased for the third quarter in a row (see figure). Survey contacts expect these improvements to continue, with a consensus that the demand in the first quarter of 2016 was higher than last year. Residential real estate construction activity in the zone was mixed in the fourth quarter of 2015. Year-to-date single-family building permits were growing at a slower pace in Memphis and Jonesboro and declining in Jackson (see table). Memphis commercial real estate activity continued to be strong. Contacts reported slightly higher demand in apartment, retail, and office sectors. Asking rents continued to increase compared with the same period a year ago in most sectors. Asking rents in the industrial sector have been declining over the past four quarters. Commercial construction activity was strong. The combined value for current construction activity and new announcements was over $400 million in the apartment, office, and retail sectors. “Memphis is rising. Over $2.4 billion worth of major lifestyle, tourism, and medical-oriented projects have either been recently completed or are in progress.” —Memphis area business contact Memphis home sales rebounded Percent change from one year ago, year-to-date 16 US Memphis 12 8 4 0 -4 -8 Q3-13 Q1-14 Q3-14 Q1-15 Q3-15 Source: Memphis Area Association of Realtors. Non-residential market (Memphis, Q4-15) Apartment Office Retail Industrial 8.3 23.0 11.2 9.8 2.6 1.4 0.7 Residential market (Q4-15) Memphis Jackson CoreLogic Home Price Index 1.7 0.0 Single-family building permits 1.1 -17.3 New and existing home sales 5.5 -- 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 DTZ. Jonesboro ▼ ▼ -10.7 US 0.9 5.5 0.3 9.5 -- 7.4 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 the 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 First Quarter 2016 Household Debt Experiences Modest Growth By Joseph McGillicuddy, Research Associate “December was a banner month for auto retail, and I think the market slowed a little afterwards.” —Memphis area auto dealer “Lower gas prices are lessening the demand for smaller vehicles… and now consumers are shifting to SUVs and trucks.” —Northeast Mississippi contact Over the past several quarters, household debt balances in the zone experienced their fastest growth since the end of the recession, growing faster than U.S. debt balances but at a relatively modest rate compared with the pre-recession period (see figure). This recent growth corresponds to zone households unwinding their mortgage debt at a slower rate. Auto debt growth remained strong compared with the previous quarter, although slightly below the national rate. Reports from local auto dealers were mixed, including one local dealer who indicated that first-quarter sales fell below expectations after a strong December (see quote). Credit card debt balances continued to increase in the zone, growing faster than the U.S. average. Delinquency rates within the zone remained largely unchanged from the previous quarter. The zone’s mortgage delinquency rate exceeded the nation’s for the first time since the recession. Income per capita growth accelerated across Arkansas, Mississippi, and Tennessee in the third quarter of 2015. Both Arkansas’s and Tennessee’s growth rates exceeded the national average while Mississippi’s fell below it. Zone household debt balances continue to grow modestly Percent change in per capita debt balances from one year ago 15 Memphis Zone 10 US 5 0 -5 -10 2007 2009 2011 2013 2015 Source: FRBNY Consumer Credit Pa nel and Equifax. Memphis Zone Per capita personal income (Q3-15) Arkansas Mississippi Tennessee US -- 4.2 3.3 4.0 3.9 Mortgage -0.4 -0.1 1.4 0.6 -0.5 Credit card 3.4 2.9 5.4 2.4 2.7 Auto loan 9.2 10.4 9.8 9.7 9.5 Mortgage 2.0 1.5 2.0 1.4 1.9 Credit card 7.4 7.3 6.5 6.9 7.3 Auto loan 4.2 2.9 4.7 3.1 3.1 Per capita debt balances (Q4-15) 90+ day delinquency rates (Q4-15) (%) ▼ 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 First Quarter 2016 Business Lending and Asset Quality Trend Up; Profitability Mixed in Memphis Zone By Michelle Neely, Economist, and Hannah Shell, Senior Research Associate “Uncertainty concerning rates is impacting business lending decisions.” —Memphis banker “Construction and land development loan activity remains stable in the area.” —Northeast Mississippi banker Most bankers surveyed reported loan demand was about the same in the first quarter compared with the same time last year; the rest reported it was somewhat higher. Bankers expectations are evenly split between somewhat higher loan demand and unchanged loan demand in the second quarter compared with one year ago. Business lending continued to pick up in the first quarter. Almost all respondents reported stronger demand compared with the same time last year; one respondent said demand was unchanged. Bankers expect business loan demand in the second quarter to remain higher than year-ago levels. Profitability trends were mixed in the fourth quarter. Return on average assets (ROA) declined 6 basis points at Mississippi banks, but increased at Arkansas and Tennessee banks. The decline in ROA at Mississippi banks was driven by an increase in loan loss provisions. Asset quality improved across the zone. In the fourth quarter, the ratio of nonperforming loans to total loans declined 8 basis points at Arkansas and Mississippi banks and 14 basis points at Tennessee banks. The trends in delinquency rates were mixed in the first quarter. Bankers surveyed were evenly split between reporting delinquencies as unchanged, slightly higher, and slightly lower in the first quarter compared with the same period last year. Almost all respondents expect delinquencies to be unchanged in the second quarter. “The pressure on net interest margins is continuing and may continue as the yield curve is expected to flatten.” —Memphis banker Coverage ratios inch up as nonperforming loans decline Loan loss reserve coverage ratio, percent 250.0 US TN MS AR 200.0 150.0 100.0 50.0 0.0 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: FRED. Banking performance (Q4-15 ) Tennessee Mississippi Return on average assets 0.92 0.88 Net interest margin 3.64 3.70 Nonperforming loans / total loans 1.07 114.02 Loan loss reserve coverage ratio Arkansas 8th District US Peer Banks 1.26 1.05 1.11 4.25 3.78 3.81 1.10 1.13 1.04 1.07 103.64 110.62 120.19 122.43 ▼ 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 First Quarter 2016 Farm Income Remains a Concern, but Some Are Optimistic About Beef By Jonas C. Crews, Research Analyst All three states in the zone align with the U.S. winter wheat trend, as the low price received for the crop has driven down the acres planted in each state more than 10 percent relative to the 2015 crop. Meanwhile, farmers will not know whether the crop was damaged by December flooding until it has come out of dormancy and can be analyzed. With the recent period of reduced farm income and the expectation of continued tight margins for the near future, many contacts are reporting that farmers are unsure whether they should sell off their assets now or keep planting and hope for relief soon (see quote). Meanwhile, the decline in the number of farms has not yet accelerated for the states in the zone (see figure). The consistent decline is the result of longer-run economic factors, including the per-acre cost benefits of larger operations. While 2015 red meat production increased only for Tennessee relative to the previous year, one contact has noted growth in specific areas of the zone and believes the region is primed for growth in both cattle farming and red meat production during 2016 (see quote). In alignment with the rest of the country, mining and logging employment and coal production for the three states in the zone continued to decline as alternative fuel prices remained low. “Farmers are asking, ‘Do I continue to farm the acreage I currently farm or do I sell some equipment to reduce my debt load and let the less-productive acreage go?’ ” —Eastern Arkansas contact “Look for cattle numbers as well as beef production to continue to grow in 2016. ” —Northeast Mississippi contact Number of farm operations continues to decline Index, 2000=100 105 100 95 90 Arkansas Mississippi 85 Tennessee 80 75 2000 2003 Source: USDA-NASS. 2006 2009 2012 2015 Arkansas Mississippi Tennessee US Mining and logging employment -16.6 -18.3 -- -14.1 ▼ Coal production -24.5 -17.7 -16.8 -18.4 ▼ 6.5 2.3 ▲ Natural resources (Q4-15) Red meat production (2015) Share of national production Winter wheat, area planted (2016) -6.4 ▲ -13.8 ▲ <0.1 <0.1 0.5 100 -34.3 -33.3 -12.1 -7.2 Note: Va l ues (except for production 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 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 8 Appendix Cover Page Sources Bureau of Labor Statistics Unemployment rate, nonfarm payroll employment. Labor Markets First Quarter 2016 (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 Real Estate and Construction Bureau of Labor Statistics Table Sources 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. 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 Asking rent is the publicized asking rent price. Data are in current dollars. Average hourly earnings 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. Manufacturing and Transportation New and existing home sales consist of single-family home sales. Table Sources Bureau of Labor Statistics 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 Memphis 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 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). 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. 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 Federal Reserve Bank of St. Louis — Memphis Zone 9 Appendix First Quarter 2016 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) Red meat production, number of farm operations, and winter wheat planting estimates. Federal Reserve Bank of St. Louis — Memphis Zone 10