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Burgundy Book A report on economic conditions in the Louisville zone Fourth Quarter 2016 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. Current Economic Conditions Remain Strong, Business Optimism On the Rise Data Snapshot County unemployment rates (SA, Q3-16) 4.6% By Charles S. Gascon, Regional Economist The outlook of business contacts has considerably improved relative to one year ago. Fifty-seven percent of contacts expect local economic conditions to be better or somewhat better in 2017 relative to 2016. This is a 10-percentage-point increase from one year ago, when contacts were asked about their outlook for 2016 relative to 2015. Labor market conditions have remained strong. Payroll employment growth continued to exceed the nation’s growth in most areas of the zone in the third quarter, and unemployment rates remain below the national rate in all the metropolitan areas. Business contacts generally expect continued employment growth into the first quarter of 2017. Real estate conditions in the zone remain strong. While the pace home sales slowed in the third quarter, growth remains stronger than the national rate. Real estate contacts report strong demand, and house prices have continued to increase at a moderate pace. Households financial positions generally improved. Per capita personal income growth slowed a bit; growth remains strong in Indiana and fairly modest in Kentucky. Mortgage debt growth contracted between the second and third quarters while credit card and auto loan growth increased. According to banking contacts, loan demand remained unchanged in the fourth quarter relative to the same time last year, a slowdown in business lending was offset by stronger demand for consumer loans. Crop production estimates have changed considerably since our previous report, as Kentucky and Indiana corn production was marked lower while soybean production was marked up in both states. Note to readers: This will be the final Burgundy Book. Starting in 2017, zone-specific anecdotal information will be included in a supplement to the redesigned Beige Book. The Beige Book is released eight times per year, and the next release will be January 18. The regional economic data contained in the report is available in the St. Louis Fed’s FRED database and may be accessed through the Eighth District Economy webpage: research.stlouisfed.org/regecon. This report is published by the Federal Reserve Bank of St. Louis 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 (Q3-16) -10 -5 0 Total Nonfarm (100%) Trade, Trans., and Utilities (22%) Education and Health (14%) Prof. and Business Services (13%) Government (11%) Manufacturing (12%) Leisure and Hospitality (11%) Financial Activities (7%) Nat. Res., Mining, and Construction (4%) Other Services (4%) Information (1%) Louisville US 5 10 Fourth 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 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 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 November 8 to November 16. 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 Fourth Quarter 2016 Louisville Zone Labor Market Conditions Strong with Exception of Evansville By Paul Morris, Research Associate Labor market conditions have remained strong since the third quarter. Unemployment rates in each of the five MSAs remained below the national rate, and employment growth exceeded the national rate in every MSA but Evansville. In addition, half of business contacts surveyed reported that fourth quarter employment has been higher or slightly higher than it was a year ago. Performance in the goods-producing sector was generally strong. Despite exceeding the national rate in every MSA but Evansville, growth did slow in Louisville, Evansville, and Elizabethtown relative to the pace experienced a year ago. Service-sector performance remained strong, with the strongest growth in Louisville, Elizabethtown, and Owensboro and moderate growth in Bowling Green. Evansville continued to see negative growth in both the goods-producing and service-providing sectors for the third consecutive quarter (see figure). Anecdotal evidence suggests that the labor market remains tight, as Louisville-area contacts in manufacturing, transportation, and information technology continue to report difficulties hiring qualified employees. About two-thirds of contacts surveyed reported that wages have been higher or slightly higher in the fourth quarter than the same period a year ago. “The pressure to find, add, and retain workers in the Louisville area continues and is a significant contributor to the pressures on wages.” —Louisville area business contact “We have been having difficulties hiring qualified employees as they are in such high demand.“ —Louisville area information technology contact Evansville employment growth continues to dip Sector contributions to employment growth, percent change from year ago 4 3 2 1 0 -1 -2 Government -3 Service providing -4 Goods producing -5 Nonfarm Employment -6 2009 2010 2011 2012 2013 2014 2015 2016 Source: BLS Louisville Evansville Bowling Green Elizabethtown Owensboro US Unemployment rate (Q3-16) (%) 4.2 4.3 4.1 4.5 4.3 4.9 Nonfarm employment (Q3-16) 2.5 -0.9 1.9 3.6 2.5 1.7 Goods-producing sector 1.8 -1.1 4.8 3.7 2.7 0.2 Private service-providing sector 3.3 -1.1 1.8 3.0 3.0 2.2 0.2 -1.1 4.6 0.0 0.7 Government sector -1.5 ▲ Note: Unless otherwise noted, values are percent change from one year ago. Arrows indicate a significant (± 1 standard deviation) change from the previous quarter. See appendix for notes and sources. Federal Reserve Bank of St. Louis — Louisville Zone 3 Manufacturing and Transportation Fourth Quarter 2016 Manufacturing Remains Strong in Louisville By Daniel Eubanks, Senior Research Associate Durable goods sector drives manufacturing employment growth in Louisville Manufacturing employment continued to grow at a strong pace in the Louisville MSA even as manufacturing employment decreased nationwide. Employment in the sector increased by 4.6 percent year-over-year in the third quarter, compared with 3.7 percent last quarter and 2.8 percent two quarters ago. The durable goods sector drove almost all of the employment growth (see figure). “We’ve seen increased demand for HVAC products.” – Southern Indiana manufacturer In Kentucky, growth in the durable goods sector offset the decline in the nondurable goods sector. However, the durable goods sector grew more slowly than in the previous quarter, while the pace of job losses accelerated in the nondurable goods sector. Overall, manufacturing employment increased slightly. Manufacturing exports from Kentucky increased even as total manufacturing exports from the U.S. decreased. The increase was driven almost entirely by increased exports of transportation equipment. Employment growth in the transportation sector slowed across the Louisville zone. In the Louisville MSA, the pace of transportation sector job growth has decreased for eight consecutive quarters and is now at its slowest pace since 2013. Growth also slowed in Kentucky, Indiana, and in the nation overall. Percent change from one year ago 16 14 12 10 8 6 4 2 0 -2 Durable goods contribution Nondurable goods contribution Total manufacturing 2013 2014 2015 2016 Source: BLS Louisville Kentucky Indiana US Transportation employment (Q3-16) 1.3 2.8 2.3 0.9 Manufacturing employment (Q3-16) 4.6 0.9 -0.9 -0.4 Durable goods 6.8 3.2 -2.2 -1.1 Nondurable goods 0.1 -3.3 2.4 0.8 -- 12.4 -1.3 -3.7 Manufacturing exports (Q3-16) Note: Values are percent change from one year ago. Arrows indicate a significant (± 1 standard deviation) change from the previous quarter; see appendix for notes and sources. Federal Reserve Bank of St. Louis — Louisville Zone 4 Real Estate and Construction Fourth Quarter 2016 Office Vacancy Rates Tick Up; Construction Activity Remains Strong By Joseph McGillicuddy, Senior Research Associate Louisville home sales growth has declined slightly since the previous quarter, but outpaced the national rate. Local contacts continued to report strong demand but indicated that sales have been hampered by limited inventory. House prices continued to increase in all four major MSAs within the zone but at rates below the national average. Still, the Louisville metro area experienced relatively robust growth of around 5 percent for a third consecutive quarter. The Louisville office vacancy rate has ticked up in the past two quarters after declining for most of the past four years. This increase can be attributed to a large jump in the vacancy rate for Class A office properties, the result of new inventory coming online (see figure). “Homebuyer demand remains very strong. However the amount of acceptable inventory remains low.” Louisville construction activity strengthened in the third quarter. Local contacts reported seeing an increase in speculative building for a variety of property types. The amount of industrial space under construction remained nearly double that of a year ago. —Louisville real estate contact “Speculative industrial warehouse construction is approaching record levels for the Louisville Metro.” —Louisville real estate contact “Industrial speculative construction is on-going with leasing activity staying constant.” —Louisville real estate contact Louisville Class A office vacancy rates tick up Percent 18 16 14 12 Overall 10 2012 2013 Class A 2014 Classes B and C 2015 2016 Source: Reis.com. Non-residential market (Louisville, Q3-16) Apartment Vacancy rate (%) 4.8 Asking rent Office Retail 14.7 ▼ 3.1 ▼ 8.6 0.9 Industrial 3.3 Percent change from one year ago Note: Apartment, office, and retail values are from Reis.com. Industrial values are estimates from Cushman & Wakefield. Residential market (Q3-16) Louisville Clarksville Elizabethtown Evansville 6.2 0.5 US CoreLogic Home Price Index 4.8 0.9 1.9 3.9 5.8 Single-family building permits 19.8 10.9 -0.4 8.9 8.3 New and existing home sales 7.7 -- -- -- 4.1 Note: Sales and permits data are year-to-date percent change. Prices are percent change from one year ago. Arrows indicate a signficant (±1 standard deviation) change from the previous quarter. See appendix for notes and sources. Federal Reserve Bank of St. Louis — Louisville Zone 5 Household Sector Fourth Quarter 2016 Households Reduce Their Mortgage Debt After a Year of Expanding Their Balances By Rodrigo Guerrero, Research Associate The mortgage debt growth rate dropped by over 3 percentage points, with households reducing their balances for the first time since the second quarter of 2015. This decline is consistent with the national trend (see figure). Meanwhile, mortgage delinquency rates remained largely unchanged and close to the national rate. Reports from auto dealers on sales halfway through the fourth quarter were mixed, with some reporting slightly lower year-over-year sales and others indicating that sales exceeded expectations. Though still elevated and slightly above the national rate, auto debt growth decelerated in the third quarter. Auto delinquency rates in the zone remained largely unchanged and slightly below the national rate. The credit card debt growth rate was slightly positive and over a percentage point lower than the national rate. Credit card delinquency rates in the zone, Indiana, and Kentucky remained below the national rate. “Gas prices and interest rates, which continue to be lower than expected, as well as new model launches had a positive impact on sales, exceeding our initial projections.” Real per capita income growth decreased in Indiana, Kentucky, and the U.S. as a whole. While Kentucky’s rate continued to be above the national rate, Indiana’s rate remained below it. —Louisville auto dealer “The market is slowing down for auto sales.” —Northwest Kentucky auto dealer Mortgage debt balances fall in the zone and the nation Percent change from one year ago 2 Louisville Zone US 0 -2 -4 -6 -8 -10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Source: FRBNY Consumer Credit Panel and Equifax. Louisville Zone Per capita personal income (Q2-16) -- Indiana Kentucky 2.0 US 1.1 1.4 Per capita debt balances (Q3-16) ▼ -1.3 ▼ -2.0 ▼ Mortgage -1.9 -1.5 Credit card 0.3 1.1 1.6 1.7 Auto loan 6.6 6.2 6.6 6.2 Mortgage 1.3 1.3 1.3 1.4 Credit card 5.8 5.6 6.1 7.0 Auto loan 3.1 3.7 3.6 ▼ 3.4 90+ day delinquency rates (Q3-16) (%) 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 . Future releases of these data are available in The Quarterly Debt Monitor . See appendix for a link to the report. Federal Reserve Bank of St. Louis — Louisville Zone 6 Banking and Finance Fourth Quarter 2016 Consumer Borrowing Growth Offsets Slowing Commercial Lending in Louisville By Michelle Neely, Economist, and Evan Karson, Research Associate Asset quality improves across Louisville zone Nonperforming loan ratio at commercial banks, percent According to banking contacts, overall loan demand across the Louisville zone remained unchanged in the fourth quarter relative to yearago levels. A slowdown in lending to businesses offset an increase in demand for consumer loans, according to contacts. However, expectations among zone bankers are that commercial and industrial loan (C&I) demand will rise in the first quarter of 2017 on a year-over-year basis. Contacts indicated that, in the fourth quarter, the creditworthiness of applicants for C&I loans weakened slightly compared with last year. However, credit standards for loan approvals in the fourth quarter remained stable relative to year-ago levels across all loan categories and are not expected to waver in the first quarter of 2017, according to survey respondents. Compared with year-ago levels, return on average assets (ROA) in the third quarter declined slightly at banks in Indiana due in part to a 10-basis-point drop in the average net interest margin (NIM). ROA at Kentucky banks rose 5 basis points from its year-ago level, while NIM remained unchanged over the same period. “Uncertainty about the stability of local industry and declines in gross revenues from agricultural production are hampering overall lending.” — Louisville banker “Low mortgage rates have caused an increase in new construction loans for housing, giving us a good opportunity to expand our construction-to-permanent offerings.” — Southwest Indiana banker Asset quality in the zone improved slightly during the third quarter relative the previous quarter. The ratio of nonperforming loans to total loans fell 4 basis points at Kentucky banks and 5 basis points at Indiana banks, which was consistent with national trends. 4.5 4.0 US 3.5 Indiana 3.0 Kentucky 2.5 2.0 1.5 1.0 0.5 0.0 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: FRED. Banking performance (Q3-16 ) Kentucky Indiana 8th District US Peer Banks Return on average assets 1.07 1.05 1.12 1.09 Net interest margin 3.78 3.58 3.70 3.80 Nonperforming loans / total loans 1.03 0.86 0.94 1.01 119.42 131.40 121.28 123.76 Loan loss reserve coverage ratio Note: Values are percentage points. Arrows indicate a significant ( ± 1 standard deviation) change from the previous quarter. See appendix for notes and sources. Federal Reserve Bank of St. Louis — Louisville Zone 7 Agriculture and Natural Resources Fourth Quarter 2016 Soybean Yields at Record Levels; Agricultural Land Value Growth Slowing By Jonas C. Crews, Research Associate The zone’s crop production estimates vary significantly from expectations reported in the previous report. The estimated changes in Kentucky and Indiana corn production from last year were each more than 10 percentage points below expectations. In contrast, Kentucky and Indiana soybean production growth were 4 percentage points and 8 percentage points higher than expectations, respectively. The change is a result of yield estimates that are significantly better than expectations. In particular, the estimated Kentucky soybean yield is equal to the state record, while the Indiana yield estimate is three bushels higher than the state record (see figure). Strong yields are helping create another year of large U.S. grain supply, which contacts note will keep prices low heading into the next crop season. With crop prices remaining low, agricultural land price growth is slowing in the zone, and contacts believe that farmland prices could delcine if the crop price environment does not improve soon. “Yields are excellent and the weather was good. All the extra grain means more stock, which means crop prices stay low.” Declines continue for zone coal production and related employment in mining and logging. However, year-over-year, Kentucky coal production declined significantly more slowly in the third quarter than in the second quarter (see table). —Kentucky agricultural goods producer “We could see farmland prices falling if things stay the way they are.” —Kentucky agricultural goods producer Indiana and Kentucky soybean yields at record levels Bushels per acre 60 50 40 30 20 Indiana Kentucky 10 0 1950 1957 1964 1971 1978 1985 1992 1999 2006 2013 Source: USDA-NASS. Indiana Natural resources (Q3-16) Mining and logging employment Coal production Estimated production (2016) Corn Cotton Rice Sorghum Soybean Kentucky US -9.5 -18.9 -14.9 -17.1 -20.3 16.5 ---21.9 -0.5 ---0.9 ▲ -13.8 11.9 25.4 22.1 -22.6 11.0 ▲ ▲ ▲ 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 or yea r. 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. Fourth Quarter 2016 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. See The Quarterly Debt Monitor for future releases https://www.stlouisfed.org/publications/quarterly-debt-monitor 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 (Food Manufacturing); 312 (Beverage and Tobacco Product Manufac- Federal Reserve Bank of St. Louis — Louisville Zone 9 Appendix Fourth 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) Production and yield estimates. Federal Reserve Bank of St. Louis — Louisville Zone 10
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