Fed report: Most near-term outlooks see modest economic growth; coronavirus, presidential election called potential risks

Ten of the Federal Reserve’s 12 districts said economic activity expanded at a modest to moderate rate in recent weeks, though two districts – St. Louis and Kansas City – reported no change, according to a report released Wednesday by the Fed Board.

The report – the Fed’s Beige Book covering information collected in the central bank’s districts on or before Feb. 24 – also pointed to the coronavirus and the coming presidential election as potential risks ahead.

Trends overall included continued growth in consumer spending, though growth was uneven and included mixed reports on auto sales. Overall loan growth was flat to up modestly, according to most districts; notable exceptions were St. Louis, New York, and Kansas City, where declines were reported. Residential home sales, on the whole, picked up modestly.

Reports on 10 out of the 12 districts – all but Boston and Minneapolis – also summarized banking and financial services trends:

  • New York: Financial sector contacts reported flat to weaker activity, and expressed ongoing concern about the business outlook. Small to medium-sized banks in the district reported lower demand for consumer loans but higher demand for residential mortgages, including refinancing, as well as commercial loans and mortgages. Bankers reported unchanged credit standards for all loan categories, narrowing spreads on residential mortgages and commercial mortgages, and widespread decreases in the average deposit rate. Finally, bankers reported little change in delinquency rates across the board.
  • Philadelphia: Financial firms continued to report modest growth in overall loan volumes (excluding credit cards) on a year-over-year basis. Credit card lending also remained at a modest pace. During the current period (reported without seasonal adjustments), volumes appeared to grow robustly for commercial real estate and other consumer loans (not elsewhere classified). Home mortgages grew moderately, commercial and industrial loan volumes grew modestly, and auto lending appeared flat. No major category was negative on a year-over-year basis. Banking contacts continued to express few concerns over credit quality and lending standards at their own institutions, but some were critical of “crazy deals,” especially from nonbank competitors. One large bank noted that loan quality was “eerily quiet.” Most banking contacts were optimistic about the overall health of the U.S. economy going forward but expressed concerns over the potential impact of the coronavirus.
  • Cleveland: Overall, loan demand was stable. On the consumer side, while some bankers reported that lower interest rates spurred growth in mortgage demand, others noted the usual first-quarter decline in consumer credit card balances. On the commercial side, loan demand was balanced. One banker noted that some new capital projects were initiated at the beginning of the year, while others reported slower demand for commercial credit as trade tensions and weakness in the manufacturing sector weighed on business activity. Some contacts noted a sense of caution among their commercial clients; a few mentioned that the typical first quarter decline in deposits was less severe than usual. Contacts speculated there is a possibility that businesses are holding more cash reserves because of uncertainty about the outlook.
  • Richmond: Overall, loan demand grew slightly since our previous Beige Book. Bankers indicated that commercial real estate and commercial and industrial lending improved slightly, though several banks mentioned that much of commercial borrowing now is outside the traditional banking system and that most of their new lending was for refinancing existing debt rather than new capital expenditures. Residential mortgage lending, auto loans, and demand for other consumer credit grew moderately, attributed in part to low rates. Meanwhile, credit standards, delinquencies, and credit quality were reportedly unchanged at good levels. Despite several bankers citing fierce competition, deposits increased modestly in recent weeks.
  • Atlanta: Conditions at financial institutions remained stable. Margins at banks were steady as lower loan yields were offset by a decline in interest expense. Loan growth was positive but continued to moderate as demand for commercial and industrial loans weakened, and banks tightened underwriting standards for credit cards and vehicle lending. Loan growth was lowest among smaller community banks. Asset quality remained strong, as there was little change in the level of nonperforming assets.
  • Chicago: Financial conditions were unchanged over the reporting period. Participants in the equity and bond markets reported little change in conditions on balance, citing the positive impact of low interest rates but the negative impact of the coronavirus outbreak. Business loan demand increased slightly overall. Contacts reported increased volumes in the commercial real estate, trucking, construction, and auto sectors, though some of the increase appeared to reflect greater borrowing needs due to lower revenues. Loan quality was little changed overall, though one contact said that the warm winter had led to greater delinquencies for natural gas producers. Lending standards were generally unchanged. Consumer loan demand increased modestly, led by growth in mortgage volumes for home purchases and refinancing; loan quality and standards were little changed.
  • St. Louis: Banking conditions in the District have weakened slightly since the previous report. Demand for mortgages, commercial and industry loans, and auto loans all decreased slightly relative to one year ago. Bankers expect no change to overall loan demand in the second quarter of 2020. Credit standards were little changed compared with year-ago levels but are expected to tighten slightly in the next quarter. Delinquencies increased on a year-over-year basis and are expected to remain unchanged in the second quarter.
  • Kansas City: Overall loan demand declined modestly in the District since the previous survey due to modest decreases in the demand for consumer, commercial real estate, and commercial and industrial loans. Bankers indicated less movement in the demand for agricultural and residential real estate loans, with a slight downtick in the demand for agricultural loans and a slight uptick in the demand for residential real estate loans. Loan quality improved modestly over the past year, and bankers expected a slight increase in loan quality in the next six months. Compared to the previous survey period, credit standards remained stable and deposits increased modestly.
  • Dallas: Growth in loan demand increased moderately over the reporting period. Overall, loan volumes increased, driven primarily by a sharp rise in residential real estate loans. Commercial and industrial loan volumes decreased over the reporting period. Loan pricing continued its marked decline, and a majority of bankers continued to report no change in credit standards. Growth in general business activity picked up notably, and expectations for activity in the next six months improved significantly.
  • San Francisco: Lending activity grew further. Reports noted stronger demand for new mortgages, refinancing credit, and auto loans. Lending to the commercial sector also increased relative to the previous reporting period, especially for industrial real estate. Agricultural lending weakened in the Pacific Northwest. Overall, capital levels and asset quality remained high. Tighter competition for loans narrowed net interest margins and profitability. Credit availability was generally stable, and underwriting standards tightened somewhat. An investment financier in California reported stable private equity conditions.

Beige Book (March 4, 2020)