WASHINGTON — Banks are seeing mostly positive or neutral trends in loan demand and broader economic indicators in the first six weeks of 2017, and are cautiously optimistic about future economic performance, according to a Federal Reserve report released Wednesday.

In its Beige Book report outlining summaries of economic activity and sentiments compiled by the 12 regional Fed banks every six weeks, the Fed noted that the economy continued to expand “at a moderate to modest pace” since the beginning of the year. Bank lending overall was steady or somewhat improved, with some districts reporting increased optimism among lenders that loan demand and economic activity would increase in the next six months.

“Most contacts continued to note the increased optimism of Wall Street investors and larger Main Street businesses but also noted increased uncertainty, especially for consumers and small businesses,” the Philadelphia Fed noted. “In general, banking contacts continued to express cautious optimism for slow, steady growth.”

Some districts reported especially robust economic activity in certain sectors. The Richmond Fed said that it had experienced “record strength in container volume” in shipping ports, while “competition among banks remained fierce.” The Cleveland Fed noted that consumer spending through internet sales had increased while in-store retail spending remained flat.

Federal Reserve building.
"Most contacts continued to note the increased optimism of Wall Street investors and larger Main Street businesses but also noted increased uncertainty," the Fed said in its Beige Book. Bloomberg News

Other regions saw areas of weakness, however. The Cleveland Fed noted that some commercial real estate developers are forfeiting collateral rather than repaying development loans because “many retail properties are worth less than the loan value.” The St. Louis Fed reported especially low credit quality among agricultural loan applicants, while the Dallas Fed said that already high subprime automotive loan delinquency was increasing. The New York Fed said that small and midsize banks were experiencing “weaker demand for consumer loans and residential mortgages” and “higher delinquency rates across all loan categories except commercial mortgages.”

Banks nonetheless appear to expect that economic activity will increase, and many say the expectation of regulatory relief from the incoming administration will help augment that boost.

The Cleveland Fed noted that bankers’ outlook is “more positive since the presidential election because of an increase in consumer and business confidence,” and the Richmond Fed said “bankers expressed optimism that regulatory changes under the new administration would be more favorable.” Bankers told the St. Louis Fed that they expect “modestly higher loan demand and the possibility of regulatory relief reducing compliance costs.”

But other sectors are less optimistic. Some manufacturers told the Boston Fed that they were concerned “about policy changes from the new administration,” particularly those related to immigration and tax reform. One manufacturer said that “a border adjustment tax would have a big effect on where they located future production facilities and they would be reluctant to commit to new investment without some resolution of the issue,” while another said that “restrictions on the H1B Visa program would affect his ability to staff positions.”

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