U.S. Federal Reserve Beige Book: Cleveland District (Text)

The following is the text of the Federal Reserve Board’s Fourth District -- Cleveland.

On balance, economic activity in the Fourth District grew at a modest pace during the past six weeks. Manufacturers reported some improvement in new orders and production. Car sales increased, while general retailing was flat to down slightly. Freight carriers saw a small rise in volume, and energy companies reported stable production. Residential and nonresidential construction remains sluggish. Demand for business loans showed some signs of a pickup, while consumer borrowing was weak.

Reports of rising payrolls in manufacturing, banking, and auto dealerships increased slightly since our last survey. Overall, staffing-firm representatives noted little change in the number of new job openings, with vacancies concentrated in the healthcare sector. Wage pressures continue to be contained. Apart from volatility in commodity prices, raw materials and product pricing were fairly steady.

Manufacturing

Reports from District factories indicated that new orders and production were either stable or rose modestly during the past six weeks. Production was higher on a year-over-year basis, with many contacts experiencing double-digit increases. Several manufacturers commented that opportunities continue to grow at a faster pace in offshore markets than domestically. In general, manufacturers are cautiously optimistic and expect at least modest growth during 2011. Steel producers and service centers reported that volume was either flat or improving, with shipments being driven by energy-related, auto, and heavy equipment industries. Two respondents commented that they are experiencing some difficulty filling orders due to capacity constraints and long lead times. Most steel executives we spoke with expect business activity to follow seasonal trends in the near term. Looking forward to the remainder of 2011, they anticipate modest growth at best. District auto production showed a moderate rise during October on a month-over-month and year- over-year basis.

Capacity utilization is trending up for some manufacturers and steel producers, while the majority said that utilization rates still remain below pre-recession levels. Inventories are balanced with incoming orders. Although there has been some increase in capital outlays, most producers are conservative in their planning. Several noted that new spending will be directed at their offshore facilities. Other than volatility in steel and commodity prices, the cost of raw materials has been relatively stable. Several manufacturers announced selective product price increases to reflect changes in steel, copper, and agricultural input prices. We heard a few reports that these adjustments are expected to become more widespread in 2011. About half of our contacts told us that they have expanded their payrolls slightly since our last report. Wage pressures are contained.

Real Estate

New home construction was generally flat at a low level during the past six weeks, with several builders reporting no sales. General contractors expect construction to remain sluggish going into the new year and their outlook for the remainder of 2011 is uncertain. Most new home sales are occurring in the move-up buyer categories. Spec inventories are intentionally being kept at low levels, and those who want to build have difficulty obtaining financing. A majority of our contacts reported lowering the list prices of their homes. Construction material costs have shown little movement since our last report. We have been hearing an increasing number of reports about subcontractors and building material suppliers going out of business. General contractors continue to work with very lean crews.

Discussions with nonresidential builders drew mixed responses. A majority of our contacts reported having less work than a year ago and seeing a slowdown in inquiries. Several builders characterized their backlogs as acceptable, but noted that they were down year-over-year. New projects are generally falling into the infrastructure category. The general consensus is for little change in business conditions in the near term. On balance, construction material prices have been stable. Two general contractors reported reducing their payrolls, while other builders said employment was steady. Subcontractors are still struggling and bidding at very competitive rates. Reports indicate that it is very difficult for subs to obtain credit.

Consumer Spending

Retail sales for the period from mid-September through mid-October were flat or down slightly when compared to the previous 30-day period. The exception was food retailing, where sales showed a modest improvement. When compared to year-ago levels, most retailers said that sales volume was similar or had increased. A few of our contacts noted that consumers have postponed buying cold-weather items. Expectations call for sales to improve somewhat through year’s end, reflecting the holiday shopping season. Households remain price sensitive and tend to purchase items only as needed, focusing more on necessities. Several retailers saw modest price increases from their suppliers, which they passed through selectively to customers. Half of our contacts plan to increase capital budgets in 2011, mainly for new stores and warehousing. Hiring will be limited to temporary holiday workers.

Most auto dealers saw a pickup in new vehicle sales during October on a month- over-month basis. Looking forward, dealers expect sales to follow seasonal trends through the winter months. However, they anticipate that volume will be higher than the prior year’s level. New car inventories rose during the past few weeks. Used vehicle purchases are flattening out since our last report. Little change in lending standards was reported, while credit pricing remains very competitive. We heard a few reports of incremental hiring at dealerships.

Banking

Bankers reported commercial loan demand was stable or showed modest growth since our last survey. Demand was driven primarily by companies in the energy, healthcare, and manufacturing sectors. Demand also came from firms seeking financing for mergers and acquisitions. On the consumer side, conventional loan demand remains weak, although several bankers reported that they are beginning to see early signs of growth. Consumer activity is strongest in indirect auto lending and home equity lines of credit. We heard a few reports that households are relying more heavily on debit cards and are bypassing credit, even if it means postponing a purchase. Interest rates for business and consumer credit moved by only a few basis points, with a slight bias to the downside. Most of our contacts said that the demand for residential mortgage refinancing remains strong, while new-purchase mortgage originations are weak.

Mortgage rates are stabilizing at historic lows. Core deposits continue to grow, with most of the growth occurring in nonmaturing products. Credit quality was generally characterized as either stable or showing a slight improvement, especially for business applicants. In total, delinquency rates are stable or trending down. However, delinquencies in some residential mortgage portfolios, though manageable, are either high or rising slightly. Several bankers reported that they have slowly increased their payrolls during the past few months, though some existing positions are being converted from full-time to part-time.

Energy

Reports indicate that oil and gas output from conventional wells was fairly steady during the past six weeks, with output expected to remain at current levels in the near term. Production from Marcellus shale was somewhat higher and is expected to continue to increase. Spot prices for natural gas are generally flat at a low level, which is putting downward pressure on capital spending. Oil prices continued on a slow upward trend. Coal production has been stable since our last report, with little change expected in the near term. However, one energy executive noted that international demand for coal is rising as an economic recovery in Europe builds momentum and traditional supply sources are being drawn to Asian markets. Spot and contract prices for coal were mixed but are tending to the down side. Other than a rise in fuel prices, equipment and material costs have been flat. Employment at energy companies has not changed recently.

Transportation

Freight transport executives reported that volume generally showed a modest increase during the past six weeks. Chemical shipments rose, while a decline was seen in apparel and building materials. Several carriers characterized their outlook as cautious, with some expectation for a slight drop in volume due to seasonal factors. Almost all of our contacts reported rising prices for fuel, with limited success at passing the increase through to customers. Capital outlays are expected to remain at relatively low levels until the pace of the recovery picks up. Although pent-up demand exists to replace aging equipment, high prices for new tractors and tight credit are limiting purchases. Two of our contacts said that they are now leasing equipment because of attractive rates. Wage pressures are beginning to emerge due to a growing problem with driver turnover and a tightening of the driver pool.

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