U.S. Federal Reserve Beige Book: Cleveland District (Text)
The following is the text of the Federal Reserve Board’s Fourth District-- Cleveland.
FOURTH DISTRICT - CLEVELAND
Economic activity in the Fourth District increased slowly during the past six weeks. Manufacturers reported stable production but a small decline in new orders and backlogs. Energy companies noted little change in output. Freight transport volume trended slightly higher. Retail sales rose slightly, whereas new-car purchases were reported as mixed. Home builders are increasingly turning to multi-family development as a revenue source, and nonresidential contractors struggled to rebuild their backlogs. The demand for business credit continued to slowly improve, while consumer loan demand was generally weak.
The pace of hiring seen earlier in the third quarter has diminished, especially in the manufacturing and energy sectors. Staffing-firm representatives reported a drop-off in the number of new job openings, with vacancies concentrated in technical occupations and healthcare. Wage pressures are contained. Prices for materials used by manufacturers and building contractors were fairly stable or fell slightly.
Manufacturing. Production at District factories during the past six weeks was mainly stable along seasonal trends, with minor declines in new orders and backlogs. Compared to year-ago levels, output was moderately higher. Most of our contacts expect near- term weakening in demand, but not to levels seen in the last recession. Steel producers and service centers reported that shipping volume was flat or somewhat higher. Shipments are being driven by transportation, energy, and industrial-equipment- related industries. Steel reps are cautious in their outlook but remain hopeful that current volume can be maintained. District auto production rose significantly in August on a month-over- month basis due to production starts on the 2012 models and the abatement of supply disruptions from Japan. Year-over-year output also rose, but the increase was limited to domestic nameplates.
Manufacturers remain committed to their capital spending plans for 2011; however, a few of our contacts indicated that they are considering pulling back on spending for 2012. Capacity utilization remains below normal at most factories, while steel executives reported that their utilization rates were at or near normal levels. Inventories are in line with sales. Reports on raw materials show that prices were stable or declined slightly. Nonetheless, several manufacturers announced modest price increases that will go into effect early in the fourth quarter. Expectations for rising steel prices were short-lived. Hiring has diminished since our last report. Manufacturers who have added to payrolls reported that it was difficult to recruit highly skilled workers. Wage pressures are contained.
Construction. Single-family home construction remains at a low level; however, several builders noted a recent pick up in traffic and inquiries. Sales contracts were evenly distributed across price-point categories. Half of our contacts reported that constructing and managing multi-family developments now accounts for most of their work. One contractor remarked that his business has shifted to renovating foreclosed houses and renting them. A few builders reported that they would like to increase their spec inventory, but it remains difficult to obtain financing. Expectations call for little change in residential building in the near term. Not much difference was seen in the list prices or discounting of new homes since our last report, while building material prices showed normal fluctuations. We heard comments about subcontractors attempting to raise their prices to cover rising costs, but these attempts were mainly unsuccessful. General contractors added slightly to their payrolls. Any increases in take-home pay are being offset by substantial increases in health insurance premiums.
Activity in nonresidential construction for small to medium-size builders remained fairly weak, with much of their work limited to expansions and lower-budget projects. However, the number of inquiries has picked up slightly since our last report. The biggest challenge facing builders at this time is adding backlog. Construction contracts were primarily with health care providers and manufacturers, while a decline was seen in government-funded projects. Looking forward, our contacts expect modest growth at best during the next six months. Building material prices held steady. One builder mentioned that his firm recently purchased construction equipment for the first time since 2007. Construction payrolls and wages were stable.
Consumer Spending. Retailers described their sales for the period from mid-August through late September as slightly higher than during the previous six weeks. On a year-overyear basis, transactions also improved, mainly in the low single digits. Many of our contacts reported that customers were particularly interested in items that are new and innovative. Looking ahead to the fourth quarter, retailers expect sales to rise in the low- to mid-single digits on a year-over-year basis; however, grocers anticipate little change. We continued to hear about some upward pressure on supplier prices, although it mainly affects food products and items manufactured from cotton. In response, retailers were selective about the amount of the price pressures they passed through to consumers. Reports on profit margins were mixed. Capital budgets remain as planned. Half of our contacts said that outlays are higher than a year ago, and that they are used mainly for remodeling, constructing new stores, and e-commerce infrastructure. Little change in payrolls is expected at existing stores.
Reports on new-vehicle sales from mid-August through late September were mixed. On a year-over-year basis, vehicle purchases improved for most of our contacts, with several noting double-digit increases. Demand for fuel-efficient, less- expensive cars continued to grow, although the market for crossover vehicles remains fairly strong. Inventories are rebuilding, especially for Japanese cars, but remain below what many dealers would like. Dealers are cautious in their outlook due to uncertainty about the economy and the availability of vehicles that consumers want to buy. Demand for used cars is steady but down slightly from earlier in the year. We heard a few reports of some easing in credit restrictions, while banks and credit unions continued to price loans very competitively. Many dealers are in the process of initiating factory-mandated programs for showroom upgrades and reimaging. The pickup in dealer hiring that we saw a couple of months ago has diminished. The few dealers who are looking to hire report that it is difficult to find qualified candidates.
Banking. Demand for business loans showed a moderate improvement, with requests being driven mainly by commercial real estate, manufacturing, and healthcare. Reports indicated downward pressure on interest rates for commercial credit. On the consumer side, bankers reported that applications for home equity lines of credit have declined, and they characterized installment loan activity as flat or down. However, direct and indirect auto lending continued to show strength. Applications for refinancing residential mortgages have picked up due to lower interest rates, with little activity in new purchases. No changes were made to loan application standards. Since our last report, many of our contacts have experienced substantial growth in core deposits from consumers and businesses. Delinquencies were mainly steady or declined across loan categories. Payrolls were stable, with only very selective hiring expected for the remainder of the year.
Energy. Conventional oil and natural gas drilling and production were fairly stable during the past six weeks, while activity in Marcellus and Utica shales expanded. A few producers expect output from conventional wells to increase in the upcoming months. Wellhead prices paid to independent producers remain on a downward trend. Little change in coal output is anticipated for the remainder of this year and into 2012. Spot prices for coal increased slightly. Capital outlays are on target, with moderate increases projected by oil and gas companies in the upcoming months for drilling new wells. The cost of production equipment and materials was flat during the past six weeks. Energy payrolls held steady.
Transportation. Overall, freight transport volume continued on a slight upward trend, with increases seen in consumer products, including furniture. Most of our contacts expect volume to grow at a slow, steady pace in the near term. Although diesel fuel prices have moderated, a few contacts noted that their companies still have a fuel surcharge in place. Truck maintenance costs continued to rise. Two of our respondents have successfully increased their shipping rates as customer contracts came up for renewal. Capital outlays have accelerated during 2011 relative to prior-year levels. Spending is mainly to replace aging equipment and to support demand growth from energy customers. One executive noted that newer engines and class 8 trucks are increasing in price, and that it is becoming more difficult to secure financing. Hiring has been largely for driver replacement; however, we heard a couple of reports about carriers adding capacity. Wage pressures are emerging due to a tightening of the driver pool.
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