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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

Business activity in the Fourth District expanded at a modest pace since our last report. Manufacturers reported that new orders and production were stable. Single-family home building remained sluggish, while construction of multi-family housing rose. Inquiries to nonresidential builders picked up some, but backlogs are still low. Retail sales increased slightly. Auto dealers described sales of new and used vehicles as very good. Shale gas drilling and production continued to expand. Freight transport volume was stable. The demand for business credit grew moderately, while consumer loan demand was weak.

Hiring remains at a low level across almost all industry sectors. Staffing-firm representatives reported modest growth in the number of new job openings and placements, with vacancies concentrated in professional business services and energy. Wage pressures are contained. Respondents noted some upward pressure on prices, especially for metals and petroleum-based products.

Manufacturing. New orders and production at District factories were stable along seasonal trends during the past six weeks. Compared to year-ago levels, output was mainly higher. Most of our contacts are cautious in their outlook but expect little change in demand during the upcoming months. Steel producers and service centers reported that shipping volume was steady or slightly lower, with demand being driven by energy and industrial equipment industries. Steel representatives remain hopeful that current volume can be maintained, although some seasonal slowing is expected. District auto production held steady in October on a month-over-month basis. Compared to year- ago levels, output rose moderately, more so for domestic nameplates.

Manufacturers remain committed to their capital spending plans, with many steel companies expecting to increase outlays during the upcoming months. Capacity utilization remains below normal at most factories, while steel producers saw their utilization rates at or near normal levels. Inventories are in line with sales for a majority of our contacts. Reports on raw materials prices were mixed. Half of our respondents said that prices were steady or declining; others told us that prices continue to rise, but at a slower rate than earlier in the year. Increases were mainly associated with metals and petroleum-based products. Changes in raw materials prices were passed through to customers. New hiring remains at a low level. Those adding to payrolls found it difficult to recruit highly skilled workers. Wage pressures are contained.

Construction. Single-family home construction remained sluggish, while activity in multi-family housing and remodeling expanded. Sales contracts were mainly in the move-up price-point categories. Several builders reported that difficulty in obtaining financing is preventing them from adding to their spec inventory. Little change is expected in residential building for the next one to two years. Not much difference was seen in the list prices or discounting of new houses since our last report. The pickup in hiring by general contractors that occurred late in the summer has diminished.

Activity in nonresidential construction for small to medium-size builders was described as steady or slowly improving. While the number of inquiries has picked up recently, the biggest challenge facing builders at this time is adding backlog. One contractor commented that the incubation period for public infrastructure projects can be as long as five years. Construction contracts were primarily in education, manufacturing, energy, and research and development. Looking forward, builders expect modest growth at best during the next six months. We heard several reports of upward pressure on prices for copper and steel, though the price of lumber declined. Construction managers are in the process of laying off seasonal workers.

Consumer Spending. Retailers saw a slight improvement in sales during October, when compared to September’s results, with several of our contacts noting a pickup in purchases of cold- weather-related items and home furnishings. Transactions were also ahead of last year’s levels, mainly in the mid-single digits. Looking ahead to the holiday shopping season, retailers expect stronger sales on a year-over-year basis. We continued to hear numerous reports about upward pressure on supplier costs, particularly for packaging, fuel, and agricultural commodities. A few retailers reported that suppliers have held off passing through the entire price increase, but they may be less reluctant to do so in 2012. Retailers were also selective about passing through rising prices to consumers. Reports on profit margins were mixed. Capital budgets remain on plan. Most of our contacts said that outlays during 2012 will not change appreciably from this year’s levels, and that they will be used mainly for technology enhancements, e-commerce investments, and remodeling. Little change in payrolls is expected at existing stores. Seasonal hiring at some stores will be slightly higher than in 2010.

Auto dealers characterized new-vehicle sales during October as very good, with most of our contacts reporting higher sales volume when compared to year-ago levels. Demand was strongest for fuel-efficient, less-expensive cars, and crossover vehicles. Inventories continue to be rebuilt but remain below what 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 up substantially since the beginning of October; prices remain elevated. Two dealers noted that there has been a sharp increase in manufacturers’ incentives, which they attributed to the model-year changeover. The few dealers looking to hire reported that it is difficult to find qualified candidates, especially sales representatives and service technicians.

Banking. Demand for business loans showed a moderate improvement, although a few community bankers observed some weakening. Requests are being driven by energy, manufacturing, multi-family housing, and healthcare. Reports indicate continued downward pressure on interest rates for commercial credit. On the consumer side, our contacts described installment loan activity as flat or down; however, direct and indirect auto lending continued to show strength. Interest rates remain very competitive. Activity in the residential mortgage market has slowed since our last report, with most applicants looking to refinance. Many bankers noted a pickup in the number of applicants who are refinancing into 15-year mortgages. No changes were made to loan application standards. Overall core deposits continue to grow, although several bankers reported that the growth is being driven by business customers. Delinquencies were steady or declined across loan categories; any stress was mainly on the consumer side. Payrolls were stable, with little hiring expected in the near-term.

Energy. Conventional oil and natural gas production rose moderately during the past six weeks, while drilling was little changed. Our contacts were somewhat uncertain about future activity due to falling prices for natural gas. Well-head prices for oil were fairly stable. Activity in shale-gas extraction continued to expand. One report characterized production from confirmation wells drilled in Ohio’s Utica shale as good. Coal output is expected to be stable for the remainder of this year, though increases are possible in 2012 as a result of growing demand from export markets and domestic utilities. There is some uncertainty surrounding utility demand due to abundant supplies of low-priced natural gas and regulatory compliance issues for coal-fired generators. Spot prices for coal showed normal fluctuations. Capital outlays are on target, with moderate increases projected by oil and gas companies in the upcoming months. The cost of production equipment and materials was flat during the past six weeks. Energy payrolls held steady.

Transportation. On balance, freight transport volume was stable over the past six weeks and up slightly on a year-over-year basis. Rising demand was seen from the retail and energy (shale gas and coal) sectors. Our contacts expect volume to grow at a slow, steady pace in the near term. We heard numerous reports of rising prices for tires, parts, and equipment, and of some volatility in fuel prices. Much of the cost increase was recovered via fuel surcharges and rate adjustments when contracts came due. Capital outlays have accelerated during 2011 relative to prior-year levels. Spending is mainly to replace aging equipment and to support demand growth, especially from energy customers. All of our contacts reported hiring for driver replacement or adding capacity, although recruiting qualified drivers was difficult. Wage pressures are emerging due to a tightening of the driver pool.

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