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

The economy in the Fourth District grew at a slow pace during the past six weeks. Manufacturers reported that new orders and production were stable. Single-family home construction improved slightly, while nonresidential builders saw a drop-off in inquiries and weak backlogs. November retail and motor vehicle sales were little changed from the prior month. Activity in shale gas drilling and production expanded. Freight transport volume slowed along seasonal trends. The demand for credit by businesses and households was characterized as either steady or increasing slightly.

Labor market reports indicated that hiring remains at a low level, while recruiting high-skilled workers was difficult. Staffing-firm representatives saw growth in the number of new job openings, with vacancies concentrated in healthcare and energy. Wage pressures were largely contained. Other than a boost in steel prices, upward pressure on raw material prices has abated.

Manufacturing. New orders and production at District factories were mainly stable during the past six weeks. Any declines were attributed to seasonal factors or lessening demand from European and Chinese customers. Compared to year-ago levels, the majority of our contacts noted a moderate improvement in output. However, they are cautious in their outlook and expect little change in demand during the upcoming months. Most steel producers and service centers reported that shipping volume was steady along seasonal trends, although two of our contacts noted an unexpected pickup for this time of year. Demand is being driven by autos, energy, and heavy equipment industries. Steel representatives are hopeful about the first quarter of 2012, and most expect to see at least modest growth. District auto production showed a substantial decline during November on a month-over-month basis, more so for foreign nameplates. Most of the decline was attributed to supply chain issues. Year-over- year, domestic auto producers’ output rose significantly, while their foreign counterparts posted moderate declines.

Capacity utilization was below normal at most factories, while steel producers saw their utilization rates at or near normal levels. Inventories were in line with sales for the majority of our contacts. Manufacturers told us that their capital outlays have reached targeted levels for the year. Only a few respondents indicated that they expect to significantly raise their capital budgets for 2012. Other than steel, raw material prices were steady during the past few weeks. We heard several reports about steel producers raising their prices and the possibility of a second round of increases early in 2012. New hiring remained at a low level. Those adding to payrolls found it difficult to recruit professional and high-skilled production workers. Wage pressures are contained.

Construction. Single-family home construction was described as better during the past couple of months, with sales contracts distributed across all price-point categories. Builders were slightly more optimistic in their outlook, but they are not expecting an industry turnaround in the near term. We heard a report that homebuilders’ inventories are on a decline in some parts of the District, which should help boost new-home construction during 2012. Not much change was seen in the list prices of new homes, though two of our contacts noted a greater use of discounting. A few subcontractors attempted to raise billing rates, but they were unsuccessful. Employment and wages were stable.

Activity in nonresidential construction for small to medium-size builders was steady, although the number of inquiries has fallen off during the past few weeks. The biggest challenges facing nonresidential contractors continue to be financing projects and adding to backlog. Construction contracts were primarily with manufacturers and health-care providers. Builders are uncertain about future prospects. One contractor noted that he does not expect a major pick-up through at least the first half of 2012. On balance, building material prices were stable. The number of reports about sub contractors going out of businesses rose, while general contracting payrolls showed a slight decline.

Consumer Spending. Retailers reported that November sales were stable or slightly higher relative to October sales. According to a few of our contacts, a milder than expected autumn was holding back purchases of cold weather-related items, while purchases of electronics and home furnishings were better than expected. On a year-over-year basis, results were mixed. Sales for the first quarter of 2012 are generally expected to improve over prior-year levels, mainly in the low- to mid-single digits. Some retailers expressed caution about 2012 given the fragility of household balance sheets. Upward pressure on supplier costs has abated during the past six weeks. Inventories were characterized as good except for apparel items, which are higher than desired. Capital budgets were on plan. Most of our contacts said that outlays during 2012 will not change appreciably from this year’s levels and that outlays will be used mainly for technology enhancements and remodeling. Other than seasonal hiring, there was little change in employment at existing stores.

Auto dealers reported that new-vehicle sales during November remained strong. On a year-over-year basis, sales volume was largely higher. Dealers saw robust demand for all vehicle types. A few dealers noted that their inventories are now adequate. Others said that inventories are low, which they attributed to brisk sales. The outlook for 2012 is somewhat tentative, mainly because of uncertainty. Purchases of used vehicles have fallen off slightly, due in part to a supply shortage. We heard reports about some easing of credit restrictions, while interest rates were very competitive. Dealers are investing in manufacturer- mandated facility upgrades and imaging programs. 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 was characterized as either stable or increasing. Requests are being driven by commercial real estate, notably multifamily housing, and healthcare. On the consumer side, our contacts described installment loan activity as flat or up a bit. Auto lending (direct and indirect) and home equity lines of credit continued to show strength. Bankers said that they have not seen a bump up in the use of credit cards during the holiday shopping season. Interest rates for business and consumer credit were very competitive. Activity in the residential mortgage market has been solid in the fourth quarter, driven by low interest rates. Most applicants are looking to refinance. No changes were made to loan application standards. Delinquencies were steady or declined across most loan categories; any stress was found in real estate portfolios and credit cards. Overall core deposits grew, although a few bankers commented that growth is being driven by business customers. Payrolls were stable, with little hiring expected in the near term.

Energy. Conventional oil and natural gas production was mainly steady during the past few weeks, with little change expected in the upcoming months. Our contacts were uncertain about future gas drilling due to eroding natural gas prices. Well-head prices for oil were flat, but remained elevated. Activity in shale-gas extraction expanded. Coal output was stable, though it may decline during 2012 due to an easing in demand for thermal and metallurgical coals from European customers and domestic power producers. The latter was attributed to abundant supplies of low-priced natural gas and regulatory compliance issues for coal-fired generators. Spot prices for several types of coal have fallen off. 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 generally flat during the past six weeks. Energy payrolls held steady. A few small oil and gas producers are beginning to experience wage pressures brought on by competition from large firms engaged in shale gas exploration and production.

Transportation. Freight transport volume has slowed during the past few weeks, following seasonal trends. Strong demand was still seen from the energy and manufacturing sectors. Our contacts expect volume to grow at a slow, steady pace during 2012, with predictions in the mid-single digits. We heard numerous reports of rising prices for parts, especially tires, 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 were on plan for 2011. Most of our contacts expect to increase their capital budgets during 2012 for fleet expansion and to replace aging equipment. Operators reported hiring for driver replacement or adding capacity, although recruiting qualified drivers is difficult. Wage pressures exist due to a tightening of the driver pool.

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