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 modest pace since our last report. Manufacturers reported a small increase in production, while activity in residential and nonresidential construction picked up slightly. Many retailers and auto dealers characterized February sales as good. Energy production was stable except for shale gas, where activity expanded. Freight transport volume trended higher at a moderate rate. And the demand for business and consumer credit improved slightly.
Hiring remains at a low level and was mainly limited to the manufacturing and freight transport sectors. Staffing-firm representatives reported that the number of job openings has increased, especially for information technology and healthcare workers. Wage pressures are largely contained. Prices were largely stable apart from increases in petroleum-based products, metals, and some building materials.
Production at District factories showed a small increase during the past six weeks, and a majority of manufacturers said that output was above year-ago levels. However, several contacts reported that the boost in new orders they had seen late last year is leveling off and they are uncertain about sales to European customers. Some of our respondents expressed a more cautious outlook than at the start of 2012, but they are not expecting a significant weakening. Shipping volume by steel producers and service centers was trending slightly higher. Demand is being driven by the auto, energy, and industrial equipment markets. Steel representatives are cautiously optimistic about second-quarter shipments, and they expect the positive growth trend to continue. District auto production showed a modest rise during February on a month-over-month basis, while increasing substantially from prior-year levels. Increases were attributed, in part, to the abatement of supply chain issues.
Capacity utilization has returned to normal rates for the majority of our contacts, while inventories were consistent with demand. Capital budgets remain on track, with many manufacturers reporting that they plan to increase outlays during the next several months. Input- cost changes were mainly limited to rising prices for petroleum-based products and metals. Only a few producers said that they are considering raising product prices during the second quarter. Manufacturers continued to hire, but at a modest pace. We heard reports about difficulties recruiting professional and high-skilled production workers. Wage pressures are contained. Several contacts said that they need to allocate additional monies for pension plans due to low rates of return.
Single-family-home construction has improved slightly during the past couple of months, although overall sales remain at very low levels. Activity in multi-family construction and remodeling remains strong. Single-family-home builders are a little more optimistic in their outlook due to the time of year and low mortgage interest rates. A few builders reported reducing house sizes and altering interior specs as a means of holding new- home prices steady. Employment and wages were stable.
Activity in nonresidential construction for small to medium-size contractors continues to strengthen and is at a higher level than a year ago. Inquiries were up substantially for most of our contacts, although backlogs, while growing, are not as strong as builders would like. Financing projects remains one of the biggest challenges facing contractors. Construction activity is broad-based, driven by student housing, senior housing, healthcare, office, and manufacturing. Our contacts expect that business will slowly improve as the year progresses, but it will remain below pre-2008 levels. Looking at building-materials prices, residential and nonresidential contractors reported increases for petroleum-based products, drywall, and lumber. Hiring by nonresidential general contractors was limited. Several commented that they need to see more robust growth before expanding their payrolls.
Retailers reported that sales were ahead of plan during the past six weeks and increased by single digits relative to year-ago levels. Almost all of our contacts cited the unusually warm weather as a primary factor for the pickup in sales, which was seen across their product lines. However, several of our respondents described middle-income households as challenged. These consumers are trading down, looking for value, and they remain very sensitive to rising gasoline prices. Most retailers expect second-quarter sales to increase over prior-year levels, mainly in the low- to mid-single digits. However, grocers anticipate little change in sales. Reports on vendor pricing were mixed. Upward pressure was attributed mainly to rising transportation and offshore labor costs, with little emphasis on changes in raw material pricing. There was some reluctance to pass through rising costs to consumers. Inventories were characterized as being in good shape. Capital spending for the year remains on track. Outlays will be used largely for technology enhancements, distribution facilities, store expansions, and new store construction. Little hiring is anticipated except at new stores.
Auto dealers described new-vehicle sales during February as good. Sales received a boost from the unusually warm weather. We heard one report of a shale gas producer purchasing 75 vehicles from a dealer. On a year-over-year basis, sales were mainly higher. However, some dealers reported seeing a lull in activity, which they attributed to a significant pick up in vehicle leasing at the beginning of 2011. Inventories are light on the domestic side, but foreign nameplates are rebuilding stocks rapidly, as those manufacturers are trying to recapture market share. The outlook for the remainder of this year was mixed. Half of our contacts expect the rise in 2011 sales will be repeated, while others believe that the rate of increase seen last year is unsustainable. Purchases of used vehicles were fairly strong. On the financing side, interest rates are competitive, but it remains difficult to arrange financing for customers with low credit scores. Auto dealers are hiring at a very slow rate.
Demand for business credit was described as either steady or rising, with a majority of bankers telling us that loan pricing remains competitive. Requests are being driven by commercial real estate, including multifamily housing, and healthcare. Consumer credit requests rose slightly during the past six weeks. Demand was mainly for auto lending (direct and indirect) and home equity lines of credit. Several community bankers commented that it is difficult competing against large banks, credit unions, and captives, especially for motor vehicle loans. In the residential mortgage market, demand was described as steady to very strong. A high percentage of applicants are looking to refinance. No changes were made to loan application standards. Delinquencies were generally steady or declined; any increases were found largely in real estate portfolios. Core deposits continued to grow. Payrolls were stable, with little hiring expected.
Conventional oil and natural gas drilling and production were flat since our last report, with little change expected in the upcoming weeks. Our contacts attributed these conditions to low natural gas prices and regulatory costs. Well-head prices for oil were up slightly. Leasing activity in Ohio’s Utica shale continues to expand, and energy companies are redeploying drilling resources from dry gas to the wet gas areas of the Marcellus shale due to its significantly higher market value. The outlook for coal production during 2012 is similar to 2011 levels. However, there is a growing likelihood that output will decline due to the regulatory environment and lessening demand from electrical utility companies and offshore markets. Spot prices for metallurgical and steam coals continued to decline. Production equipment and materials prices were fairly steady except for rising diesel fuel prices and the cost of items tied to steel. Energy payrolls were stable, though some small oil and gas companies are considering layoffs because of reduced revenues.
Freight transport volume has been trending higher during the past few weeks. Industries driving demand include energy and metals. One executive noted a significant upswing in long-term leasing of his railroad cars. Volume is expected to continue growing at a moderate pace for the remainder of the year. Costs associated with truck maintenance have begun stabilizing after increasing for two consecutive quarters. The price of diesel fuel continues to rise, although a few of our contacts characterized it as manageable. Some of the increase was passed through via surcharges. Capital spending for 2012 remains on plan. Outlays are allocated for replacement of aging units and adding capacity, although it remains difficult to recruit qualified drivers. We heard two reports of additional drivers being hired to meet potential staffing requirements under the new hours-of-service rules. Some wage pressure exists due to a tightening of the driver pool.