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 moderate pace since our last report. On balance, demand for manufactured products grew at a moderate rate. Housing market activity dipped slightly, while nonresidential builders saw an overall pick up in business. Reports on retail purchases during October were mixed. New-motor-vehicle sales posted moderate gains on a year-over-year basis. Wet-gas production in the Marcellus and Utica shales rose sharply between the second and third quarters of 2013. The rate of decline in coal production is slowing. Freight volume remains above year-ago levels. Applications for business and consumer credit rose slightly.
Hiring was sluggish across most industry sectors, though we did see a pickup in construction. Staffing-firm representatives reported that the number of job openings and placements increased slightly, with vacancies found primarily in healthcare and manufacturing. Wage pressures remain contained. Input and finished goods prices saw little change, apart from increases in residential construction materials and steel.
Reports from District factories showed that demand was steady to growing at a robust pace during the past six weeks. Companies seeing the strongest activity were suppliers to the aerospace, housing, motor-vehicle, and oil and gas industries. A few contacts noted that they are starting to see improvements in European markets. Defense contractors are still coping with uncertainty, due primarily to government fiscal issues. Compared to a year ago, manufacturing production levels are mainly higher. Looking forward, most of our respondents expect little change in demand other than normal seasonal variation, though several manufacturers cited the regulatory environment and the dampening effect it could have on confidence. Steel producers and service centers reported that shipping volume is below expectations due in part to customers keeping their inventories at low levels. Most of our respondents remain concerned about the quantity of steel imports, though a few noted that they are beginning to see a decline in the amount being imported. Steel producers do not expect market conditions to change appreciably in the next few months apart from seasonal variation. District auto production was strong during October, with production numbers showing sizeable increases on a month-over-month and year-over-year basis.
Capacity utilization rates have risen during the past few months for some of our contacts, but almost all reported sufficient capacity to absorb additional demand spikes. Only one contact reported that he is considering expanding capacity. Capital expenditures are in line with budgeted amounts for the fiscal year. Outlays are being allocated primarily for productivity enhancements and information-technology upgrades. Several manufacturers indicated that they are taking a more conservative stance toward upcoming capital budgets until there is a higher degree of certainty about the economy. Growth in raw material and finished goods prices was generally flat. We heard a few reports about rising steel prices, which manufacturers successfully passed through to their customers. Factories expanded payrolls at a sluggish pace.
Sales of new single-family homes declined slightly during the past six weeks, which builders attributed to seasonal factors and a lowering of consumer confidence. Multifamily construction remains strong. New-home contracts were found mainly in the move-up price-point categories. The first-time home-buyer category remains very weak. Selling prices of new homes continued on a steady upward trend due to rising costs (labor and materials) and low inventory in desirable areas. One builder noted that he has seen three price increases in the past year. Builders are confident that demand for new homes will persist, and sales should pick up after the first of the year.
Nonresidential builders reported an overall pick up in business. Smaller projects are filling the pipeline at this time, while very large projects are few in number. With respect to the latter, uncertainty about the strength of the economy and fiscal issues are keeping investors from moving forward. Most of our contacts indicated that they are comfortable with the number of inquiries they receive and their backlogs. However, several builders emphasized that clients are only closing on projects that are viewed as crucial to their businesses. The strongest activity was in manufacturing, distribution, shale gas, commercial development, and multifamily/affordable housing. Our contacts are cautiously optimistic about near-term prospects but are expecting slow growth at best.
Prices for residential construction materials--lumber and drywall--have increased substantially in the past year, but the rate of increase is slowing. General contractors reported moderate hiring in their apartment management divisions, while the hiring of field and back-office personnel was more limited. Many of our contacts noted increases in health-insurance premiums. Builders cited a scarcity of high-skilled trade workers. As a result, there is upward pressure on wages, and subcontractors are demanding and getting higher rates.
Reports on retail purchases during October were mixed. Retailers who saw flat or lower sales relative to September attributed it in part to a weakening in consumer confidence. A full-service food retailer noted a proliferation of dollar stores, which are attracting a rising share of his lower-income customers. Stores seeing increased sales credited a larger product selection and wider use of promotions. Most of our contacts said that year-over-year sales were higher. Products in greater demand included core goods and cold-weather apparel. One of our contacts expects that electronics purchases will pick up once the holiday shopping season gets under way. Projections for the fourth quarter call for flat to moderately higher sales relative to the same time period last year. Inventories were described as being in good shape. Vendor and shelf prices held steady. Some retailers expect to increase capital spending in 2014, mainly for improving e-commerce and distribution systems. Temporary hiring for the holiday shopping season is expected to be flat compared to 2012, though one chain reported that it plans to hire about 10 percent more holiday workers this year. Another retailer reported that it is very difficult to hire the number of temporary workers needed for a regional distribution center.
Year-to-date sales through October of new motor vehicles showed a moderate increase when compared to the same time period in 2012. On a month-over-month basis, purchases of new vehicles were slightly lower during October versus September. Although buyers continue to prefer smaller, fuel-efficient vehicles, there was a pickup in sales of crossovers and SUVs. New-vehicle inventories were characterized as very good to a little high. Aggregate unit volume projections for 2013 were mixed. In some regions of the District, our contacts believe that volume will be 10 percent to 12 percent higher year-over-year. In other regions, such as those that are dependent on the coal industry for income, dealers are projecting little change from a year ago. Used-vehicle purchases showed a large increase from September to October. Employment levels rose slightly across dealerships.
Demand for business credit grew slightly during the past six weeks. No loan category or industry is performing significantly better than others, although many bankers noted that commercial-real-estate lending has picked up. Downward pressure on commercial-loan pricing was described as moderate to strong. Consumer credit was little changed. Home-equity products and auto lending drew the highest demand. A large regional banker observed that credit-card usage is falling below expectations. Most contacts reported a slowdown in residential mortgage activity, which they attributed to seasonal factors and a rise in interest rates. The shift from refinancings to new-purchase applications continued. For the most part, delinquency rates were stable or declining. No changes to loan-application standards were reported. Core deposits by businesses and consumers grew. On balance, banking payrolls were flat.
Aggregate coal output across the District remains below year-ago levels. A large production decline in eastern Kentucky is being partially offset by modest increases in Ohio, Pennsylvania, and northern West Virginia. Going forward, little change in output is projected. Spot prices for steam and metallurgical coal have declined since our last report. There has been little change in the number of drilling rigs across the District since the beginning of August. However, production from the wet-gas regions of the Marcellus and Utica shales has grown significantly in the third quarter of 2013, when compared to the second quarter. Higher production was attributed to the completion of pipeline connections and the startup of gas-processing plants. We heard one report about plans to construct six additional wet-gas processing plants in the state of West Virginia. Well-head prices for natural gas remain at low levels, with some volatility seen in oil prices. Coal operators and oil and gas producers reported that capital outlays were at targeted levels. Some oil and gas companies plan to increase spending in the first quarter of 2014 for land acquisition and drilling. Production-equipment and material costs were stable. Payrolls and wages held steady.
Freight executives reported that the slowing in the rate of revenue growth that began early in the third quarter has continued. However, year-to-date shipping volume is higher when compared to the same period in 2012. The industry outlook is favorable, with volume expected to grow at a slow, but steady pace. Operating costs were stable. A few contacts noted that they have successfully negotiated rate increases, although increases fell below desired levels. Capital outlays for new tractors were somewhat higher than planned for the current fiscal year due to capacity expansion or OEM price incentives. The industry has been actively hiring for replacement and to a lesser degree, adding capacity.
SOURCE: Federal Reserve Board