The following is the text of the Federal Reserve Board’s Fourth District-- Cleveland.
FOURTH DISTRICT - CLEVELAND
Economic activity in the Fourth District continued to expand since our last report, but at a slower pace. On balance, manufacturers reported a slight rise in production. New-home construction ticked down, while nonresidential builders saw stronger inquiries. Retailers and auto dealers noted little change in sales during May. Wet shale gas drilling and production increased, though the demand for coal has slowed. Freight transport volume moved lower. And there was some easing in the demand for business credit.
Little hiring was reported across industry sectors. Staffing-firm representatives indicated that the largest numbers of job openings were found in healthcare and information technology. Wage pressures are contained. Input prices were stable, apart from the volatility in residential building materials.
Manufacturing. On balance, District factories reported a slight increase in new orders and production during the past six weeks, although we continued to hear reports about a weakening in orders from European customers. Almost all of our respondents said that output was above year-ago levels. The outlook by manufacturers was mixed. Respondents who sell products to aerospace, auto, and energy companies expect moderate growth in the near term. Other contacts are less certain about growth prospects than they had been a few months earlier. Shipping volume by steel producers and service centers was flat or down slightly, with demand being driven mainly by the transportation and energy sectors. Because of uncertainty about market conditions in the upcoming months, many steel producers are in the process of lowering their inventories. District auto production showed a moderate pick-up during May on a month-over-month basis, while rising substantially from year-ago levels. Increased production year-over-year was attributed mainly to the abatement of supply chain issues.
Capacity utilization was at normal levels for most producers after adjusting for seasonal factors. Capital budgets remain on track, with several contacts reporting that they intend to ramp up spending during the second half of the year. Three manufacturers said that they are currently planning capacity expansions. Raw material prices were stable or declined slightly. Most steel makers lowered their prices; otherwise, producer prices held steady. Little change in payrolls was noted, although attracting skilled workers remains difficult. Wage pressures are contained.
Construction. Single-family home construction slowed a bit across the District relative to the March/April time frame, although sales were higher compared to year-ago levels. The outlook by homebuilders is less favorable than in our last report. They believe that the domestic political climate and a lowering in consumer sentiment may hurt sales. Contracts were in all price-point categories, except for the high-end. Buyers are looking to downsize and are noticeably more cost conscious. A few reports indicated an uptick in new-home prices within the Fourth District, though margins are still tight. Volatility in building material prices, which began late in the first quarter, has persisted.
Nonresidential contractors described current business conditions as good and much better than a year ago. Inquiries were strong, which should help bolster near-term backlogs. Projects were broad based, driven by education, healthcare, manufacturing, and multi-family housing. Financing has become more readily available, except for speculative projects. The outlook is fairly positive, but builders are concerned about the upcoming elections and events in Europe and the impact they could have going into 2013. We heard reports of a slight rise in building material prices. Even with the pickup in volume, residential and nonresidential builders have been reluctant to hire additional workers. One builder commented that he is hesitant to add workers until he has a backlog of two-to-three years. Residential and commercial subcontractors have kept their billing rates steady.
Consumer Spending. Retailers reported little change in sales during May on a month-over-month basis, but sales were higher relative to year-ago levels. Increased revenues were seen across retail categories. Two of our contacts noted that the warm winter weather did not negatively impact consumer spending during the second quarter. Other respondents reported that the rate of growth in purchases of luxury goods has decelerated during the past couple of months. Retailers anticipate that revenues during the third quarter will be above prior-year levels, mainly in the single digits. Vendor prices were fairly stable. Increases were attributed to higher costs for off-shore labor. Little change was noted in store prices. Inventories continued to rise modestly, but they were described as manageable. Capital spending for the year remains on target. No hiring is anticipated, except at new stores, and wage pressures are contained.
Auto dealers described new-vehicle purchases as steady during the past six weeks, when compared to earlier in the second quarter. Any slowdowns were attributed to seasonal factors or a poor inventory mix, although most dealers are satisfied with their inventory positions. Volume was higher on a year-over-year basis. Dealers reported that sales of fuel-efficient vehicles and trucks are doing particularly well. Leasing continued to grow in popularity. The outlook by dealers for the remainder of 2012 is cautiously optimistic, with many expecting that total sales for the year will equal or be slightly above 2011 levels. Purchases of used vehicles were fairly steady on a year-over-year basis, although some dealers were unhappy with the quality of their inventory. Hiring for sales and service positions was at a very slow pace. Difficulty in finding qualified service technicians has resulted in some wage pressure.
Banking. Bankers reported some easing in demand for business credit. Interest rates remain competitive, especially for refinancings. Loan requests were broad based, with the primary drivers being healthcare, multifamily construction, and shale-gas-related businesses. Little change in consumer credit was noted. Products in highest demand were auto loans (direct and indirect) and home equity lines of credit. Consumer credit pricing trended down slightly. In the residential mortgage market, demand was described as stable to very strong. A high percentage of applicants were looking to refinance, although a few contacts said that they are beginning to see a shift in applications from refinancing to new purchase. Two bankers reported some moderate loosening of auto lending guidelines, otherwise no changes were made to loan application standards. Delinquencies were steady or declined and a few of our respondents cited a drop in credit card delinquencies. Core deposits rose; consumers continued to transition from time-deposit accounts to transaction accounts. One banker reported a moderate reduction in the size of his workforce, while another said that his bank is considering a staff reduction due to the low interest rate environment.
Energy. Conventional oil and natural gas production was stable, with little change expected in the upcoming weeks. Well-head prices for natural gas remain at very low levels, while crude prices dropped slightly. Permitting in the Utica shale region of Ohio expanded. The number of Utica permits issued by the Ohio Department of Natural Resources during the first half of 2012 equaled the number issued for all of 2011. Drilling in the Utica shale has picked up, mainly by large, out-of-state companies. Coal production this year is expected to fall below 2011 levels due primarily to reduced demand from electric utilities. Spot prices for metallurgical and steam coals declined further. Production equipment and materials prices were flat, and capital outlays were at projected levels. Significant layoffs were announced by one coal producer due to the idling of some of its mining operations. Otherwise, little change was seen in energy payrolls.
Transportation. Freight transport volume was flat or moved slightly lower during May on a month-over-month basis. Sectors driving demand included energy and transportation along with seasonal products. The outlook for the remainder of 2012 remains positive, but most respondents do not expect that growth will be as strong as they had predicted earlier in the year. Costs associated with truck maintenance and diesel fuel prices continued to stabilize. Capital spending for 2012 remains on plan. Outlays are allocated for the replacement of aging units and adding capacity. However, some slowing in spending might occur due to concerns about economic growth and industry consolidation. One contact noted that he is finalizing plans for a terminal expansion in the eastern part of the District. Companies are hiring for replacement and capacity expansion. Wage pressure exists due to a tightening of the driver pool.