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U.S. Federal Reserve Beige Book: Cleveland District (Text)

Oct. 10 (Bloomberg) -- The following is the text of the Federal Reserve Board’s Fourth District-- Cleveland.


Business activity expanded in the Fourth District since our last report, although the rate of growth remains modest. On balance, manufacturing output rose. In the real estate sector, nonresidential construction picked up, while reports on single-family housing starts were mixed. Sales of existing family homes increased. Retailers and auto dealers saw a modest improvement in sales during August and September on a year-over-year basis. Shale gas activity continued at a robust pace, while coal production fell below prior-year levels. The slowdown in freight transport volume, which began in the second quarter, has abated. And the demand for business and consumer credit moved slightly higher.

Little net hiring was reported across industry sectors. We heard a number of reports that recruiting qualified workers for open positions remains difficult. Staffing-firm representatives said that the number of job openings and placements has slowed during the past six weeks. Vacancies were found primarily in healthcare and manufacturing. Wage pressures are contained. Input prices were stable, apart from increases in some agricultural commodities and petroleum-based products.

Manufacturing. District factories reported that production levels were stable or increased during the past six weeks, while new orders weakened. Rising production was mainly limited to goods sold to the construction, energy, and transportation sectors. Compared to prior-year levels, output was higher for a majority of our contacts. Several producers pointed to a rise in inventories, but said that they are manageable. The outlook by manufacturers was mixed. Steel producers and service centers reported that shipping volume was flat or down and they continued to reduce their inventory. A seasonal pickup that typically begins in September has yet to materialize. Several contacts noted that competition (volume and pricing) from offshore producers has intensified. Steel producers do not expect market conditions to change appreciably in the upcoming months. District auto production recovered in August on a month-over-month basis, as auto plants returned to normal production schedules. Compared to a year ago, production figures were down slightly for domestic producers, while showing a moderate rise for foreign nameplates. The latter is attributable to the abatement of supply chain issues.

Little change in capacity utilization was reported, although a majority of our contacts said that rates were slightly below normal levels. Capital spending remained on track, but several producers intend to delay some projects during the upcoming months. Raw material prices were either flat or trended lower, while finished goods prices were steady. Little change in payrolls was noted, although attracting skilled workers remains very difficult. Wage pressures are contained.

Real Estate. Reports from home builders on single-family housing starts were mixed. Compared to a year ago, construction activity was described as similar. On balance, builders expect a modest rise in new-home construction in the near term. Spec building remains on the low side, due in part to difficulty in obtaining financing. List prices of new-homes held steady, though most builders indicated that they have cut back on discounting. Sales contracts were found across all price-point categories. Reports of higher prices for lumber, shingles, and concrete were widespread, rising mainly in the mid-single digits. Sales of existing homes continued to show improvement, although inventory is tight in the mid-price range.

Nonresidential contractors reported that business activity continued to improve, and most are satisfied with their backlogs going into 2013. Project work is driven by industrial (manufacturing and energy), education, healthcare, multi-family housing, and some public works. Most contractors expect that the momentum built up this year will be maintained in 2013, though some commented that customers seemed hesitant about moving forward at this time. Material price increases were mainly limited to petroleum-based products.

Residential and nonresidential builders reported little change in their payrolls. Some seasonal layoffs are expected. A few builders said that they would like to hire more workers but are hesitant to do so because of uncertainty surrounding the upcoming election and the fiscal cliff. Wage pressures are contained, but sharp increases in health insurance premiums were noted by many contacts. Subcontractors are holding their prices steady and many are finding it difficult to recruit skilled trades.

Consumer Spending. Retailers reported a modest improvement in sales during August and September relative to year-ago levels. Consumers have responded positively to new lines of fall merchandise and back-to-school sales were characterized as good. Some retailers noted that consumers in middle-income brackets have entered a holding pattern until after the elections. Our contacts expect growth in the fourth quarter to be in the low-to-mid single digits relative to 2011. Vendor pricing has been stable, with little change in shelf prices. Grocery store chains reported that their costs have risen due to the summer drought. Attempts at passing through higher food prices were met with mixed results. Capital spending for the year remains on target. Two retailers noted that they may accelerate spending before year’s end, mainly for distribution equipment. No permanent hiring is expected other than at new stores. The number of temporary workers expected to be hired for the upcoming holiday season is planned to be a little higher than last year.

New-vehicle sales were stronger in August and September when compared with the same time period a year ago. Dealers reported that sales of fuel-efficient cars and crossover vehicles are doing particularly well. New-vehicle inventories increased since our last report and most dealers described them as acceptable. Dealers expect little change in monthly sales for the remainder of 2012. Used-vehicle sales were flat, which was attributed primarily to a lack of inventory. Most dealers reported that credit is more readily available and leasing is growing in popularity. Hiring for sales and service positions remains at a slow pace. Recruiting qualified people is challenging.

Banking. Demand for business credit moved slightly higher since our last report, with requests mainly for commercial loans and refinancings. Several small business owners told us that it remains difficult for them to obtain credit. The interest rate environment was described as very competitive. Consumer lending was up a little, driven by demand for auto loans and home equity lines of credit. In the residential mortgage market, activity is fairly strong. Although a majority of applicants are still looking to refinance, many bankers noted an increase in new-purchase requests. No changes were made to loan application standards. Delinquency rates continued to improve across consumer loan categories; however, several bankers reported an uptick in delinquencies from commercial customers. Core deposits grew, especially in transaction accounts. Bankers expect little change in payrolls for the remainder of this year.

Energy. Conventional oil and natural gas production held steady during the past six weeks, with little change projected in the upcoming months. Wellhead prices for natural gas rose slightly. Drilling rigs are migrating from other states to Ohio to take advantage of the higher-priced wet gas found in the Utica shale. To date, 375 permits have been issued in Ohio for drilling horizontal shale gas wells. Thirty wells are now producing, with 50 expected to be in production by year’s end. Coal producers reported production declines in 2012 of between 10 and 50 percent over prior-year levels due to lower demand from electric utilities and a stricter regulatory environment. Reports of idled mines are widespread. Spot prices for export metallurgical coal declined further, while domestic steam coal prices rose slightly due to tight supplies. Production equipment and materials prices were flat in most categories, other than for diesel fuel. Capital outlays remain at projected levels. Several coal operators announced layoffs. In Ohio, a regulatory agency more than doubled its employment size over the past 12 months to cope with expanding shale gas activity.

Freight Transportation. Reports on freight transport indicated that volume is returning to normal trends after a second-quarter slowdown. Industries which contributed to the pickup include automotive, construction, and shale gas. However, lower-than-expected harvests have negatively impacted revenues for some carriers. Most of our contacts believe that their companies’ growth objectives for 2012 will be met. Apart from fuel prices, costs associated with truck maintenance held steady. Carriers have successfully passed through higher diesel prices via a surcharge. Reports on capital spending were mixed. Half of our contacts said that 2012 expenditures are on track. Others reported a slowdown or postponement in purchasing new trucks, citing a sluggish economy, uncertainty about the fiscal cliff, and difficulty obtaining financing. Hiring is for replacement and adding capacity. Recruiting qualified personnel remains difficult, which is contributing to wage pressures.

SOURCE: Federal Reserve Board

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