Nov. 28 (Bloomberg) -- 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. On balance, manufacturing orders and production rose. Residential and nonresidential construction activity increased, with particular strength noted in the multi family segment. Realtors reported a rise in purchases of existing homes. Retailers and auto dealers saw higher sales during October relative to year-ago levels. Conventional oil and gas well output held steady, while coal production trended lower. Freight transport volume slowed. And the demand for business credit moved slightly higher.
Hiring was sluggish across industry sectors. Exceptions were found in the auto industry, where hiring continued at a more robust pace, and construction, where payrolls began to grow. Staffing-firm representatives said that the number of job openings has picked up slightly during the past six weeks. Vacancies were found primarily in manufacturing, information technology, and healthcare. Wage pressures are contained. Input prices were stable, apart from increases in construction materials.
Manufacturing. District factories reported that new orders and production increased on net during the past six weeks. Companies citing increases were mainly linked to the aerospace, construction machinery, medical device, motor vehicle, and oil and gas industries. Compared to prior-year levels, production activity was mixed. Several producers pointed to rising inventories but said that they are manageable. Many of our contacts are expecting a slight weakening in business activity during the next few months due to seasonal factors and uncertainty surrounding the outcome of the fiscal cliff. Steel producers and service centers reported that shipping volume was down slightly, which they attributed in part to weaker international demand. Inventories have been reduced relative to sales. Steel producers expect market conditions to remain flat through at least the end of the year. District auto production showed a moderate decline during September on a month-over-month and year-over year basis for domestic nameplates, while their foreign counterparts increased production.
Little change in capacity utilization was reported; rates were within or slightly below their normal range. Several companies, particularly those serving the energy and transportation sectors, reported plans to expand capacity. Capital spending was largely on track. Raw material prices were either flat or trended lower, while finished goods prices were mainly steady. Manufacturers noted that they are feeling pressure from customers to lower prices. The auto industry provided a boost to District employment. Otherwise, manufacturing payrolls expanded at a modest pace, even at companies experiencing a pick-up in demand. Wage pressures are contained, and rising health insurance premiums remain a challenge.
Real Estate. Reports from home builders indicated that the number of single-family housing starts since mid-September increased relative to earlier in the third quarter and on a year-over-year basis. Sales contracts were found mainly in higher price-point categories. Some contractors commented that shrinking inventories of existing homes have spurred new residential developments. Opportunities in constructing multifamily and special-needs housing remain strong. Nonetheless, tight lending standards are seen as restraining the effect of low interest rates for builders and home buyers. Builders are hopeful that the recent improvement in sales will continue after the winter slowdown. List prices of new homes are beginning to rise, and builders have cut back on discounting. Sales of existing homes have picked up, with a few reports of bidding wars.
Nonresidential contractors reported that business activity is expanding. Although inquiries have slowed in the past few weeks, most builders are satisfied with their backlogs going into 2013. Project work is driven by multifamily housing and industrial contracts. Public-sector projects have declined. Obtaining financing remains difficult, particularly for projects that are deemed speculative by lenders. Nonetheless, contractors are cautiously optimistic about activity going into 2013.
Residential and nonresidential builders reported higher prices for construction materials, especially drywall and lumber, with rising prices being attributed in part to a cutback in output by suppliers. Many builders have added to their payrolls during the past couple of months, although some layoffs of seasonal workers are expected. Wage pressure was felt among the skilled trades due to a lack of qualified workers.
Consumer Spending. Most retailers reported a modest rise in sales during the past six weeks relative to the same time period a year ago. Increased volume was seen across product categories, except for home furnishings, which declined slightly. There is concern about potential tax increases in 2013 and the effect they might have on household spending, especially those in higher-income brackets. Our contacts are cautiously optimistic about the holiday shopping season. Two retailers said that they have expanded their inventories (after seasonal adjustments) in anticipation of rising sales volume. Vendor pricing has been fairly stable. Any increases were absorbed into store margins. Capital spending remains on target. A few retailers reported that they are considering increasing outlays during 2013, particularly for improvements to their distribution systems. No permanent hiring is expected other than at new stores. The number of temporary workers being hired for the holiday season is similar to 2011.
New-vehicle sales were stronger during October when compared with the same time period a year ago. Dealers reported that sales of fuel-efficient cars and compact SUVs are doing well. Truck sales have picked up, with the onset of the winter season. New-vehicle inventories are rising, although one dealer said that trucks are in short supply. Dealers expect little change in monthly sales for the remainder of this year. Purchases of used vehicles rose slightly, though inventories are still tight. Leasing continued to grow in popularity, which should help to replenish the used-vehicle inventory by mid-2013. Bank credit was more readily available as is captive financing. Hiring for sales and service positions is slow. We heard reports about dealers partnering with technical colleges to train people for all facets of dealership work.
Banking. Demand for business credit moved slightly higher since our last report. Many applications were for refinancing loans originated by competitors. Small business owners found that credit is available, but collateral requirements are more stringent than prior to the recession and personal guarantees are often required. In contrast, micro-businesses reported that it remains very difficult for them to obtain credit. On the consumer side, several of our contacts reported a decline in auto lending, while demand for other consumer products held steady. Activity was strong in the residential mortgage market. Although a large majority of applicants are looking to refinance, bankers noted an increase in new-purchase requests. Delinquency rates improved across consumer and commercial loan categories. Growth in core deposits was driven more by business customers. Little change in banking payrolls is expected for the remainder of this year and into 2013.
Energy. Conventional oil and natural gas production held steady during the past six weeks. Most of our contacts reported plans to increase drilling in the upcoming months, which will boost capital outlays beginning early in 2013. Wellhead prices for natural gas are up slightly, while oil declined about $5 per barrel. Shale gas activity continued at a robust pace. Coal production for the year is below 2011 levels due to lower demand from domestic utilities and offshore customers and a stricter regulatory environment. Reports of idled mines were common. However, an increase in thermal coal production is expected beginning in December for the winter heating season. As a result, one producer reported that he has rehired about 25 percent of his laid-off workers. Declining prices for metallurgical coal have leveled off, while steam coal prices were mixed. Production equipment and materials prices were flat across most categories. Wage pressures are contained.
Freight Transportation. Reports on freight transport indicated that volume has slowed since late in the third quarter, though part of the slowing was attributed to seasonal factors. Our contacts told us that Hurricane Sandy and weakness in European markets might be contributing to the downturn. Industries driving demand include housing, motor vehicles, and retail. Most of our contacts believe that activity will be slow through year’s end, with a pick-up during the first quarter of 2013. However, rebuilding in the aftermath of Sandy could provide a year-end volume boost. Costs associated with truck maintenance held steady. One contact is experiencing pushback from customers when negotiating rate increases. Reports on capital spending were mixed. Some freight haulers said that 2012 expenditures are on track. Others reported a postponement in purchasing replacement equipment due to a sluggish economy and uncertainty about the outcome of the fiscal cliff. Hiring is mainly for replacement. Recruiting qualified personnel remains difficult, which is contributing to wage pressures.
SOURCE: Federal Reserve Board