March 6 (Bloomberg) -- The following is the text of the Federal Reserve Board’s Fourth District-- Cleveland.
The economy in the Fourth District grew at a modest pace since our last report. Manufacturing orders and production were steady or rose slightly. The momentum seen in residential construction at the end of 2012, including multi-family, has carried over into 2013. Nonresidential construction showed some slowing. Retail purchases during January fell below year-ago levels, while motor vehicle sales posted solid gains on a year-over-year basis. Little change was seen in conventional oil and natural gas production, but shale gas activity expanded at a robust pace. Output at coal mines trended lower. Freight transport volume exceeded projections made late last year. And demand for business and consumer credit was flat. Hiring was sluggish across industry sectors. Staffing-firm representatives reported that the number of job openings and placements picked up slightly since the beginning of the year. Vacancies were found primarily in the shale gas and motor vehicle industries and in professional business services. Wage pressures were contained. Input prices were stable, apart from increases in construction materials and some petroleum-based products.
Manufacturing. Reports from District factories indicated that new orders and production were steady or up slightly during the past six weeks. Companies seeing increases were largely suppliers to the energy, residential construction, and transportation industries. Defense contractors cited concerns about the potential downside effects of sequestration. Compared to a year ago, production activity was mixed. Steel producers and service centers described shipping volume as slightly higher since the start of 2013 relative to the previous quarter. Many manufacturing contacts are somewhat more optimistic about near-term growth prospects than they were late in the fourth quarter. Auto production at District plants increased along seasonal trends during January on a month-over-month basis. Compared to a year ago, production was moderately lower, especially for domestic makers.
Inventories are aligned with demand. Steel producers reported that capacity utilization rose slightly during the past few weeks; other factory contacts said that rates were within or slightly below their normal range. Capital expenditures were on plan for the fiscal year. Most outlays are for technology that will be used to enhance productivity. Raw material prices were flat or trended lower, except for increases in some petroleum-based products. Finished goods prices held steady. On balance, manufacturing payrolls were little changed. Wage pressures are contained, although rising health insurance premiums remain a challenge.
Real Estate. Home builders reported that the upturn in sales of new single-family homes continued into January, and that sales were significantly higher than a year-ago. Contracts were found mainly in the mid- to higher-price-point categories. Demand for multifamily housing remains strong, particularly in urban areas, and the turnover rate for apartments has been trending lower. While builders expressed confidence that the improvement in the housing market will persist in the upcoming months, they still see the appraisal process and the availability of financing as headwinds to more robust growth. List prices of new homes are increasing, which was attributed to shrinking inventories and rising construction costs. Builders have cut back on discounting.
Nonresidential contractors experienced some slowing in business activity, when compared to the fourth quarter of last year. Margins are still tight and inquiries were down slightly. Builders noted that stress on government budgets is choking the supply of projects, especially defense-related. One contractor stated that uncertainty has eased somewhat and the number of potential clients is growing. But transforming proposals into signed contracts remains challenging, which is due in part to difficulty in obtaining financing. Project work is found mainly in manufacturing, distribution, and large multifamily developments. Our contacts are cautious about near-term activity and expect slow to moderate growth, mainly from private-sector clients.
Residential and nonresidential builders reported substantially higher prices for lumber (plywood and softwood), drywall, and to a lesser extent, concrete. General contractors are concerned about subcontractors raising their rates by the second half of this year. The potential increase was attributed to a dwindling number of subcontracting businesses and stronger demand. Residential builders are expanding payrolls at a modest pace, mainly field personnel, while nonresidential builders have stopped hiring due to uncertainty about future demand.
Consumer Spending. Many retailers we spoke with reported that January sales fell below year-ago levels. Higher taxes were cited as a potential contributing factor. Nonetheless, some of these contacts described January results as good or strong. We heard one report that high-end and lower-cost brands were doing better than products aimed at middle-income consumers. Increased volume was seen in apparel and firearms. Most of our contacts anticipate that transactions in the upcoming months will be above year-ago levels, in the low to mid-single digits. However, there is concern about the impact of rising gasoline prices on spending by lower-income households. Vendor and shelf prices held steady. Inventories rose slightly, but they were described as manageable. Capital expenditures were on plan for the fiscal year. No hiring is anticipated, except for staffing new stores.
Sales of new motor vehicles grew at a robust pace during January when compared to the same time period a year ago. Dealers credited milder-than-normal January weather and pent-up demand for the sales boost. Purchases of smaller, fuel-efficient cars, crossovers, and compact SUVs are doing well. New-vehicle inventories were higher than most dealers would like. Our contacts are cautiously optimistic about sales prospects during the next few months. Some commented that the upcoming regional auto shows typically have a positive impact on consumers’ willingness to buy. Sales of used vehicles rose moderately during January. Leasing continued to trend higher, which should help to replenish the used-vehicle inventory. We heard two reports about further easing in financing new vehicles. A few dealers are considering increasing their sales staff if volume continues at the current pace. Dealers in the eastern part of the District are apprehensive about losing technicians to the shale gas industry, which may put upward pressure on wages.
Banking. Demand for business credit was little changed across sectors and product categories since our last report. A few large banks noted a slowdown in loan applications during January, while community bankers saw a rise in demand for commercial real estate loans. Reports on consumer credit also indicated little change in demand. Credit card balances were coming down, while activity in home-equity products and auto lending picked up. The residential mortgage market was characterized as strong; however, some of our contacts cited a decline in the number of applicants from a year ago. Delinquency rates held steady or declined across consumer and commercial loan categories. Aggregate core deposits grew, but there was a slight drop-off in business and public-sector deposits. Bankers remain very concerned about shrinking net interest margins. In response, they are considering broad-based cost-control initiatives, which include layoffs. Energy. Coal production declined across the District relative to 2012 levels, with the largest decreases seen in northern West Virginia and eastern Kentucky. The downward trend in production is expected to continue in the near term. Falling prices for metallurgical coal leveled off, while steam-coal prices were mixed. Conventional oil and natural gas production was steady during the past couple of months, with little change expected during the next quarter. In contrast, shale gas activity expanded at a robust pace. Well-head prices have stabilized. Capital spending in the conventional oil and gas industry is expected to remain low until drilling picks up in late spring or summer. One contact said that he will drill fewer wells this year due to credit restrictions. Coal producers have cut back on capital expenditures. Production equipment and material prices were flat across most categories. Shale gas producers expanded payrolls, while employment at conventional oil and gas firms was flat. We heard several reports of layoffs by coal operators. Many of our contacts pointed to rising health insurance premiums as a concern.
Freight Transportation. For the most part, our contacts reported that shipping volume met or exceeded projections made late in 2012. Higher volume was attributed to stronger demand from the energy sector, rerouting of container traffic, and some residual effects of Hurricane Sandy. Freight executives were fairly positive in their outlook for 2013, but they were uncertain whether the boost in activity seen during a traditionally slow part of the shipping season is sustainable. Diesel fuel prices rose, which some carriers passed through via surcharges. Costs associated with equipment and maintenance items were stable. Reports on capital spending were mixed. Some freight haulers have increased budgets significantly for new equipment this year. Others are postponing equipment replacement until they are certain that the economy is on solid footing. Hiring is primarily for replacement. Wage pressures are surfacing due to difficulty in finding and keeping qualified drivers. There were a few reports about a potential driver shortage during the summer.
SOURCE: Federal Reserve Board