The following is the text of the Federal Reserve Board’s Fourth District-- Cleveland.
FOURTH DISTRICT - CLEVELAND
The economy in the Fourth District expanded at a moderate pace during the past six weeks. Manufacturing orders and production were steady or higher. The momentum seen in residential construction since the beginning of the year has slowed, but activity remains above year-ago levels. Nonresidential builders experienced a rise in the number of inquiries and backlogs. Retail sales were lackluster during May, while new motor vehicle sales posted moderate gains on a year-over-year basis. Conventional and unconventional natural gas and oil production was stable, and drilling has declined since the start of the year. Output at coal mines trended lower. Freight transport volume exceeded projections. Demand for credit increased slightly.
Hiring picked up in manufacturing and residential construction. Staffing firm representatives reported that the number of job openings and placements was fairly steady, with vacancies found primarily in healthcare and manufacturing. Wage pressures remain contained. Input and finished goods prices saw little change, apart from increases in construction materials.
Manufacturing. Reports from District factories indicated that new orders and production were largely stable or increased during the past six weeks. Companies seeing the strongest activity were suppliers to the residential construction and transportation industries. Compared to a year ago, production levels were mixed. Steel producers and service centers reported that shipping volumes were little changed. Our contacts expressed concern about downward pressure on domestic steel prices, which they attributed to rising imports. Motor vehicle production at District plants held steady during May on a month-over-month basis. Compared to a year ago, auto production rose slightly. Many of our contacts believe that demand will soften during the next couple of months, although part of the expected decline was attributed to seasonal factors. In response, there was some reduction in finished goods inventories.
Manufacturers commented that capacity utilization rates have fallen slightly but remain within their normal ranges. Capital expenditures are either on plan or slightly ahead for the fiscal year. Several companies anticipate increasing capital budgets in the upcoming fiscal year to better position themselves for expected growth opportunities. Raw material and finished goods prices were generally flat or trended lower. Steel producers who attempted to raise their prices met with limited success. Factories expanded payrolls at a modest pace, although finding qualified production and salaried personnel was difficult. Wage pressures are contained.
Real Estate. Sales of new single-family homes were down slightly in June when compared to earlier in the spring, although they remain above year-ago levels. Construction starts also fell slightly. One contractor commented that the recent decline in sales is not abnormal for this time of year. Traffic and inquiries were described as much better relative to last year. New home contracts were found mostly in the mid- to higher-price-point categories. Demand for multifamily housing was strong. Builders were confident that the turnaround in the housing market will persist in the upcoming months. Nonetheless, they cited difficulty in obtaining financing and a lack of buildable lots as barriers to more robust growth. List prices of new homes increased by as much as 5 percent in certain markets this year due primarily to rising costs for land, building materials, and to a lesser extent, labor. Home builders have cut back on discounting. Sale prices of existing single-family homes continued to rise across the District on a year-over-year basis, but the rate of increase is somewhat lower than the national average.
Nonresidential builders have seen a small improvement in business conditions since our last report. Inquiries have picked up and backlogs are slowly rising. The strongest activity was on the commercial side, especially in distribution and warehousing. Bank financing is difficult to obtain, so many smaller projects are being funded with cash. Our contacts are hopeful that the improvement in business conditions they have recently experienced will continue at the same pace or accelerate during the remainder of this year.
We heard many comments about large price increases for building materials, especially lumber, drywall, and concrete, though the rate of increase has slowed during the past month. Home builders reported moderate hiring, especially for office personnel, while nonresidential builders limited their hiring to seasonal help. Wage pressures are contained. General contractors are concerned about the availability of qualified subcontractors if demand in the construction sector begins growing at a robust pace.
Consumer Spending. Retailers described May sales as lackluster and noted that they fell below plan. However, sales were fairly even with the same month a year ago. Some of our contacts cited poor weather conditions for holding down consumer spending. Looking ahead, third-quarter sales are expected to be modestly higher when compared to those in the second quarter. A few contacts reported that their inventories were slightly higher than desired. Vendor and shelf prices held steady. Capital expenditures were on plan for the fiscal year. Monies are allocated primarily for store improvements and expansions. No hiring is anticipated, except for staffing new stores.
Year-to-date sales of new motor vehicles showed a moderate increase during May compared to the same time period a year ago. Buyers preferred smaller, fuel-efficient vehicles; however, purchases of large pickup trucks trended higher, especially in the eastern half of the District. New vehicle inventories are rising, but a majority of dealers said that they are satisfied with their inventory positions. Our contacts are fairly optimistic about sales prospects for the remainder of the year. Dealers pointed to pent-up consumer demand and the option to lease vehicles as reasons for their optimism. Used-vehicle purchases rose during the past six weeks. Inventory is building as lease rollovers start to come in. Prices for quality used cars remain high. Dealer investment in facility upgrades and expansions has increased as they grow more confident about the sustainability of higher sales volume. Dealers are looking to hire a small number of personnel, though some have postponed hiring decisions as they gauge the effectiveness of new technology that is being integrated into their selling model.
Banking. Demand for commercial real estate and multi-family construction loans has picked up since our last report, while requests for other business loan categories were little changed. Almost all bankers reported aggressive credit-pricing pressure. Consumer credit demand rose slightly, especially for auto loans and home equity products. Residential mortgage activity remains relatively strong. Several bankers attributed a decline in refinancing to a rise in interest rates. New purchase mortgages are trending higher. No changes were made to loan-application standards. Aggregate core deposits grew at a steady pace, with a movement from CDs to demand deposits still taking place. There were a few reports about workforce reductions and shifting personnel as a means of cutting costs.
Energy. District coal production remains below year-ago levels, although the downward trend seen during the first five months of 2013 was showing signs of leveling off. Producers reported that demand from domestic utility companies is up slightly, while offshore demand is slowing (Asia) or stagnant (Europe). Spot prices for steam-coal rose slightly, whereas metallurgical coal prices were flat. The number of drilling rigs across the District has fallen significantly since the beginning of the year; however, the state of Ohio continued to issue shale gas drilling permits at a robust pace. Output from conventional and unconventional gas wells was stable during the past couple of months, while oil production picked up slightly. Well-head prices were little changed. Capital expenditures remain at targeted levels. On balance, little change was seen in production equipment and material prices. Energy payrolls and labor costs were flat.
Freight Transportation. Our contacts reported that shipping volume remains higher than expected, but the rate of growth has slowed since our last report. Freight executives are positive, but cautious about growth prospects for the near term. Of particular concern is how the new hours of service regulations (HOS) that went into effect on July 1 will play out. Our contacts believe that the primary impact of HOS will be on the availability of drivers and the ability of shipping companies to effectively schedule those drivers. Potential reductions in capacity will tend to drive up shipping costs. Prices for equipment and maintenance items were stable. Capital spending is on plan for the fiscal year. Monies are used mainly for tractor/trailer replacement and capacity expansion. The industry is still experiencing a shortage of drivers and skilled mechanics. The former may worsen under the new HOS regulations.
SOURCE: Federal Reserve Board