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

The following is the text of the Federal Reserve Board’s Fourth District-- Cleveland.

The economy in the Fourth District grew at a moderate pace since our last report. Manufacturing orders and production were steady or higher. The momentum seen in residential construction since the beginning of the year, including multifamily, has been maintained. In nonresidential construction, projects are moving very slowly from the development to the construction phase. Retail sales were below our contacts’ expectations during April, while new motor vehicle sales posted moderate gains on a year-over-year basis. Conventional and unconventional natural gas and oil production was flat, and drilling has declined during the past few months. Output at coal mines trended lower. Freight transport volume exceeded projections made at the beginning of the year.

Demand for business credit increased more slowly, whereas large numbers of consumers continue to apply for auto loans. Hiring picked up in the manufacturing and freight transport sectors. Reports by staffing-firm representatives on the number of job openings and placements, primarily in the service industries, were mixed. Wage pressures are contained. Input and finished goods prices were stable, apart from increases in construction materials and natural gas.


Reports from District factories indicated that new orders and production were largely stable or increased during the past six weeks. Domestic sales were stronger than those to offshore customers, with declines in Europe being more acute than in China. Companies seeing the strongest activity were suppliers to the oil and gas, residential construction, and transportation industries. Defense contractors and suppliers to the coal industry experienced weakening activity. Compared to a year ago, production levels were mixed. Steel producers and service centers reported that shipping volumes were stable but remain below levels seen early in the first quarter. Several contacts expressed concern about the quantity of steel produced in China and Europe that is now being imported into the United States. Motor vehicle production at District plants rose at a robust pace during April on a month-over-month and year-over-year basis. Looking forward, many of our contacts believe that business conditions will continue to slowly improve during the second half of the year.

Capacity utilization rates stood within their normal ranges. Several manufacturers noted that they have considerable excess capacity. For the most part, finished goods inventories are in-line with demand. Capital expenditures are on plan for the fiscal year. Outlays are primarily allocated for productivity enhancements and equipment replacement. Little capacity expansion is planned due to lingering uncertainty about future demand. Raw material and finished goods prices were flat or trended lower. Our respondents said that their ability to raise prices during 2013 is likely to be limited. We heard numerous reports from manufacturers who intend to increase payrolls at a modest to moderate pace during the next few months. Wage pressures are contained, while premiums for healthcare insurance spiked higher.

Real Estate.

Sales of new and existing single-family homes trended higher and they were above year-ago levels. Our contacts attributed this trend to low interest rates, favorable prices, and an improving labor market. One builder commented that young people are less inclined to buy a house than were their parents due to a perceived lack of value and a desire for

mobility. He believes that this reluctance may put downward pressure on the housing industry for years to come. New home contracts were found mostly in the mid- to higher-price-point categories. Demand for multifamily housing remains strong. Builders expressed confidence that the turnaround in the housing market will persist in the upcoming months. However, they cited difficulty in obtaining financing and low inventory as barriers to more robust growth in their industry. List prices of new homes increased by as much as 10 percent in certain markets this year due primarily to rising construction costs. Builders have cut back on discounting. Nonresidential builders told us that while inquiries have weakened, there were still a large number of projects in the development phase. However, backlogs are lower than what most builders would like. The strongest activity was in multifamily housing, energy, and manufacturing. The office and large-footprint retail segments were relatively weak. Our contacts are cautious about near-term activity. While they expect some growth, especially in the second half of the year, many of their clients are not in a rush to move projects into the construction phase. A substantial rise in commercial and industrial leasing is seen as a positive indicator by builders. They believe that some of their clients may commit to new building in the upcoming months.

There were many reports about large price increases for building materials, especially lumber (softwoods) and drywall. Residential builders felt the brunt of these increases. Little change in payrolls or wages was reported. Hiring for the prime construction season is expected to be limited. Subcontractors are having difficulty obtaining working capital and attracting skilled labor.

Consumer Spending.

Most retailers reported that April sales fell short of expectations. Some of our contacts cited colder-than-normal weather for holding down consumer spending. Others saw a pickup in purchases of large home goods such as furniture and exercise equipment. On a year-over-year basis, volume was up slightly. Going into summer, sales are projected to be modestly higher, when compared to the same time period last year. Vendor and shelf prices held steady. A food retailer commented that his customers remain sensitive to changes in gasoline prices, with any hike in gas prices negatively impacting his sales. Capital expenditures were on plan for the fiscal year. Monies are allocated primarily for improvements to distribution systems and new store construction. No hiring is anticipated, except for staffing new stores.

Year-to-date sales of new motor vehicles showed a moderate increase during April compared to the same time period a year ago. Buyers preferred smaller, fuel-efficient cars, crossovers, and SUVs, and the number of customers opting to lease continued to trend higher. Large pickup trucks were big sellers in regions with significant shale gas activity. New vehicle inventories are rising, but a majority of dealers said that they are satisfied with their inventory positions. Our contacts are cautiously optimistic about sales prospects for the year, with a few projecting 5 percent growth over 2012. Used vehicle purchases declined in April on a month-over-month basis. Several dealers commented that it is difficult to find a quality used car. However, they believe that as lease rollovers start to come in this year, the availability of low mileage used cars will improve. Two of our contacts noted that financing activity in the

subprime market is starting to pick up. Dealers want to hire a small number of sales and technical personnel, but they are having a difficult time finding qualified workers.


Demand for business credit has increased, but at a slower rate, since our last report. Although loan requests originated from many sectors, commercial real estate and industrial production stood out. A few bankers commented that insufficient collateral was the primary reason behind small business owners being denied credit. Consumer credit demand rose slightly, especially for auto loans. Installment loans are growing in popularity, whereas drawdowns on home equity lines of credit trended lower. Residential mortgage activity was stable. The shift in applications from refinancing to new purchase grew. Delinquency rates declined across consumer and commercial loan categories. No substantive 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. Customer preferences for online banking, rising use of ATMs, and shrinking net interest margins were factors cited by some of our contacts for cutting payrolls and reducing the number of branches.


Coal production continued to trend down across the District, although lower production numbers are showing signs of stabilizing. One producer noted that demand from domestic utility companies is up slightly, while offshore demand is slowing or stagnant. Spot prices for steam-coal rose slightly, whereas metallurgical coal prices were flat. The number of drilling rigs across the District was little changed over the past six weeks but has fallen since the beginning of the year. Ohio and West Virginia issued shale gas drilling permits at a robust pace. Output from conventional and unconventional oil and natural gas wells was flat during the past couple of months. In the wet gas regions of Ohio and West Virginia, output should begin to increase later in the year as newly constructed gas processing units come on line. Well-head prices for natural gas are trending higher, but not to the point that would encourage aggressive drilling. Capital expenditures were at targeted levels, with little change expected. No change in production equipment and material prices was reported. Energy payrolls held steady. Labor costs were stable except for increases in health insurance premiums.

Freight Transportation.

Our contacts described shipping volume as robust and higher than expected. Demand was particularly strong from motor vehicle and energy-related customers. Freight executives are optimistic about growth prospects for the remainder of the year. Diesel-fuel prices trended lower, and costs associated with equipment and maintenance items were stable. The biggest concern facing trucking companies at this time is the potential impact on operations (number of trucks and drivers, productivity, and pricing) due to the new hours of service (HOS) rules that go into effect on July 1. Capital spending is on plan for the fiscal year. Two of our contacts reported that they will be investing heavily in equipment that will service their energy customers. Another commented that his firm will order more trucks than originally budgeted to add capacity. Hiring is for 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