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

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

The Fourth District’s economy continued to expand at a moderate pace during the past six weeks. Most of our contacts have a positive outlook for the new year, and they expect demand for their products and services to remain at current levels or rise. On balance, demand for manufactured products stayed at a higher level relative to a year ago. Housing market activity was strong, while nonresidential builders saw an overall pick-up in business. Retail purchases during the holiday shopping season were above year-ago levels. New-motor-vehicle sales posted moderate gains on a year-over-year basis. The number of drilling rigs rose across the District, while natural gas output was stable. The rate of decline in coal production is slowing. Freight volume was in line with or exceeded expectations. Demand for business and consumer credit weakened slightly relative to our previous report.

Hiring was sluggish across most industry sectors, though the pickup in construction jobs continued. Staffing-firm representatives reported that the number of job openings and placements rose slightly, with vacancies found primarily in healthcare, information technology, and oil and gas. Wage pressures were contained. Input and finished goods prices saw little change, apart from some increases in metals and residential construction materials.


Reports from District factories indicated that demand continued at a moderate to robust level during the past six weeks. Firms seeing the strongest activity were suppliers to the aerospace, housing, motor-vehicle, and oil and gas industries. Declines in demand were attributed to seasonal variation. The recently enacted federal budget agreement is viewed as providing a boost to defense contractors in the upcoming year. Compared to a year ago, manufacturing production levels are mainly higher. Almost all of our respondents expect demand will remain at current levels through at least the first quarter of 2014. Steel shipments during the fourth quarter were generally characterized as stable or slowly increasing. Demand is strongest from the transportation and oil and gas industries. Defense orders were still described as weak. Shipments in the first quarter of 2014 are expected to be higher relative to the previous quarter. Several contacts in the steel industry noted that confidence on the part of their customers is improving. District auto production showed a seasonal decline during November. However, November production numbers were moderately higher than those recorded a year ago.

Most manufacturers reported that their capacity utilization rates were within a normal range. Numerous respondents said that they have excess production capacity and could easily absorb any demand spikes. Auto parts suppliers were described as operating near capacity. One industry executive estimated that 85 percent of all parts suppliers need to increase capacity, but many are reluctant to do so. In contrast, aerospace suppliers have invested heavily in capacity expansion during the past year. A few steel producers reported lowering capacity utilization, due in part to excess global capacity. Capital expenditures for the upcoming fiscal year are expected to be in line with current year outlays or somewhat higher. Monies are being allocated primarily for rehabbing production lines, technology enhancements, and new equipment. Raw material prices were stable, except for a modest increase in metals. Several of our contacts announced price increases across their product lines, which will go into effect during the first quarter of 2014. On balance, factory payrolls were stable. A majority of our contacts cited rising healthcare insurance premiums as a concern.


Sales of new single-family homes have been trending slightly lower since October. Nonetheless, single-family construction starts continued at a robust pace and were significantly above year-ago levels. Multifamily construction remains strong. We heard several reports about the inventory of improved lots being at a low level. New-home contracts were found mainly in the move-up price-point categories. Only a few starter homes are being built. Selling prices of new homes have stabilized. One builder observed that he has now reached the limit of how much he can raise prices before impacting demand. Existing home values rose moderately year-over-year. Builders are confident that demand for new homes will persist into 2014, especially in the higher-end segments of the market.

Nonresidential building activity continued to improve, although builders reported that some high-value projects remain stalled in the pipeline. This project stagnation was attributed mainly to lingering uncertainty. Most builders indicated that they are comfortable with their backlogs and that the number of inquiries is rising. Demand was strongest for distribution facilities, industrial buildings, and multifamily housing. Our contacts are cautiously optimistic about near-term prospects, and they are expecting slow, but steady growth during 2014.

Prices for residential construction materials -- lumber and drywall -- have increased substantially in the past year, but the rate of increase is slowing. A majority of general contractors we spoke with reported hiring some field and back-office personnel since our last report. Most of our contacts experienced increases in health-insurance premiums, generally around 5 percent. Builders reported a scarcity of high-skilled trade workers. As a result, there is upward pressure on wages, and subcontractors are demanding and getting higher rates.

Consumer Spending.

Retail sales at the start of the holiday shopping season were above year-ago levels. Electronics, cold-weather apparel, and footwear were selling especially well. In some regions of the District, retailers experienced a tapering off as December progressed. They attributed the decline in part to persistently poor weather conditions. One contact reported a slowdown in sales of teen clothing and school items throughout 2013, which he believes is due to a high level of teen unemployment. A furniture dealer observed that his sales started to pick up recently following a large drop-off that began midway through the third quarter. His outlook is optimistic. Overall projections for the month of January call for sales to be slightly to significantly higher relative to the same time period in 2013. Inventories were described as being in good to great shape. Vendor and shelf prices held steady. Several of our respondents noted that the use of promotions was higher than normal for this time of year. Hiring during 2014 will be mainly limited to staffing new stores and for e-commerce support. Year-to-date sales through November of new motor vehicles showed a moderate increase when compared to the same time period in 2012. On a month-over-month basis, November purchases of new vehicles exhibited a seasonal decline. Buyers continued to shift from smaller, fuel-efficient cars to SUVs, crossovers, and light trucks. Some of the increase in truck sales was attributed to growing demand for vehicles by residential builders. Reports on new-vehicle inventories were mixed. The rate of growth in new-vehicle sales during 2014 is expected to be positive, but not as strong as in 2013. Used-vehicle purchases declined from October to November, but year-to-date sales were higher when compared to 2012. Dealers are planning fewer capital projects in 2014 relative to the past couple of years. Payrolls held steady since our last report.


Demand for business credit was stable or down slightly during the past six weeks. No loan category is performing considerably better than others, although many bankers said that commercial-real-estate lending continued to pick up. Organic loan growth was characterized as slow, due in part to businesses holding excess cash. Several respondents commented that long-term interest rates need to rise more than 200 to 300 basis points before any meaningful impact will be seen on spending decisions by businesses. Consumer credit demand was described as steady or down slightly. Auto lending drew the highest demand, while home-equity products slowed. A few bankers saw a pick up in credit card usage, which they attributed to holiday shopping. Most contacts reported a net slowdown in residential mortgage activity. While there was an increase in new purchase applications, they did not offset the decline in refinancings. Several bankers raised concerns about new banking regulations related to real estate -- residential and commercial -- and their potential negative impact on lending and operating costs. For the most part, delinquency rates were stable. No significant changes to loan-application standards were reported. Core deposits by businesses and consumers grew. We heard a few reports about staffing cuts due to branch closures and cost containment.


Aggregate coal production across the District remains slightly below year-ago levels. A large decline in eastern Kentucky is being offset by increases in Ohio and northern West Virginia. Going forward, little change in output is projected. Spot prices for steam coal increased, reflecting seasonal variation, while metallurgical coal prices held steady. The number of drilling rigs increased across the District since our last report. Natural gas production was stable, but at a high level. Well-head prices for natural gas rose slightly, while oil prices declined. No change was reported in the cost of production equipment and materials. Payrolls held steady.

Freight Transportation.

Freight executives reported that shipping volume was in-line with or exceeded expectations during the past six weeks. The industry outlook for 2014 is more favorable compared to our last report, with year-over-year volume expected to grow at a moderate to strong pace. One respondent attributed the upbeat outlook to the rebound in manufacturing. A few contacts noted that the limited availability of qualified drivers and the recently enacted hours of service (HOS) regulations have resulted in a tightening of capacity during the fourth quarter. They believe this issue will intensify during 2014. Operating costs were mostly stable. Capital outlays for the fiscal year were in line with budgets. Little change in capital spending is forecast, with monies allocated more toward replacement. The industry has been hiring for replacement and, as a result of HOS, to maintain current capacity.

SOURCE: Federal Reserve Board

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