WASHINGTON (MNI) – The following is the latest Beige Book’s survey
of economic activity in the Fourth District, published Wednesday:

FOURTH DISTRICT – CLEVELAND

Economic activity in the Fourth District increased slowly during
the past six weeks. Manufacturers reported stable production but a small
decline in new orders and backlogs. Energy companies noted little change
in output. Freight transport volume trended slightly higher. Retail
sales rose slightly, whereas new-car purchases were reported as mixed.
Home builders are increasingly turning to multi-family development as a
revenue source, and nonresidential contractors struggled to rebuild
their backlogs. The demand for business credit continued to slowly
improve, while consumer loan demand was generally weak. The pace of
hiring seen earlier in the third quarter has diminished, especially in
the manufacturing and energy sectors. Staffing-firm representatives
reported a drop-off in the number of new job openings, with vacancies
concentrated in technical occupations and healthcare. Wage pressures are
contained. Prices for materials used by manufacturers and building
contractors were fairly stable or fell slightly.

Manufacturing

Production at District factories during the past six weeks was
mainly stable along seasonal trends, with minor declines in new orders
and backlogs. Compared to year-ago levels, output was moderately higher.
Most of our contacts expect near-term weakening in demand, but not to
levels seen in the last recession. Steel producers and service centers
reported that shipping volume was flat or somewhat higher. Shipments are
being driven by transportation, energy, and industrial-equipment-related
industries. Steel reps are cautious in their outlook but remain hopeful
that current volume can be maintained. District auto production rose
significantly in August on a month-over-month basis due to production
starts on the 2012 models and the abatement of supply disruptions from
Japan. Year-over-year output also rose, but the increase was limited to
domestic nameplates.

Manufacturers remain committed to their capital spending plans for
2011; however, a few of our contacts indicated that they are considering
pulling back on spending for 2012. Capacity utilization remains below
normal at most factories, while steel executives reported that their
utilization rates were at or near normal levels. Inventories are in line
with sales. Reports on raw materials show that prices were stable or
declined slightly. Nonetheless, several manufacturers announced modest
price increases that will go into effect early in the fourth quarter.
Expectations for rising steel prices were short-lived. Hiring has
diminished since our last report. Manufacturers who have added to
payrolls reported that it was difficult to recruit highly skilled
workers. Wage pressures are contained.

Construction

Single-family home construction remains at a low level; however,
several builders noted a recent pick up in traffic and inquiries. Sales
contracts were evenly distributed across price-point categories. Half of
our contacts reported that constructing and managing multi-family
developments now accounts for most of their work. One contractor
remarked that his business has shifted to renovating foreclosed houses
and renting them. A few builders reported that they would like to
increase their spec inventory, but it remains difficult to obtain
financing. Expectations call for little change in residential building
in the near term. Not much difference was seen in the list prices or
discounting of new homes since our last report, while building material
prices showed normal fluctuations. We heard comments about
subcontractors attempting to raise their prices to cover rising costs,
but these attempts were mainly unsuccessful. General contractors added
slightly to their payrolls. Any increases in take-home pay are being
offset by substantial increases in health insurance premiums.

Activity in nonresidential construction for small to medium-size
builders remained fairly weak, with much of their work limited to
expansions and lower-budget projects. However, the number of inquiries
has picked up slightly since our last report. The biggest challenge
facing builders at this time is adding backlog. Construction contracts
were primarily with health care providers and manufacturers, while a
decline was seen in government-funded projects. Looking forward, our
contacts expect modest growth at best during the next six months.
Building material prices held steady. One builder mentioned that his
firm recently purchased construction equipment for the first time since
2007. Construction payrolls and wages were stable. Consumer Spending.
Retailers described their sales for the period from mid-August through
late September as slightly higher than during the previous six weeks. On
a year-overyear basis, transactions also improved, mainly in the low
single digits. Many of our contacts reported that customers were
particularly interested in items that are new and innovative. Looking
ahead to the fourth quarter, retailers expect sales to rise in the low-
to mid-single digits on a year-over-year basis; however, grocers
anticipate little change. We continued to hear about some upward
pressure on supplier prices, although it mainly affects food products
and items manufactured from cotton. In response, retailers were
selective about the amount of the price pressures they passed through to
consumers. Reports on profit margins were mixed. Capital budgets remain
as planned. Half of our contacts said that outlays are higher than a
year ago, and that they are used mainly for remodeling, constructing new
stores, and e-commerce infrastructure. Little change in payrolls is
expected at existing stores.

Reports on new-vehicle sales from mid-August through late September
were mixed. On a year-over-year basis, vehicle purchases improved for
most of our contacts, with several noting double-digit increases. Demand
for fuel-efficient, less-expensive cars continued to grow, although the
market for crossover vehicles remains fairly strong. Inventories are
rebuilding, especially for Japanese cars, but remain below what many
dealers would like. Dealers are cautious in their outlook due to
uncertainty about the economy and the availability of vehicles that
consumers want to buy. Demand for used cars is steady but down slightly
from earlier in the year. We heard a few reports of some easing in
credit restrictions, while banks and credit unions continued to price
loans very competitively. Many dealers are in the process of initiating
factory-mandated programs for showroom upgrades and reimaging. The
pickup in dealer hiring that we saw a couple of months ago has
diminished. The few dealers who are looking to hire report that it is
difficult to find qualified candidates.

Banking

Demand for business loans showed a moderate improvement, with
requests being driven mainly by commercial real estate, manufacturing,
and healthcare. Reports indicated downward pressure on interest rates
for commercial credit. On the consumer side, bankers reported that
applications for home equity lines of credit have declined, and they
characterized installment loan activity as flat or down. However, direct
and indirect auto lending continued to show strength. Applications for
refinancing residential mortgages have picked up due to lower interest
rates, with little activity in new purchases. No changes were made to
loan application standards. Since our last report, many of our contacts
have experienced substantial growth in core deposits from consumers and
businesses. Delinquencies were mainly steady or declined across loan
categories. Payrolls were stable, with only very selective hiring
expected for the remainder of the year.

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** Market News INternational Washington Bureau: 202-371-2121 **

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