WASHINGTON (MNI) – The following is the Beige Book section on the
Federal Reserve’s Fourth District, published Wednesday:
FOURTH DISTRICT – CLEVELAND
On balance, economic activity in the Fourth District held steady
during the past six weeks. Manufacturers reported that new orders and
production rose modestly. An uptick in residential construction, retail
sales, and new car buying that began in mid-summer has tapered off.
Nonresidential building activity showed little change. Reports from
energy companies indicated stable production, while freight carriers saw
a small decline in volume. Demand for business loans showed some signs
of a pickup, and consumer borrowing remained weak.
New hiring continues at a slower pace than seen earlier in the
year. There were scattered reports of increased payrolls in
manufacturing, energy, and banking. Overall, staffing-firm
representatives noted that the number of new job openings declined
slightly, with available openings concentrated in healthcare and
professional business services. Wage pressures continue to be contained.
Apart from volatility in steel and commodity prices, raw materials and
product pricing were fairly steady.
Manufacturing. Reports from District factories showed that new
orders and production rose modestly during the past six weeks.
Production was also higher on a year-over-year basis, with many contacts
experiencing double-digit increases. Several manufacturers commented
that opportunities are growing faster in offshore markets than
domestically. Almost all of our respondents expect business activity to
follow current seasonal trends for the near term. Most steel producers
and service centers reported that volume was either flat or trending up.
Shipments are being driven by energy-related, auto, and heavy equipment
industries. Two contacts noted that exports are gaining strength. All of
our steel contacts expect little change in business activity in the near
term. District auto production showed a large increase during August on
a month-over-month basis, due to production starts on the 2011 models.
In terms of year-over-year comparisons, production was little changed
for both domestic and foreign nameplates.
Capacity utilization is slowly rising for several manufacturers and
steel producers, but it continues below pre-recession levels across the
board. Inventories are balanced with incoming orders. Capital outlays
remain at relatively low levels, with many of our contacts reporting
that they have postponed starting projects until they are certain of a
sustainable recovery. Other than volatility in steel and commodity
prices, the cost of raw materials has been relatively stable. Several
manufacturers announced product cost adjustments to reflect changes in
steel, copper, and agricultural prices. We heard only scattered reports
of companies hiring new workers, although several firms have extended
work hours. Wage pressures are contained.
Real Estate. New home sales have slowed during the past six weeks,
and all of our contacts expect construction to remain very sluggish
going into 2011. Builders continue to point to tight credit,
foreclosures, and a large inventory of existing homes as reasons for the
depressed market. Most homebuilders are intentionally keeping their spec
inventories at low levels, and those who want to build are unable to
obtain financing. Our contacts tell us that the entry-level price-point
category is seeing the least activity, with most sales occurring in the
move-up buyer categories. The list prices of new homes and construction
material costs have shown little movement since our last report. Several
builders said that they are increasing the use of discounting to close
sales. General contractors and subcontractors continue to work with very
lean crews.
Discussions with nonresidential builders showed little change in
construction activity since our last report and from year-ago levels.
One contractor, who noted a slow down, attributed it to seasonal
factors. A few builders commented that although their backlogs have
slipped, they are encouraged by the number of inquiries. New projects
generally fall into the industrial category. Most of our contacts expect
little change in business conditions in the near-term, with several
mentioning that they are concerned about prospects for the recovery.
Reports indicated stable construction material costs. New hiring by
general contractors has diminished, while subcontractors are still
struggling and bidding at very competitive rates.
Consumer Spending. On balance, there was little change in retail
sales for the period from mid-August through mid-September, when
compared to the previous 30-day period. Consumers remain price sensitive
and focused on buying necessities. When given the option, they prefer
private-label to premium brands. Retailers expect conservative sales
growth at best, going through the holiday season. Several retailers
noted modest price increases from their suppliers, which they passed
through selectively to consumers. Half of our contacts reported on plans
to increase capital budgets in 2011 relative to this year. Hiring will
be limited to temporary holiday workers.
Auto dealers characterized new vehicle sales during August as
decent, although they were slower than those seen during the peak summer
season. Many sellers reported that August sales were down compared to
year-ago levels due to the cash-for-clunkers program. Looking toward the
year’s end, dealers expect modest sales increases at best. New car
inventories remain on the light side, especially for popular models.
Used vehicle purchases have picked up since our last report, although
supplies are tight and prices remain high. The number of financing
options is growing across the District, and pricing is competitive.
Still, credit standards are tight, and potential buyers often find
themselves unqualified for the vehicle they want to purchase. The
incremental hiring at auto stores that began in mid-summer has tapered
off.
Banking. The business-lending environment remains soft; however,
almost half of the bankers we spoke with noted that demand showed some
signs of a pickup across industries. On the consumer side, conventional
loan demand remains very weak, with most of the activity found in
indirect auto lending and home equity lines of credit. Interest rates
for business and consumer credit moved by only a few basis points, with
a slight bias to the downside, as competitive pressures are growing.
Most of our contacts said that the demand for residential mortgage
refinancing is very strong, while new-purchase mortgage originations
remain at a slow pace. Residential mortgage rates continued their
downward trend. Core deposits increased at almost all banks, with most
of the growth occurring in nonmaturing products. Credit quality was
generally characterized as either stable or deteriorating, while most
reports on delinquencies indicated rates were stable or showed a modest
decline. Several bankers noted that they have slowly increased their
payrolls during the past few months.
Energy. Reports indicate that oil and gas output was mainly steady
during the past six weeks, with output expected to remain at current
levels in the near term. Companies not participating in Marcellus shale
drilling, a largely untapped natural gas reserve, see the industry
slowing down during the next several months due to slumping gas prices.
Nonetheless, some gas producers reported increasing their capital
outlays for additional drilling. Spot prices for oil are holding up.
Coal production has been fairly stable since our last report, with
little change in demand expected. Coal executives commented that rising
government intervention into permitting and compliance issues may dampen
capacity. Prices for coal were mixed but are tending to the down side.
Equipment and material costs have been relatively flat. We heard
scattered reports of companies hiring new workers.
Transportation. Freight transport executives reported steady to
declining volume during the past six weeks. Still, bottom lines have
improved for some carriers due to better pricing and higher
productivity. Looking forward, carriers expect that any further volume
decline will be modest, with a few anticipating a return to slow growth.
Due to a drop in capacity attributed to carriers exiting the industry
and the enactment of additional federal safety regulations, executives
believe they will be able to successfully negotiate more favorable rates
as demand rises. A few of our contacts reported rising prices for fuel.
The cost of new tractors is substantially higher, while used equipment
prices are falling. Capital outlays are expected to increase at a modest
rate going into 2011, with most monies allocated for equipment
replacement. Current hiring is due to attrition.
** Market News International Washington Bureau: 202-371-2121 **
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