WASHINGTON (MNI) – The following is the Beige Book report on
economic activity by the Cleveland Federal Reserve Bank, published


Business activity in the Fourth District expanded at a modest pace
since our last report. Manufacturers reported that new orders and
production were stable. Single-family home building remained sluggish,
while construction of multi-family housing rose. Inquiries to
nonresidential builders picked up some, but backlogs are still low.
Retail sales increased slightly. Auto dealers described sales of new and
used vehicles as very good. Shale gas drilling and production continued
to expand. Freight transport volume was stable. The demand for business
credit grew moderately, while consumer loan demand was weak.

Hiring remains at a low level across almost all industry sectors.
Staffing-firm representatives reported modest growth in the number of
new job openings and placements, with vacancies concentrated in
professional business services and energy. Wage pressures are contained.
Respondents noted some upward pressure on prices, especially for metals
and petroleum-based products.


New orders and production at District factories were stable along
seasonal trends during the past six weeks. Compared to year-ago levels,
output was mainly higher. Most of our contacts are cautious in their
outlook but expect little change in demand during the upcoming months.
Steel producers and service centers reported that shipping volume was
steady or slightly lower, with demand being driven by energy and
industrial equipment industries. Steel representatives remain hopeful
that current volume can be maintained, although some seasonal slowing is
expected. District auto production held steady in October on a
month-over-month basis. Compared to year-ago levels, output rose
moderately, more so for domestic nameplates.

Manufacturers remain committed to their capital spending plans,
with many steel companies expecting to increase outlays during the
upcoming months. Capacity utilization remains below normal at most
factories, while steel producers saw their utilization rates at or near
normal levels. Inventories are in line with sales for a majority of our
contacts. Reports on raw materials prices were mixed. Half of our
respondents said that prices were steady or declining; others told us
that prices continue to rise, but at a slower rate than earlier in the
year. Increases were mainly associated with metals and petroleum-based
products. Changes in raw materials prices were passed through to
customers. New hiring remains at a low level. Those adding to payrolls
found it difficult to recruit highly skilled workers. Wage pressures are


Single-family home construction remained sluggish, while activity
in multi-family housing and remodeling expanded. Sales contracts were
mainly in the move-up price-point categories. Several builders reported
that difficulty in obtaining financing is preventing them from adding to
their spec inventory. Little change is expected in residential building
for the next one to two years. Not much difference was seen in the list
prices or discounting of new houses since our last report. The pickup in
hiring by general contractors that occurred late in the summer has

Activity in nonresidential construction for small to medium-size
builders was described as steady or slowly improving. While the number
of inquiries has picked up recently, the biggest challenge facing
builders at this time is adding backlog. One contractor commented that
the incubation period for public infrastructure projects can be as long
as five years. Construction contracts were primarily in education,
manufacturing, energy, and research and development. Looking forward,
builders expect modest growth at best during the next six months. We
heard several reports of upward pressure on prices for copper and steel,
though the price of lumber declined. Construction managers are in the
process of laying off seasonal workers.

Consumer Spending

Retailers saw a slight improvement in sales during October, when
compared to September’s results, with several of our contacts noting a
pickup in purchases of cold-weather-related items and home furnishings.
Transactions were also ahead of last years levels, mainly in the
mid-single digits. Looking ahead to the holiday shopping season,
retailers expect stronger sales on a year-over-year basis. We continued
to hear numerous reports about upward pressure on supplier costs,
particularly for packaging, fuel, and agricultural commodities. A few
retailers reported that suppliers have held off passing through the
entire price increase, but they may be less reluctant to do so in 2012.
Retailers were also selective about passing through rising prices to
consumers. Reports on profit margins were mixed. Capital budgets remain
on plan. Most of our contacts said that outlays during 2012 will not
change appreciably from this year’s levels, and that they will be used
mainly for technology enhancements, e-commerce investments, and
remodeling. Little change in payrolls is expected at existing stores.
Seasonal hiring at some stores will be slightly higher than in 2010.

Auto dealers characterized new-vehicle sales during October as very
good, with most of our contacts reporting higher sales volume when
compared to year-ago levels. Demand was strongest for fuel-efficient,
less-expensive cars, and crossover vehicles. Inventories continue to be
rebuilt but remain below what 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 up substantially since the beginning of October; prices remain
elevated. Two dealers noted that there has been a sharp increase in
manufacturers’ incentives, which they attributed to the model-year
changeover. The few dealers looking to hire reported that it is
difficult to find qualified candidates, especially sales representatives
and service technicians.


Demand for business loans showed a moderate improvement, although a
few community bankers observed some weakening. Requests are being driven
by energy, manufacturing, multi-family housing, and healthcare. Reports
indicate continued downward pressure on interest rates for commercial
credit. On the consumer side, our contacts described installment loan
activity as flat or down; however, direct and indirect auto lending
continued to show strength. Interest rates remain very competitive.
Activity in the residential mortgage market has slowed since our last
report, with most applicants looking to refinance. Many bankers noted a
pickup in the number of applicants who are refinancing into 15-year
mortgages. No changes were made to loan application standards. Overall
core deposits continue to grow, although several bankers reported that
the growth is being driven by business customers. Delinquencies were
steady or declined across loan categories; any stress was mainly on the
consumer side. Payrolls were stable, with little hiring expected in the


Conventional oil and natural gas production rose moderately during
the past six weeks, while drilling was little changed. Our contacts were
somewhat uncertain about future activity due to falling prices for
natural gas. Well-head prices for oil were fairly stable. Activity in
shale-gas extraction continued to expand. One report characterized
production from confirmation wells drilled in Ohio’s Utica shale as
good. Coal output is expected to be stable for the remainder of this
year, though increases are possible in 2012 as a result of growing
demand from export markets and domestic utilities. There is some
uncertainty surrounding utility demand due to abundant supplies of
low-priced natural gas and regulatory compliance issues for coal-fired
generators. Spot prices for coal showed normal fluctuations. Capital
outlays are on target, with moderate increases projected by oil and gas
companies in the upcoming months. The cost of production equipment and
materials was flat during the past six weeks. Energy payrolls held

Transportation. On balance, freight transport volume was stable
over the past six weeks and up slightly on a year-over-year basis.
Rising demand was seen from the retail and energy (shale gas and coal)
sectors. Our contacts expect volume to grow at a slow, steady pace in
the near term. We heard numerous reports of rising prices for tires,
parts, and equipment, and of some volatility in fuel prices. Much of the
cost increase was recovered via fuel surcharges and rate adjustments
when contracts came due. Capital outlays have accelerated during 2011
relative to prior-year levels. Spending is mainly to replace aging
equipment and to support demand growth, especially from energy
customers. All of our contacts reported hiring for driver replacement or
adding capacity, although recruiting qualified drivers was difficult.
Wage pressures are emerging due to a tightening of the driver pool.

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