WASHINGTON (MNI) – The following is the Beige Book summary of
business activity in the Federal Reserve’s Fourth District,
published Wednesday:

FOURTH DISTRICT – CLEVELAND

The economy in the Fourth District grew at a modest pace since our
last report. On balance, manufacturing orders and production rose.
Residential and nonresidential construction activity increased, with
particular strength noted in the multi family segment. Realtors reported
a rise in purchases of existing homes. Retailers and auto dealers saw
higher sales during October relative to year-ago levels. Conventional
oil and gas well output held steady, while coal production trended
lower. Freight transport volume slowed. And the demand for business
credit moved slightly higher.

Hiring was sluggish across industry sectors. Exceptions were found
in the auto industry, where hiring continued at a more robust pace, and
construction, where payrolls began to grow. Staffing-firm
representatives said that the number of job openings has picked up
slightly during the past six weeks. Vacancies were found primarily in
manufacturing, information technology, and healthcare. Wage pressures
are contained. Input prices were stable, apart from increases in
construction materials.

Manufacturing

District factories reported that new orders and production
increased on net during the past six weeks. Companies citing increases
were mainly linked to the aerospace, construction machinery, medical
device, motor vehicle, and oil and gas industries. Compared to
prior-year levels, production activity was mixed. Several producers
pointed to rising inventories but said that they are manageable. Many of
our contacts are expecting a slight weakening in business activity
during the next few months due to seasonal factors and uncertainty
surrounding the outcome of the fiscal cliff. Steel producers and service
centers reported that shipping volume was down slightly, which they
attributed in part to weaker international demand. Inventories have been
reduced relative to sales. Steel producers expect market conditions to
remain flat through at least the end of the year. District auto
production showed a moderate decline during September on a
month-over-month and year-over year basis for domestic nameplates, while
their foreign counterparts increased production.

Little change in capacity utilization was reported; rates were
within or slightly below their normal range. Several companies,
particularly those serving the energy and transportation sectors,
reported plans to expand capacity. Capital spending was largely on
track. Raw material prices were either flat or trended lower, while
finished goods prices were mainly steady. Manufacturers noted that they
are feeling pressure from customers to lower prices. The auto industry
provided a boost to District employment. Otherwise, manufacturing
payrolls expanded at a modest pace, even at companies experiencing a
pick-up in demand. Wage pressures are contained, and rising health
insurance premiums remain a challenge.

Real Estate

Reports from home builders indicated that the number of
single-family housing starts since mid-September increased relative to
earlier in the third quarter and on a year-over-year basis. Sales
contracts were found mainly in higher price-point categories. Some
contractors commented that shrinking inventories of existing homes have
spurred new residential developments. Opportunities in constructing
multifamily and special-needs housing remain strong. Nonetheless, tight
lending standards are seen as restraining the effect of low interest
rates for builders and home buyers. Builders are hopeful that the recent
improvement in sales will continue after the winter slowdown. List
prices of new homes are beginning to rise, and builders have cut back on
discounting. Sales of existing homes have picked up, with a few reports
of bidding wars.

Nonresidential contractors reported that business activity is
expanding. Although inquiries have slowed in the past few weeks, most
builders are satisfied with their backlogs going into 2013. Project work
is driven by multifamily housing and industrial contracts. Public-sector
projects have declined. Obtaining financing remains difficult,
particularly for projects that are deemed speculative by lenders.
Nonetheless, contractors are cautiously optimistic about activity going
into 2013.

Residential and nonresidential builders reported higher prices for
construction materials, especially drywall and lumber, with rising
prices being attributed in part to a cutback in output by suppliers.
Many builders have added to their payrolls during the past couple of
months, although some layoffs of seasonal workers are expected. Wage
pressure was felt among the skilled trades due to a lack of qualified
workers.

Consumer Spending

Most retailers reported a modest rise in sales during the past six
weeks relative to the same time period a year ago. Increased volume was
seen across product categories, except for home furnishings, which
declined slightly. There is concern about potential tax increases in
2013 and the effect they might have on household spending, especially
those in higher-income brackets. Our contacts are cautiously optimistic
about the holiday shopping season. Two retailers said that they have
expanded their inventories (after seasonal adjustments) in anticipation
of rising sales volume. Vendor pricing has been fairly stable. Any
increases were absorbed into store margins. Capital spending remains on
target. A few retailers reported that they are considering increasing
outlays during 2013, particularly for improvements to their distribution
systems. No permanent hiring is expected other than at new stores. The
number of temporary workers being hired for the holiday season is
similar to 2011.

New-vehicle sales were stronger during October when compared with
the same time period a year ago. Dealers reported that sales of
fuel-efficient cars and compact SUVs are doing well. Truck sales have
picked up, with the onset of the winter season. New-vehicle inventories
are rising, although one dealer said that trucks are in short supply.
Dealers expect little change in monthly sales for the remainder of this
year. Purchases of used vehicles rose slightly, though inventories are
still tight. Leasing continued to grow in popularity, which should help
to replenish the used-vehicle inventory by mid-2013. Bank credit was
more readily available as is captive financing. Hiring for sales and
service positions is slow. We heard reports about dealers partnering
with technical colleges to train people for all facets of dealership
work.

Banking

Demand for business credit moved slightly higher since our last
report. Many applications were for refinancing loans originated by
competitors. Small business owners found that credit is available, but
collateral requirements are more stringent than prior to the recession
and personal guarantees are often required. In contrast,
micro-businesses reported that it remains very difficult for them to
obtain credit. On the consumer side, several of our contacts reported a
decline in auto lending, while demand for other consumer products held
steady. Activity was strong in the residential mortgage market. Although
a large majority of applicants are looking to refinance, bankers noted
an increase in new-purchase requests. Delinquency rates improved across
consumer and commercial loan categories. Growth in core deposits was
driven more by business customers. Little change in banking payrolls is
expected for the remainder of this year and into 2013.

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** MNI Washington Bureau: 202-371-2121 **

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