WASHINGTON (MNI) – The following is the text of the Federal
Reserve’s Fourth District assessment in Wednesday’s Beige Book survey of
regional economic conditions, prepared by the St. Louis Fed through Feb.
17:

FOURTH DISTRICT – CLEVELAND

The economy in the Fourth District grew at a moderate pace during
the past six weeks. Manufacturers reported that business conditions have
improved. Activity in residential and nonresidential construction picked
up slightly. Comments by retailers about January sales were mixed, while
auto sales dipped along seasonal trends. Activity in shale gas drilling
and production expanded. Freight transport volume trended higher. And
the demand for business and consumer credit improved slightly.

Our contacts indicated that hiring by manufacturers and energy
producers has increased, though the recruitment of high-skilled workers
remains difficult. Reports from staffing-firm representatives tended
toward the negative. Two of our contacts noted a slight decline in the
number of permanent job openings, while others observed a small drop in
the number of placements. Wage pressures were largely contained. Price
increases were mainly limited to metals and to materials and equipment
used by energy producers and freight carriers. Manufacturing. New orders
and production at District factories were generally stable or moderately
higher during the past six weeks. A few manufacturers told us that
growth was being tempered by lessening demand from European customers.
The majority of our contacts saw a moderate improvement in output
compared to year-ago levels. Manufacturers are cautious in their outlook
and anticipate modest gains in demand. Most steel producers and service
centers reported that shipping volume was trending slightly higher.
Demand is being driven by the oil and gas, transportation, and
industrial equipment industries. Steel representatives are cautiously
optimistic about shipments during the second quarter of 2012, and they
expect the positive growth trend to continue. District auto production
showed a substantial rise during January on a month-over-month and
year-over-year basis. Increases were attributed, in part, to the
abatement of supply chain issues.

Capacity utilization remains below normal for the majority of our
contacts, with little change expected in the near term. A few
manufacturers said that they have been building inventories to meet
approaching seasonal demand; otherwise, inventories were balanced with
orders. Nearly half of our contacts reported that their capital budgets
for 2012 will be higher than in 2011. A slight rise in raw material
prices was noted-especially for metals, with increases being passed
through to customers. New hiring by manufacturers has become more
widespread, though the average number of hires per company is fairly
low. Those adding to payrolls found it difficult to recruit professional
and high-skilled production workers. Wage pressures are contained.

Construction

The uptick we saw in single-family home construction toward the end
of last year has abated somewhat. Nonetheless, builders reported that
January sales were above year-ago levels and traffic and inquiries have
picked up. Sales contracts were mainly in the move-up price-point
categories. Builders’ outlook for single-family construction can best be
described as uncertain. In contrast, activity in multi-family
construction and the conversion of existing properties to rental units
is expected to be strong. One of our contacts noted a significant upturn
in remodeling and maintenance. Little movement was seen in the list
prices or discounting of new homes. A few builders commented that they
would like to increase their spec inventory, but they are unable to
obtain financing. Employment and wages were stable. Activity in
nonresidential construction for small to medium-size contractors has
improved during the past few weeks. Inquiries have shown a modest
increase, and backlogs are starting to grow.

Construction contracts were primarily with industrial and retail
customers. One contact described pockets of significant activity in
large commercial construction projects across the District, noting
particular strength in northeast Ohio. The outlook by small to
medium-size builders has brightened since our last report. One
contractor observed that while business is slowly returning to pre-2008
levels, profit margins are still very tight compared with this point in
past recoveries. Other than rising prices for steel and drywall, the
cost of building materials was steady. We heard two reports about
project financing being easier to obtain. Payrolls were little changed,
but they are expected to rise slightly in the near future. Consumer
Spending. Reports on January retail sales were mixed. According to
several of our contacts, the warm winter weather is negatively impacting
purchases of seasonal merchandise. However, products used outdoors, such
as sporting goods, are selling better than expected. Sales for the first
quarter of 2012 are generally expected to improve over prior-year
levels, mainly in the low- to mid-single digits. Looking at vendor
pricing, reports were also mixed. Retailers told us that lower costs
attributable to declining cotton prices were offset by a rise in
overseas labor costs. Retailers are satisfied with their inventories
except for cold-weather apparel, which is higher than desired. Capital
budgets for 2012 will be slightly greater than in 2011 for a majority of
our contacts. Outlays will be used mainly for technology enhancements,
remodeling, and new store construction. Payrolls at existing stores were
stable.

Auto dealers reported a slowdown in new-vehicle sales during
January that followed normal seasonal trends. On a year-over-year basis,
sales were somewhat higher. A few dealers noted that their inventories
are now on the high side but are manageable; others said that
inventories are light. The outlook for 2012 was generally optimistic.
However, several of our contacts were uncertain about whether or not the
sales increases seen during 2011 would be repeated this year. Purchases
of used vehicles showed a modest improvement, but inventories were low
and prices elevated. On the financing side, interest rates remain
competitive, and at the same time it is difficult to arrange financing
for customers with low credit scores. Auto dealers looking to hire
reported that it is not easy to find qualified candidates, especially
sales representatives and service technicians.

Banking

Demand for business credit was described as either stable or
slightly higher. Any drop-off was attributed to seasonal factors.
Requests are being driven by commercial real estate, including spec
building, and healthcare. On the consumer side, most of our contacts
said that installment loan activity is flat, although auto lending
(direct and indirect) continued to show strength. A few bankers reported
a decline in the use of credit cards or home equity lines of credit
during January. Some stabilization in interest rates for business and
consumer credit was observed. In the residential mortgage market, real
estate appraisals remain on the conservative side, and a majority of
applicants are looking to refinance. No changes were made to loan
application standards. Delinquencies were steady or declined across loan
categories. Overall core deposits grew, with continued runoff from CDs
into more liquid assets. Payrolls were stable, and little hiring is
expected in the near term.

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

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