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U.S. Federal Reserve Beige Book: Cleveland District (Text)

June 06, 2012

The following is the text of the Federal Reserve Board’s Fourth District-- Cleveland.


Business activity in the Fourth District has grown at a moderate pace since the beginning of April. Manufacturers reported stable production, while residential and nonresidential construction showed moderate growth. Retail sales held steady, and auto dealers described April sales as generally good. Exploration and production in shale gas expanded, even as the demand for coal has slowed. Freight transport volume moved higher. And the market for business credit has strengthened.

Hiring continued at a modest pace across most industry sectors, although staffing-firm representatives reported that the number of job openings had increased for information technology and healthcare workers. Wage pressures are contained. Input prices were stable, apart from increases in building materials.

Manufacturing. New orders and production at District factories were mainly steady during the past six weeks, with a few reports indicating a weakening in orders from European customers. Nonetheless, a majority of our respondents said that output was above year-ago levels. The outlook by manufacturers has grown more positive since our last report, buoyed by a pickup in activity in the construction, energy, and transportation sectors. Manufacturers expect that this pickup will continue through the remainder of 2012. On balance, shipping volume by steel producers and service centers was stable. Demand is being driven mainly by the auto industry. Steel shipments are expected to follow their seasonal drop-off during the summer. However, several of our contacts expressed uncertainty about the extent to which markets will pick up in the fourth quarter. District auto production showed a moderate decline during April on a month-over-month basis, while increasing substantially from prior-year levels. Year-over-year increases were attributed mainly to the abatement of supply chain issues.

No change in capacity utilization was noted, with most producers running at or slightly below normal rates. Inventories were generally consistent with demand. Respondents citing rising inventories reported that they are manageable. Capital budgets remain on track; only one-third of our contacts said that they expect to increase outlays during the upcoming months, mainly for information technology upgrades or capacity expansion. Input costs were stable, with any upward pressure being characterized as modest. However, the majority of our respondents reported raising their product prices slightly, partly to recoup raw- material cost increases that they were unable to pass through in prior years. A few manufacturers reported hiring due to expansions in auto and steel plants; otherwise there was little change in payrolls. Wage pressures are contained.

Real Estate. Single-family home construction showed a moderate improvement during the past couple of months, and the majority of our contacts said that sales were significantly above year- ago levels. Contracts were almost all in the move up price-point categories. While builders are encouraged by year-to-date results, they are guardedly optimistic in their outlook. We heard a few reports of builders raising new home prices, though margins are still tight. Reports indicated a broad-based rise in building material prices. One respondent told us that suppliers are raising prices because there is a perception that the housing industry is on a comeback. Year-to-date sales of existing single-family homes showed modest growth relative to prior-year levels across the eastern third of the District. Several of our contacts noted that sellers are becoming more realistic and flexible about asking prices. The appraisal process remains a major challenge.

Activity in nonresidential construction for small to medium-size contractors continued to strengthen and stands at a higher level than a year ago. Financing projects is getting easier, but banks still demand a substantial equity share on the part of the developer, and the amount of due diligence required has increased. Construction activity is broad based, driven by healthcare, higher education, hospitality, and retail. We heard several reports of downward pressure on rents for retail space, which was attributed to retailers looking for smaller footprints. Our contacts expect that business will continue to slowly improve as the year progresses. The majority of residential and commercial builders reported hiring a few people, but recruiting highly qualified candidates is difficult, especially for project managers. Top candidates are demanding higher wages.

Consumer Spending. Retailers reported that April sales held steady on a month-over-month basis, but increased by mid-single digits relative to year-ago levels. Contacts cited the unusually warm, dry spring weather as a factor for the pickup in sales across product lines. Nonetheless, several reports described middle-income households as stressed. One contact noted that his company is investing in the development of new products that would be more attractive to value-conscious consumers. All of our contacts anticipate that revenues during their next fiscal quarter will be above prior-year levels, mainly in the mid- single digits. Retailers cited upward pressure on vendor costs, which they attributed to elevated commodity prices and increased costs for packaging and off-shore labor. There was some reluctance to pass through rising costs to consumers. Inventories rose modestly, but they were described as manageable. Capital spending for the year remains on target, with a large majority of retailers expecting to increase outlays during the upcoming months. Monies will be used largely for technology enhancements, distribution facilities, and store remodeling. Little hiring is anticipated, except at new stores.

Auto dealers characterized new-vehicle purchases during the past six weeks as generally good, with commercial truck sales doing particularly well. Some slowing of passenger car sales was reported, which dealers attributed to a lack of incentives from the manufacturers and a small number of lease rollovers. On a year-over-year basis, transactions were higher. Most contacts are satisfied with their inventory positions. The outlook by dealers for the remainder of 2012 has grown more positive since our last report, although some dealers believe that total sales during 2012 will be slightly below prior-year levels. Purchases of used vehicles were fairly steady year-over-year--inventories are building and prices declined slightly. On the financing side, we heard two reports that banks are more willing to work with dealers. Leasing activity picked up. Dealers are investing in manufacturer-mandated facility upgrades and imaging programs. Hiring for sales and service positions continued, but at a very slow pace.

Banking. Demand for business credit is on the upswing. Bankers reported that loan pricing remains very competitive. Loan requests were broad based, with the primary drivers being commercial real estate, energy, and healthcare. Little change in consumer credit was noted. Products in highest demand were auto loans (direct and indirect) and revolving lines of credit. Consumer credit pricing held steady. In the residential mortgage market, demand was described as stable to very strong. A high percentage of applicants are looking to refinance, although a few bankers said that they are beginning to see a shift in applications from refinancing to new purchase. No changes were made to loan application standards; some respondents saw an improvement in the quality of loan applicants. Delinquencies were steady or declined, with several bankers citing a drop in credit card delinquencies. Core deposits rose. There was a slight increase in the number of new hires compared to a couple of months ago, but on balance, no change in payrolls is expected in the near term.

Energy. Conventional oil and natural gas production was stable, with little change expected in the upcoming weeks. Conventional drilling has slowed due to very low natural gas prices. Well- head prices for oil dropped slightly. The Ohio Department of Natural Resources has issued 119 Utica shale drilling permits since January 1 and 68 horizontal wells are currently being drilled in Ohio. Coal production during 2012 is expected to be slightly less than 2011 levels. Spot prices for metallurgical and steam coals declined. Production equipment and materials prices were flat. Capital spending is expected to hold at current levels or decline. Little change was seen in energy payrolls.

Transportation. Overall, freight transport volume moved higher. A couple of contacts did report a modest slowdown beginning in April, although they were uncertain if this was the beginning of a trend. Sectors driving demand include energy and transportation along with seasonal products. Volume is expected to continue growing at a moderate to strong pace for the remainder of the year. However, all of our contacts expressed concern about the regulatory environment and the negative impact it could have on potential growth. Costs associated with truck maintenance moderated, and diesel fuel prices have declined, although fuel surcharges remain in place. Many carriers negotiated rate increases as freight contracts came up for renewal. Capital spending for 2012 remains on plan. Outlays are allocated for replacement of aging units and adding capacity. We heard two reports about small carriers reducing the size of their fleets due to high replacement costs. Companies are hiring for replacement and capacity expansion. Wage pressure exists due to a tightening of the driver pool.

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