Beige Book Report: Cleveland
April 17, 2013
Business activity in the Fourth District expanded at a moderate pace during the past six weeks. Manufacturing orders and production were mostly higher. The momentum seen in residential construction since the beginning of the year, including multi family, has been maintained. Nonresidential construction activity increased slightly, but remains below levels seen in the second half of last year. Retail sales volume between mid-February and mid-March was higher relative to the lackluster post-holiday period, while new motor vehicle sales posted moderate gains on a year-over-year basis. Conventional and unconventional natural gas and oil production was stable, but a pickup is expected later in the year as additional gas processing units come on line. Output at coal mines trended lower. Freight transport volume exceeded projections made late last year. Demand for business and consumer credit was higher when compared to early in the first quarter.
Hiring was sluggish across industry sectors, although the pace has picked up among home builders since the start of the year. Staffing-firm representatives reported that the number of job openings and placements rose slightly, with vacancies found primarily in industrial production. Wage pressures were contained. Input prices were stable, apart from increases in construction materials.
Manufacturing
Reports from District factories indicated that new orders and production were mostly higher during the past six weeks. Companies seeing the most activity were suppliers to the residential construction, shale gas, and transportation industries. Manufacturers serving the defense and commercial building industries experienced some weakening in new orders. Exports to Pacific Rim countries improved, while exports to Europe diminished. Compared to a year ago, manufacturing activity was mixed. Steel producers and service centers reported that the pickup in shipping volume early in the first quarter has leveled off. Excess steel produced in China and Europe is now being imported into the United States in larger quantities. Auto production at District plants rose at a moderate pace during February on a month-over-month basis. Compared to a year ago, production numbers were little changed. Many manufacturing contacts remain cautiously optimistic about near-term growth prospects.
Capacity utilization rates stood within their normal ranges. Steel producers reported reducing inventories during the past six weeks, while inventories at other factories held steady. Capital expenditures were on plan for the fiscal year. Most outlays are allocated for technology that will be used to enhance productivity. Little capacity expansion is planned. Raw material and finished goods prices were flat or trended lower. Many manufacturers noted that their ability to raise prices during 2013 is likely to be very limited. Manufacturing payrolls were stable and wage pressures are contained.
Real Estate
Sales of new and existing single-family homes continued on an upward trend since our last report, and sales were higher than a year ago. Contracts were found mainly in the mid- to higher-price-point categories. Demand for multi-family housing remains strong. A developer of market-rate apartments described activity as very good. Another developer said that demand for affordable rental units is surging. While builders expressed confidence that the improvement in the housing market will persist in the upcoming months, they still see the appraisal process and the availability of financing as headwinds to more robust growth. Reports indicated that list prices of new homes increased by 1 to 2 percent this year, which was attributed to shrinking inventories and rising prices for building materials, especially lumber and drywall. Builders have cut back on discounting.
Nonresidential contractors saw a modest increase in activity, relative to the January/February time period. The number of inquiries is rising, but many builders are underbidding in an effort to keep their resources engaged. As a result, tight margins are being compressed even further. Project work is found mainly in manufacturing, large multifamily developments (affordable, market rate, and senior), and shale gas infrastructure. Our contacts are cautious about near-term activity. Many builders pointed to uncertainty in the market and clients who are unwilling to take risks at this time. In addition, the time-consuming process of financing a project is holding back some clients. Little change was reported in prices of building materials.
General contractors (residential and nonresidential) expect subcontractors will attempt to raise their rates and push through price increases for materials by the second half of this year. The potential rise was attributed to a dwindling number of subcontracting businesses and stronger demand. Residential builders are hiring at a moderate pace, especially field personnel. Nonresidential builders are looking to hire a few project managers and back-office employees. Concerns about difficulties in finding qualified workers and escalating healthcare benefit costs were widespread.
Consumer Spending
Most retailers reported that sales volume for the period from mid-February through mid-March was higher relative to the previous 30-day period. Rising volume was particularly evident in apparel and electronics. Store managers who experienced a downturn in sales cited higher gasoline prices and taxes as contributing factors. Second-quarter sales are expected to be up slightly, when compared to the same quarter last year. Vendor and shelf prices held steady. A food producer commented that agricultural commodity prices, though elevated, are fairly stable, and he anticipates little upward pressure on prices attributable to food during 2013. Capital expenditures were on plan for the fiscal year. One retail chain projected significantly higher capital investment this year, but much of it is allocated for remodeling older stores. No hiring is anticipated, except for staffing new stores.
Year-to-date sales of new motor vehicles showed a moderate increase during February compared to the same time period a year ago. A few dealers noted that cold weather had curbed consumer enthusiasm. Buyers continue to prefer smaller, fuel-efficient cars and compact SUVs. Large pick-up trucks were big sellers in regions with significant shale gas activity. New-vehicle inventories were higher than most dealers would like. Our contacts are cautiously optimistic about sales prospects for the year, with most projecting 5 percent to 10 percent growth over 2012. However, some are concerned about fiscal policy decisions and the potentially negative impact they could have on the economy and consumer spending. Sales of used vehicles declined during February. Leasing is trending higher, which should help to replenish the used-vehicle inventory. Financing continues to loosen except for those buyers with low credit scores. Dealers are reluctant to add to their sales staff at this time.
Banking
Demand for business credit has picked up since our last report. Although requests originated from a broad range of sectors, commercial real estate and manufacturing stood out. Loan pricing remains under pressure. Reports on consumer credit also showed a small rise in demand, mainly for home-equity products and auto loans. Bankers noted a slight drop-off in residential mortgage activity; however, there was a definite shift in applications from refinancing to new purchase. Delinquency rates held steady or declined across consumer and commercial loan categories. No changes were made to loan-application standards. Aggregate core deposits grew; customers continue to transfer monies from non-liquid to liquid accounts. Bankers remain very concerned about shrinking net interest margins. In response, some are considering raising fees in all areas. On balance, there was little change in payrolls. Two bankers reported rising employment numbers due to acquisitions.
Energy
Coal production continued to trend down across the District, with lower production projected for the near term. One producer commented that demand from electric utilities has risen slightly due to an extended period of cold weather and an uptick in natural gas prices. Spot prices for metallurgical and steam-coal are up somewhat. Output from conventional and unconventional oil and natural gas wells was steady during the past couple of months. In the wet gas regions of Ohio and West Virginia, output should begin to increase later in the year as newly constructed gas processing units come on line. Well-head prices for oil and gas rose slightly. Rig count in the District was stable during the first quarter. Capital expenditures were at targeted levels, with little change expected. Production equipment and material prices were flat across most categories. Oil and gas payrolls held steady, while coal operators reported additional layoffs.
Freight Transportation
For the most part, our contacts reported that shipping volume was somewhat higher than expected for this time of year, although no product area stands out. Freight executives are more optimistic about growth prospects than earlier in the year, and some believe that their growth projections for 2013 may be too low. Diesel-fuel prices have started to trend down from high levels, which carriers passed through via surcharges. Costs associated with equipment and maintenance items were stable. Capital spending was generally down in the first quarter of this year relative to late last year. However, our contacts believe that spending will begin to pick up in the second quarter. One executive stated that he has an aggressive spending plan in place, which includes capacity and footprint expansion. Hiring is for replacement and capacity expansion. New hours-of-service regulations (federal) may prompt additional hiring, but it will put upward pressure on shipping prices. Wage pressures are contained.