Beige Book Report: Cleveland
October 16, 2013
The Fourth District's economy continued to expand at a moderate pace during the past six weeks. On balance, demand for manufactured products grew at a moderate rate. Housing market activity held steady; nonetheless, sales of new and existing homes were above year-ago levels. Nonresidential builders saw an overall pick-up in business. Retailers reported stronger sales during August and September, while new motor-vehicle purchases posted moderate gains on a year-over-year basis. Shale-gas activity is showing signs of moderating due to low natural gas prices; still, production is at historic highs. Output at coal mines trended lower. The rate of growth in freight volume has slowed. Applications for business credit were flat, while consumer credit demand rose slightly.
Hiring was sluggish across industry sectors. Staffing-firm representatives reported that the number of job openings and placements increased slightly, with vacancies found primarily in healthcare and manufacturing. Wage pressures remain contained. Input and finished goods prices saw little change, apart from increases in residential construction materials.
Manufacturing
Reports from District factories showed that demand was steady to growing at a robust pace during the past couple of months. Companies seeing the strongest activity were suppliers to the housing, motor-vehicle, and oil and gas industries. Weakness in euro-zone and Asian economies was often cited as a barrier to stronger growth. Defense contractors are still coping with uncertainty, which was attributed to the sequester. Compared to a year ago, manufacturing production levels are similar or higher. Most of our contacts are cautiously optimistic and expect little change in demand, although many were uneasy about fiscal issues and implications of the Affordable Care Act on their businesses. Steel producers and service centers reported that shipping volume is increasing, but at a very slow rate. Several respondents continue to express concern about the quantity of steel imports, especially from China. Steel producers do not expect market conditions to change appreciably in the upcoming months. District auto production recovered in August on a month-over-month basis as motor-vehicle assembly plants returned to normal production schedules. Compared to a year ago, motor-vehicle production figures revealed a sizeable increase.
Only a few manufacturers reported that they are moving forward with capacity expansion plans. Other producers said that they see a need to expand capacity, but they will not proceed because of uncertainty about the economy. One manufacturer commented that he will postpone any expansion until GDP grows at a sustained rate of 3 percent. Capital outlays are being allocated primarily for productivity enhancements. Several manufacturers indicated that they are taking a more conservative stance toward upcoming capital budgets until there is a higher degree of certainty about future demand. Raw material and finished goods prices were generally flat. Factories expanded payrolls at a sluggish pace. Several contacts expect production wages will rise between 2 and 3 percent in the near term. There is anxiety about rising health insurance premiums, which was attributed to the Affordable Care Act.
Real Estate
Sales of new single-family homes and construction starts were stable but below levels seen during the second quarter. Compared to a year ago, new home-building activity is considerably higher. Builders are uncertain about the effect of rising interest rates on potential buyers. New-home contracts were found mainly in the mid-price-point category. The first-time home-buyer category remains very weak. Builders are confident that demand for new homes will persist in the upcoming months, and they believe that some loosening in credit markets would provide a boost to their industry. Selling prices of new homes are rising across the District. Two builders told us that they were able to push through increases during August to offset rising labor and material costs.
Nonresidential builders reported an overall pick-up in business, but it remains difficult to move projects from the pipeline to a contract signing due to uncertainty on the part of clients. Very large projects are few in number, and renovations are more prevalent than new building in some regions of the District. In general, business is stronger than a year ago. Inquiries and backlogs have strengthened since our last report. The strongest activity was in manufacturing, distribution, healthcare, and multifamily housing. A developer of retail space characterized his industry as strong and much more positive than two years ago. He noted a decline in regional mall footprints due to chain consolidation and on-line shopping. Our contacts were fairly optimistic about near-term growth prospects, but they are concerned about unresolved fiscal policy issues.
Prices for residential construction materials--lumber and drywall--have increased substantially in the past year, but the rate of increase is slowing. General contractors reported very limited hiring of field and office workers. Many builders cited a scarcity of high-skilled trade workers, many of whom left the industry during the recession and are not returning. As a result, there is upward pressure on wages, and subcontractors are demanding higher rates. Subcontractors are also having difficulty obtaining operating capital.
Consumer Spending
Most retailers we spoke with reported that same-store sales were stronger in August and September than they had been during the previous four months and were above year-ago levels. They cited an improving labor market and new product introductions as reasons for the increase. Products in greater demand included back-to-school items, home furnishings, and cold-weather apparel. A food retailer attributed her chain's margin growth to consumers trading up in their buying habits. Fourth-quarter sales are expected to improve slightly when compared to those in the third quarter. Inventories were described as being in good shape. Retailers were able to clear out their left-over summer merchandise. Vendor and shelf prices held steady, and agricultural prices stabilized. Some of our contacts expect to increase capital spending in 2014, mainly for improving e-commerce and distribution systems. Hiring will be limited to staffing new stores. Temporary hiring for the upcoming holiday shopping season is expected to be modestly higher than a year ago.
Year-to-date sales through August of new motor vehicles showed a moderate increase when compared to the same time period a year ago. On a month-over-month basis, purchases of new vehicles were only slightly higher during August versus July. Buyers continue to prefer smaller, fuel-efficient vehicles, although trucks are in big demand in regions with considerable shale-gas activity. New-vehicle inventories are lower than desired, which dealers attributed to the model-year changeover. Our contacts are optimistic about sales for the remainder of the year. They project that sales volume for 2013 will be about 10 percent higher than in 2012 due to pent-up demand, the availability of financing, and the option to lease. Used-vehicle purchases increased during the past six weeks. Employment levels at dealerships held steady. Many of our contacts are concerned about the implementation of the Affordable Care Act and the effect it will have on their total labor cost.
Banking
Bankers reported that the low-interest-rate environment continues to hurt their revenues, though net interest margins are in line with expectations. Little change is anticipated in the near term. Demand for business credit was largely unchanged during the past six weeks. No loan category or industry is performing significantly better than others, although several bankers noted that commercial real estate lending has picked up. Competition for quality loans was described as aggressive. Consumer-credit demand showed a slight improvement, especially for auto loans and credit cards. Most bankers reported a slowdown in residential mortgage activity, mainly on the refinancing side. A slight rise in interest rates had little effect on new- purchase applications. For the most part, delinquency rates declined slightly across categories. On balance, banking payrolls were flat. We heard a couple of reports about layoffs due to branch-office downsizing or closures. Some wage pressure was reported, especially for employees working in regulation.
Energy
District coal production remains below year-ago levels; however, the rate of decline is shrinking. Going forward, producers project little change in production, but they are uneasy about the effects of the regulatory environment. Spot prices for steam coal declined, whereas metallurgical coal prices were flat. Oil and gas drilling held steady during the past six weeks. Output from shale-gas wells in Pennsylvania during the first half of 2013 was at a historic high. Well-head prices for natural gas are flat to down. One contact reported that, due to low natural gas prices and regulatory uncertainty at the federal, state, and local levels, the shale-gas industry will grow very slowly through the end of 2014, and the build-out of the transport and processing infrastructure will take longer to complete than originally estimated. Capital outlays are at targeted levels, and little change was seen in production-equipment and material costs. One coal company reported a workforce reduction; otherwise, payrolls held steady.
Freight Transportation
Freight executives reported that the rate of growth in shipping volume has slowed recently. However, year-to-date volume is higher when compared to the same period in 2012. Demand from motor-vehicle, shale-gas, and housing industries was strong. The industry outlook is favorable, with volume growing at a slow, but steady pace. Freight haulers are still uncertain about the impact of newly enacted hours-of-service regulations, especially on labor costs. Other operating costs were fairly stable. A few contacts noted that they have successfully negotiated rate increases. Some respondents plan to reduce capital outlays during the next fiscal year because substantial monies have already been allocated for capacity expansion or because equipment costs are high. The industry has been actively hiring for replacement and adding capacity.