Beige Book Report: Cleveland
March 5, 2014
Overall business activity in the Fourth District continued at a moderate pace early in 2014. While the severe weather contributed to some temporary slowing across industry sectors, it was viewed mainly as an inconvenience. Demand for manufactured products remained at a moderate to robust level. Activity in the construction sector slackened a bit compared to the same time period a year ago. Post-holiday retail purchases were characterized as disappointing. In contrast, January's auto sales showed strong gains month-over-month. The energy sector was little changed: shale gas activity stayed at a high level, and coal production trended lower. Freight volume was slightly higher. Demand for business credit showed little movement, whereas consumer credit usage was somewhat better than expected.
Hiring was sluggish across most industry sectors, though we are seeing a pickup in manufacturing jobs. Staffing-firm representatives reported that the number of job openings is trending higher, while placements are flat. Vacancies were found primarily in manufacturing and healthcare. Wage pressures were contained. Input and finished goods prices saw little change, apart from some increases in building materials, energy, and diesel fuel.
Manufacturing
Reports from District factories indicated that demand stayed at a moderate to robust level during the past six weeks. Any production declines were attributed to the severe winter weather disrupting raw material deliveries or to seasonal variation. Supply chain disruptions were viewed more as an annoyance than an event that could negatively impact business activity. Compared to a year ago, production levels were generally consistent or somewhat higher. Almost all of our respondents expect production will rise relative to current levels in the upcoming months, with the strongest demand coming from the aerospace, capital equipment, housing, and oil and gas industries. Since the beginning of the year, steel shipments grew slightly--mainly a seasonal effect. Producers predicted that their industry will not exhibit strong growth until there is considerable strengthening in the construction sector and a greater sense of confidence in the economy at large. Steel shipments for the remainder of the first quarter are expected to pick up only slightly. Auto production at District plants increased along seasonal trends during January on a month-over-month basis. Compared to a year ago, production was moderately higher.
Several factory representatives commented that capacity utilization rates were above their normal range or were increasing in the last six weeks, while steel producers noted significant open capacity. Capital budgets for 2014 are generally higher than last year, although very few contacts are allocating monies for capacity expansion. Outlays are being used primarily for equipment purchases, product development, and maintenance. Raw material prices were mainly flat to lower. We heard a few reports of an upward drift in scrap metal and agricultural commodity prices after coming off of last year's low level. Energy prices (electricity and natural gas) rose, which was attributed to the severe weather. Some producers of industrial durables raised prices at the beginning of the year with little pushback. Otherwise, most manufacturers reported that their ability to raise prices has been limited. Job markets are showing some signs of strengthening, with half of our respondents indicating that they are hiring production and salaried workers. Wage increases are expected to be slightly higher in 2014 compared to the past couple of years. A growing number of employers are passing through rising healthcare costs to their employees.
Construction
Sales of new and existing single-family homes across much of the District were significantly higher in 2013 relative to the prior year, while average sale prices showed a moderate increase. Builders reported that sales of new single-family homes slowed during the first few weeks of 2014, which they attributed to the extreme cold. Web traffic trended higher. New-home contracts were found mainly in the mid-price category, and the selling prices of new homes continued to stabilize. Reports indicated that multifamily housing remains the strongest segment in the District's construction sector, and some believe there is a risk of overbuilding. Nonetheless, rents are expected to rise 3 to 4 percent this year. Builders anticipate that the housing market will grow at a steady pace in 2014.
The pace of activity in nonresidential construction has slowed a bit relative to the same time period a year ago. Builders said that while inquiries, many from first-time customers, are strong, projects keep dropping out of the pipeline due to financing issues or a last minute decision not to proceed. Backlogs are down slightly, and the severe winter weather has slowed fieldwork. Demand was strongest for industrial and institutional building, including flex-space, distribution, manufacturing, student housing, and senior living. Our contacts remain fairly optimistic about near-term prospects, and they are anticipating moderate growth this year.
Prices for drywall, steel, and plumbing fixtures are trending higher. General contractors reported satisfaction with current staffing levels and will only hire for replacement or if business activity rises above expectations. Reports of rising costs related to healthcare were widespread. There is concern among small builders that employees may lose their employer-paid insurance. One report indicated that a growing number of builders are offering employees a lump sum payment to purchase their own health insurance rather than offering it as a benefit.
Consumer Spending
Almost all retailers we contacted expressed disappointment with January sales. Revenues were below those seen in December, and they were down compared to a year earlier. Cold-weather gear and consumables were in highest demand. Most of the decline was attributed to persistently poor weather conditions. However, two retailers commented that part of the decline is related to a fundamental shift in how consumers spend money. A furniture dealer reported that his customers are less inclined to buy quality goods that can be handed down. Rather, consumers are buying only what they need and are looking for the best value. Projections for the second quarter call for sales to be modestly higher relative to those in the first quarter. Vendor and shelf prices held steady, though a few retailers noted that they are running more promotions than normal. One contact reported that he has been introducing more products at a lower price point. This year's capital budgets will be mainly higher than in 2013. Most of the monies are allocated for opening new stores and e-commerce expansion. Hiring will be limited to staffing new stores and e-commerce support.
The number of new motor vehicles sold in January was significantly higher than in December. On a year-over-year basis, sales showed a modest increase. Buyers continued to shift from smaller, fuel-efficient cars to SUVs, crossovers, and light trucks. One dealer told us that truck sales in the southwest region of the District rose 11 percent last year, which he believes reflects an uptick in commercial and construction activity. New-vehicle inventories were described as slightly elevated, which was attributed to leftover 2013 models and the extreme weather. Used-vehicle purchases during January were slightly ahead of those in December and on a year-over-year basis. Expectations for sales of new and used vehicles are positive. Dealers cited the arrival of income tax returns and interest generated by regional auto shows. Used inventory will start building due to the expiration of 2011 leases. Payrolls held steady.
Banking
Demand for business credit showed little movement. Brisk competition continues to put downward pressure on loan pricing. Consumer credit demand grew slightly since our last report, primarily for auto loans and home equity products. Residential mortgage activity picked up a little, more so in the new-purchase market. Several bankers raised concerns about recently enacted regulations and their potential negative impact on lending. Delinquency rates were stable or trended lower. Bankers reported no significant changes to loan-application standards. On net, core deposits were flat: increases by consumers were offset by declines in commercial deposits. Little net growth in staffing is expected. Many new job openings are in the areas of regulatory compliance and IT.
Energy
January's aggregate coal production across the District fell below year-ago levels. Going forward, little change in output is projected. Spot prices for metallurgical and steam coal were flat. The number of drilling rigs in Ohio's Utica shale region has increased since the beginning of the year. Natural gas production was stable and continuing at a high level. Cold weather helped boost wellhead prices for natural gas and oil. Reports on capital spending were mixed, although one respondent commented that his firm plans to increase funding to its drilling-program in Marcellus and Utica shales by 80 percent year-over-year. Production equipment and materials prices were flat. Hiring was for replacement only.
Freight Transportation
Freight executives reported that it is difficult to gauge changes in shipping volume due to supply chain disruptions attributed to severe weather. Nonetheless, most respondents believe volume has risen slightly year-over-year. Shipments of motor vehicles and machinery were strong. The industry outlook for 2014 is somewhat less favorable than in our previous report. Most of our contacts now expect volume will be in-line or moderately higher than a year ago. Recently enacted environmental and safety regulations are constraining capacity and putting upward pressure on rates. Diesel fuel prices moved higher in January. Operators have been unable to pass through the entire increase via surcharges. Reports on capital spending plans for 2014 were mixed. The industry is hiring primarily for replacement and to maintain capacity.