Beige Book Report: Cleveland
April 16, 2014
On balance, economic activity in the Fourth District declined slightly in the past six weeks. The severe winter weather appears to have negatively impacted business activity to a heightened degree; some producers and service providers are still experiencing lingering effects. Demand for manufactured products grew at a slow rate. Building contractors reported that their pipelines remained active, while field work slowed. Retailers and auto dealers experienced disappointing sales during February and into March. In the energy sector, shale gas production stayed at a high level, while coal output trended lower. Freight volume declined. Demand for business and consumer credit moved higher.
Hiring was sluggish across industry sectors. Reports by staffing-firm representatives on the number of job openings and placements were mixed, with job vacancies found primarily in manufacturing and healthcare. Wage pressures are contained. Input and finished goods prices saw little change, apart from increases in metals, building materials, and diesel fuel.
Manufacturing
Reports from District factories indicated that production levels held steady or they started to pick up as supply chain disruptions seen earlier in the year dissipated. Compared to a year ago, demand was generally consistent or somewhat higher. Many of our contacts expect production will rise relative to current levels in the upcoming months, with the strongest demand coming from the oil and gas sector and the motor vehicle industry. However, some concern was expressed about a weakening in Chinese and western European markets and its effect on new orders. Steel shipments grew slightly during the past six weeks. Contacts expressed disappointment with the overall level of market activity during the first quarter. Some believe that the severe winter weather may be partially responsible for the slow start to the year. Steel shipments are expected to grow, but at a slow pace: estimates of year-over-year growth rates ranged from 2 to 5 percent. District auto production increased modestly during February on both a month-over-month and year-over-over basis. One motor vehicle OEM reported that recent weather-related supply disruptions might negatively impact his production schedule until early summer.
Finished goods inventories have increased slightly, primarily due to an expected rise in demand or weather-related cutbacks in new orders. Several contacts noted that their capacity utilization rates rose during the past six weeks but are still within a normal range. Capital expenditures were in line with budgeted amounts for the fiscal year. Current budgets are higher than those of a year ago, with outlays being used for equipment upgrades, product development, and maintenance. Raw material price growth was mainly flat, although several reports indicated rising prices for metals. However, passing through price increases to customers was difficult. The number of manufacturers who are hiring skilled production workers and engineers has declined since our last report. Wage pressures are contained.
Real Estate and Construction
The number of new and existing single-family homes sold during February was little changed compared to the previous month. On a year-over-year basis, the number of units sold showed a modest decline. In contrast, single-family housing starts across the District fell sharply between January and February and compared to a year ago. Single and multifamily permits also declined during February. Although the drop-off in activity was attributed primarily to the cold weather, there is some concern about the housing market stabilizing after a year of fairly robust growth. New-home contracts were in the move-up price-point categories. Builders raised prices slightly on new homes after the beginning of the year to offset material and labor cost increases. Most of our contacts anticipate that the housing market will grow at a slow but steady pace in 2014.
Activity in nonresidential construction held steady during the past six weeks, with demand coming from a broad range of industry sectors. Reports indicated that the severe winter weather slowed fieldwork. While inquiries continued at a steady pace and backlogs were characterized as reasonably good, builders expressed frustration with financing issues or customers who keep pushing back contract signings. Some builders believe the latter is due to a lack of confidence in the underlying strength of the economy. One contact observed that unless clients have a compelling need, they will not move on new construction. Nonetheless, builders remain cautiously optimistic and expect modest to moderate growth this year.
Prices for concrete, drywall, and hardwood are trending higher. General contractors are satisfied with current staffing levels and plan to hire only for replacement or if business activity expands. Subcontractors are still confronting a tight supply of skilled labor; their ability to perform in a robust market and rising wage rates are a concern among many general contractors. Reports of rising costs related to healthcare are widespread.
Consumer Spending
Retailers reported that the cold weather played a role in holding down consumer spending during February and into early March. A few of our contacts observed that as weather conditions began to improve later in March, so did their sales. In general, same-store revenues were down slightly from a year ago. Cold-weather gear and small personal items were in highest demand. One contact reported a softening in purchases of consumables. Retailers are optimistic about consumer spending in the second quarter due to pent-up demand, the Easter holidays coming in late April, and warmer weather. Most projections were for single-digit increases in revenues. Vendor and shelf prices held steady. Several retailers noted that they are running more promotions than normal, though inventories were described as being in good shape. Hiring will be restricted to staffing new stores, and even here, it will be limited.
The number of new motor vehicles sold in February fell sharply compared to January figures. The decline was attributed to the persistently cold weather. However, unit volume was unchanged from a year earlier as light-truck sales continued to trend higher and auto sales moved down. New-vehicle inventories remain slightly elevated, which was credited to the extreme weather. Used-vehicle purchases during February were ahead of those in January and a year ago. The outlook by dealers for the spring selling season is positive, with several noting a rise in incentives at this time of year to help boost sales. Leasing continues to grow in popularity as an alternative to purchasing a vehicle. Dealers are anticipating an uptick in payrolls, some of which is seasonal.
Banking
Demand for business credit began to pick up after a slow start earlier in the year. Requests were strongest for commercial real estate development, including multifamily housing, equipment financing, and mergers and acquisitions. Pricing of business loans remains competitive. Consumer credit demand stayed on a slow upward trend. Requests were primarily for auto loans and home equity products. We heard a few reports about declining credit card balances. Comments on residential mortgage activity were mixed; bankers seeing an increase said that most applications were for purchase transactions. Our contacts reported no changes to loan-application standards. Delinquency rates were stable or trended lower. Core deposits (consumer and business) grew slightly since our last report. Banking payrolls held steady, with little change expected in the upcoming months.
Energy
First-quarter coal production across the District fell below year-ago levels. However, the rate of decline is shrinking, due in part to higher demand from domestic electric utilities. Going forward, little change in output is projected. Spot prices for steam coal rose slightly, while metallurgical-coal price growth was flat. Natural gas production was stable at a high level. However, the number of unconventional wells drilled has fallen off. We heard a couple of reports indicating that conventional drilling companies are experiencing historic lows in activity due to low natural gas prices. Apart from diesel fuel, equipment, material, and labor costs were stable. Hiring was for replacement only.
Freight Transportation
Freight executives reported that their bottom lines fell sharply through the first two months of 2014 due to the severe winter weather—volumes declined while costs rose. After adjusting for weather-related costs, carriers were still close to their projected growth targets. As weather conditions improved, volume began to pick up. However, one contact noted that some business that was lost to the weather is unlikely to be regained. Diesel fuel prices moved higher in January and February. Operators have been unable to pass through the entire increase via surcharges. Year-to-date capital expenditures were in line with budgeted amounts. Monies are allocated more for equipment replacement than for capacity expansion. We heard reports about some carriers experiencing difficulty meeting demand due to the impact brought about by the hours-of-service regulations. The end result could be higher rates, which would help enable carriers to purchase additional equipment. Hiring is mainly for replacement.