Beige Book Report: Cleveland
June 4, 2014
Business activity in the Fourth District expanded at a modest pace during the past six weeks. New orders and production at District factories grew slowly. Construction activity began to pick up in the second quarter, after a slow start to the year. Auto dealers saw a strong rise in new-motor-vehicle sales during April, while retailers experienced rising sales on a year-over-year basis. In the energy sector, coal exports strengthened, and shale gas drilling edged slightly higher. Freight volume improved to more normal levels. Demand for business and consumer credit moved higher.
Employment has picked up in the manufacturing and construction sectors. Staffing-firms reported little change in the number of job openings and placements, with job vacancies found primarily in the manufacturing and oil and gas industries. Several of our contacts noted a shift toward hiring temporary workers. Wage pressures are contained. Input and finished goods prices were stable, apart from some increases in steel, construction materials, and agricultural products.
Manufacturing
Reports from District factories indicated a modest increase in new orders and production during the past six weeks; contacts attributed some of the improvement to seasonal factors. Finished goods inventories were in line with orders. Compared to a year ago, demand was generally consistent or somewhat higher. Strongest demand came from the aerospace, motor vehicle, oil and gas, and residential construction markets. While there is growing confidence in western European markets, the outlook for the Chinese economy remains a question. Our contacts are fairly optimistic about the U.S. outlook and they expect demand will rise relative to current levels in the coming months. Steel shipments grew slightly since our last report, and the pace of growth is expected to increase as the year progresses. Through April, year-to-date auto production at District assembly plants is almost 10 percent higher as compared to 2013.
Capital expenditures are in line with budgeted amounts for the fiscal year. A majority of our respondents reported that they intend to increase their capital budgets as the year progresses for software-based productivity enhancements or for capacity expansion--additional machinery and larger plant footprints. Raw material prices were largely unchanged, though a few manufacturers reported that steel prices have risen slightly. Little pass-through was noted. Hiring of production workers has picked up recently, but the net gain in payrolls is still small. Wage increases this year are in the range of 2 to 3 percent.
Real Estate and Construction
Sales of new single-family homes improved during the past six weeks, and the number of units sold was higher than during the February/March time frame. Most of our contacts noted that year-over-year sales were slightly higher. Existing single-family home purchases also started to improve in April. Reports indicated that the inventory of existing homes decreased, while the number of days on the market rose slightly. New-home contracts were mainly in the move-up price-point categories. First-time buyers continued to experience difficulty obtaining credit, especially for condominiums. Selling prices of new homes are trending slowly higher (5 to 10 percent from a year ago) due to rising labor, development, and material costs. Buyers are reportedly more accepting of the higher prices. Homebuilders believe that the housing market will grow at a slow but sustained pace in 2014.
Many nonresidential builders characterized current pipeline activity as strong, and they are fairly optimistic about converting proposed projects into contracts, though they expect that margins will remain tight. Builders experiencing declining revenue this year attributed it to 2013 being an exceptional year, and they said they were not expecting the same level of activity. Backlogs are satisfactory. Demand was strongest for multifamily housing, retail, distribution centers, and healthcare facilities--albeit small footprints. Confidence in the economy is still somewhat tepid, which is holding back some high-value projects.
Commercial developers said that banks are becoming more interested in financing projects, although the amount of paperwork required seems excessively high. One developer reported that banks are now quoting 10-year loans, and insurance companies have resumed CRE lending. In contrast, banks are reluctant to finance spec home construction and lot development. Comments on construction-material pricing varied widely, with cited increases ranging from 2 to 10 percent. General contractors are in the process of hiring--skilled trades, professionals, and back office. Skilled trade workers are very difficult to find and are driving up wages. Several builders reported that they are increasing benefits to stay competitive and to retain their labor force.
Consumer Spending
After a disappointing first quarter, most retailers reported that sales began to increase in April, in response to warmer weather and the Easter holidays. Same-store revenues were higher than a year ago. Core merchandise, such as consumables and basic apparel, were in highest demand. Furniture dealers cited weak consumer confidence for lackluster sales of indoor and outdoor furniture. Retailers are hopeful that third-quarter revenues will be higher, mainly in the low single-digits, than those seen a year earlier. We heard reports about rising food prices, especially for meat and dairy products, which are being attributed to poor weather conditions. Retailers remain reluctant to pass through these increases to consumers. Otherwise, vendor and shelf prices held steady. Hiring is being restricted to staffing new stores and a few technology-related jobs.
The number of new motor vehicles sold in April rose sharply on a month-over-month basis. Year-to-date sales were moderately higher compared to 2013. Smaller, fuel-efficient cars are gaining in popularity, as consumers shift away from SUVs and crossover vehicles. A weak first quarter kept new-vehicle inventories elevated and contributed to a boost in dealer incentives. Year-to-date sales of used cars were stronger through April than for the same time period in 2013. The outlook by dealers for the summer season is positive, with year-over-year increases in unit volume of 2 to 5 percent expected. Leasing remains popular as an alternative to buying a vehicle. Dealers are on the lookout for service technicians, but are having difficulty finding qualified workers.
Banking
The rise in demand for business credit that began in April is strengthening. Requests were strongest for equipment financing, commercial real estate development, and mergers and acquisitions. There was also a pickup in credit line utilization. Consumer credit demand stayed on a slow upward trend. Applications for auto loans were strong, and households made greater use of home equity lines of credit and credit cards. A majority of bankers we spoke with said that residential mortgage activity slowed since the fourth quarter of 2013. Recent mortgage applications were mainly for purchase transactions. Many of our contacts, especially community bankers, noted that competitive loan pricing, an inability to raise fee income, and reduced income from mortgage refinancing is impairing their ability to offset the cost of regulatory compliance and to invest in on-line and mobile banking technology. No changes were made to loan-application standards during the past six weeks. Delinquency rates trended slightly lower. Core deposits (consumer and business) showed steady growth at most banks. On balance, banking payrolls were steady: hiring was mainly for replacement or to work in regulatory compliance. We heard a couple of reports about staff cuts in mortgage business lines.
Energy
Year-to-date coal production across the District is fairly consistent with year-ago levels. We heard a report about the reopening of a shuttered mine in West Virginia due to strong demand from European and Chinese customers. Although export markets are strategically important to the coal industry, a strengthening U.S. dollar is hindering domestic production expansion. Going forward, output is projected to be stable to somewhat higher. Spot prices for steam and metallurgical coal were little changed. Unconventional oil and gas drilling increased slightly during the past six weeks. Reports indicated that wet gas production is restricted due to limited pipeline and processing capacity. Wellhead prices for natural gas have declined, while oil prices were stable. Equipment, material, and labor costs remain stable.
Freight Transportation
Freight executives are generally satisfied with current business conditions, following a very difficult winter. One contact observed that overall trends are starting to normalize. Freight carriers are seeing strong or strengthening demand for shipments of motor vehicles, chemical products, and construction-related materials. Their outlook is positive. Capacity is expected to remain tight, due in part to the effects of the hours-of-service rules that were implemented last July. Diesel fuel prices have leveled off but remain elevated. Year-to-date capital spending was in line with budgeted amounts. Monies are allocated more for equipment replacement, especially by small-to-medium fleets, than for capacity expansion. Hiring is mainly for replacement.