Beige Book Report: Cleveland
October 15, 2014
The economy in the Fourth District expanded at a moderate pace during the past six weeks. Manufacturers reported moderate to strong business activity. Demand for nonresidential construction strengthened, while the residential market slowed. Consumer spending at retail outlets grew, and year-to-date auto sales were above 2013 levels. Since the previous report, coal production and shale gas activity were little changed. Freight volume grew at a moderate to robust rate. The demand for business credit moved higher, and consumer lending was stable.
Payrolls showed a mild increase, primarily in manufacturing, construction, and freight transportation. Staffing firms reported that the number of job openings has picked up, while placements have fallen. Several recruiters reported on a trend to replace permanent, lower-skilled employees with temporary workers. Due to perceived shortages in selected labor skill areas, upward pressure on wages is beginning to be felt by general building contractors and freight haulers. Overall, input and finished goods prices were stable. Prices for energy and agricultural commodities declined, while transportation equipment prices rose.
Manufacturing
Most District factories reported little change in the pace of growth of new orders and production since the previous report and that year-over-year revenues were higher. Firms seeing lower production attributed it to seasonal factors or declining exports. Our contacts remain optimistic and expect moderate to strong demand for the remainder of the year. Steel shipments improved slightly since the last report. Fourth-quarter shipments are expected to increase on a seasonally adjusted basis relative to the third quarter, and a few steel producers project volume in 2014 will be about 5 percent higher compared to 2013. One steel executive noted that his capacity utilization rate has risen to 80 percent, a rise of 10 percentage points since the recession ended. Manufacturers and steel producers reported that the strongest demand came from the construction, motor vehicle, and oil and gas industries. Auto production at District assembly plants for the first eight months of this year was more than 7 percent higher compared to the same period in 2013.
Many of our contacts anticipate that their capital budgets for fiscal year 2015 will be higher than current-year spending. In general, input and finished goods prices were stable since the previous report, apart from declines in agricultural commodities and steel. A food producer remarked that prices for the major commodities that he purchases are at their lowest level in five years and he does not believe food inflation will be a major issue for the next 12 months. We continue to hear numerous reports about new hiring, mainly for production jobs. The boost in hiring has put little upward pressure on manufacturing wages.
Real Estate and Construction
Sales of new and existing single-family homes showed a modest decline in many parts of the District since the last report. Year-to-date sales through August were lower compared to a year ago. Most builders expect that activity will stabilize at current levels, though some expressed concern about the impact of a potential rise in interest rates combined with continued strict lending standards. Multifamily development (market rate, affordable, and senior) was characterized as very strong, with occupancy rates greater than 95 percent. In August, single-family construction starts across the District were at their highest level so far this year. However, the number of starts year-to-date remains slightly lower compared to the same time period in 2013. New-home contracts were mainly in the move-up price-point categories, though activity in the first-time buyer category continues to slowly improve. Some builders anticipate a modest rise in new-home prices before year's end, which they attribute to rising material and labor costs. The upward trend seen in sale prices of existing homes has leveled off, but the average price remains higher than the average level for 2013 as a whole.
Nonresidential builders reported continued strong pipeline activity since our last report, and a majority indicated that the level of activity has picked up compared to a year ago. A few builders noted that they are more selective about the inquiries that they respond to because they are at or near capacity. One builder commented that because his customers are not expecting prices for nonresidential construction to rise much, there is no sense of urgency to push forward with some projects. In general, backlogs were described as good or solid. Market demand is broad based, though demand for industrial space (manufacturing and distribution) and healthcare facilities is strongest. There has also been a pickup in requests for retail and office space. Leasing of vacant industrial space has increased. Most builders remain optimistic, but they are concerned about labor availability, tight margins, and capacity constraints, should a demand spike occur.
General contractors are not overly concerned with rising prices for building materials; the largest price increases are anticipated for steel components, drywall, and wood products. The pace of hiring has slowed since our last report, with some of the decline in hiring activity being seasonal. Nonetheless, a majority of general contractors reported that they expect to increase their payrolls across a broad range of occupations--craft workers, laborers, management, and back office. Little wage pressure was reported, except for craft workers. Subcontractors are pushing through rate increases to cover rising costs (including labor) and to widen their margins. Subcontractors are still encountering capacity and cash-flow issues. As a result, some general contractors are turning to prefabrication to circumvent subcontractors.
Consumer Spending
Spending at retail outlets during August and into early September was generally higher compared to earlier in the third quarter. Many retailers cited an extended back-to-school buying period as a contributing factor to the increase. Revenues were higher relative to the same time period in 2013 for most retailers, which they attributed to a stronger product mix and growing investment in e-commerce. In addition to back-to-school items, sales of home furnishings, athletic footwear, and food products were doing well. Fourth-quarter revenues are projected to be higher, with expected year-over-year percent gains in the low single digits. Vendor and shelf prices held steady. Several retailers noted that they are running more promotions than usual, mainly to clear inventory and boost revenues. Excluding new store openings and temporary seasonal hiring, retail payrolls were stable.
New motor vehicle sales showed a moderate decline in August on a month-over-month basis and were down slightly from a year ago. However, year-to-date sales through August were 5 percent higher compared to the same time period in 2013. Strong sales of SUVs and trucks continued. Inventory reports were mixed, which is attributable to the model-year changeover. Dealers believe that the level of sales will follow seasonal trends for the remainder of the year and that unit volume for 2014 as a whole will be about 6 percent higher compared to 2013. Used-car purchases showed a modest decline in August on a month-over-month basis, while year-to-date unit volume was slightly higher. We heard several reports about automakers becoming increasingly dependent on the use of incentives to boost sales. Demand for service technicians is growing, but dealers are having difficulty finding qualified applicants.
Banking
Bankers reported that demand for business credit was stable to showing moderate growth during the past six weeks. While demand was described as broad based, it was strongest for commercial real estate and construction loans and C&I lending to manufacturers. Interest rates held steady. On net, consumer credit demand was roughly stable. The number of applications for auto loans remains very high, while households are making marginally greater use of home equity lines of credit. Residential mortgage activity was flat to down slightly; some of the decline is seasonal. Purchase transactions dominate mortgage applications. Delinquency rates are stable to improving across categories. No changes were made to loan-application standards during the past six weeks. However, to gain a competitive advantage, there has been some slight relaxing of terms and conditions. Banks saw growth in core deposits from businesses and consumers. On balance, banking payrolls held steady. New hires were mainly in the areas of compliance, risk management, and commercial lending; however, in response to reduced traffic at branches, payrolls there are being reduced.
Energy
Year-to-date coal production across the District is consistent with prior-year levels, with no material change in output anticipated in the near term. A production decline in eastern Kentucky is being offset by a significant increase in northern West Virginia. Spot prices for thermal and metallurgical coal remain on a downward trend. Activity in the Marcellus and Utica Shales remains at a high level. During the first half of 2014, production in Ohio's Utica Shale was more than six times greater relative to the same time period in 2013, while the number of producing wells increased by 61 percent. Wellhead prices for natural gas and oil have declined since late in the second quarter. Since the last report, equipment and materials prices were largely unchanged and energy payrolls held steady.
Freight Transportation
Freight volume expanded since the last report, with contacts describing year-over-year growth as moderate to robust. Although demand is fairly broad based, it is strongest from the agriculture, motor vehicle, and oil and gas industries. The near-term outlook is favorable. Contacts from trucking and railroads observed that insufficient capacity is a major issue that is currently confronting the industry and that there is concern about stress on the freight-transport system from this year's grain harvest, which is expected to be at a historic high. We heard a report about rail carriers being reluctant to contract for shipments of less than five carloads, which is hurting small manufacturers. The cost of new equipment (truck tractors and rail cars) is rising, and in some cases delivery times are lengthening. Some of the higher cost was attributed to meeting regulatory requirements. Hiring is both for replacement and for adding capacity. Projected capital spending in fiscal year 2015 is mainly for equipment replacement. Although most fleets would like to add capacity, they are having difficulty finding drivers.