Beige Book Report: Cleveland
January 14, 2015
The economy in the Fourth District expanded at a modest pace during the past six weeks. Most of our contacts have a positive outlook for the new year, and they expect demand for their products and services to remain at current levels or rise. Manufacturers reported that business activity increased at a modest rate. Demand for nonresidential construction strengthened, while the residential market was stable. Retail spending during the holiday shopping season was slightly above year-ago levels, and year-to-date auto sales posted moderate gains compared to 2013. District coal production is up slightly year-over-year, while shale gas activity remains at a high level. Freight shipments were strong, but capacity issues are limiting growth. The demand for business and consumer credit moved higher.
Payrolls increased at a modest pace, primarily in banking, freight services, and manufacturing. Staffing firms reported that the number of job openings and placements in energy and manufacturing companies had risen slightly. Upward pressure on wages is limited to experienced and technically skilled personnel across industry sectors. Overall, input and finished goods prices were stable. There were scattered reports of declining prices for metals and petroleum-based products and rising prices for some building materials.
Manufacturing
Factory representatives reported that demand ranged from stable to showing a moderate improvement during the past six weeks. Any declines in orders were attributed to seasonal factors. Year-to-date results were generally better compared to those in 2013; several producers cited growth in the construction, shale gas, and auto industries as contributing to higher revenues. Our contacts are fairly optimistic and expect moderate to strong growth in 2015, though some expressed concern about weakening foreign economies and a decline in the price of oil. The seasonal slowdown in steel shipments that typically begins in November was slightly deeper than expected. A few contacts believe that customers are waiting for steel prices to stabilize at a lower level. Due to pricing and market uncertainties, some steel producers are reducing their finished goods inventory. Year-to-date auto production through November at District assembly plants was more than 4 percent higher compared to the same period in 2013.
A large majority of factory representatives reported that capital spending in fiscal year 2015 will be moderately higher than prior-year levels, with monies being allocated mainly for new IT and capital equipment. Raw material prices were stable or lower during the past six weeks; declines were seen in steel, copper, and petroleum-based products. Finished goods prices held steady. New hiring continued at a modest pace, mainly in production and sales. Wage pressures are limited to high-skilled production workers, engineering, IT, and computer system personnel.
Real Estate and Construction
Year-to-date sales through November of new and existing single-family homes were slightly below levels seen in 2013, while the average sales price was moderately higher. New-home contracts were mainly in the move-up price-point categories. Since our last report, single-family construction starts were down slightly, while the number of single and multifamily building permits issued moved mildly higher. Homebuilders pointed to a scarcity of lots in strong markets and stringent mortgage standards as factors that are constraining sales activity. The outlook for the new year is best described as cautious; while most respondents are expecting some growth, none are projecting robust activity. A majority of builders announced price increases averaging 3 percent, which will go into effect at the start of 2015. These increases will mainly cover rising costs, including higher rates from subcontractors.
Nonresidential builders reported pipeline activity generally ranging from moderate to robust, and they indicated that the level of activity has increased relative to a year ago. One builder commented that his customers feel more certain about risk-taking on high-value projects. For the most part, contractors are satisfied with their backlogs going into 2015. Market demand is broad based, although demand from manufacturers, healthcare providers, and higher education is strongest. There has also been a pickup in requests for commercial space. Builders are optimistic in their outlook for 2015. We heard a few comments about widening margins and growing opportunities for developing spec buildings. Several contractors reported that they are increasing their capital budgets for 2015, mainly to purchase heavy machinery.
Building materials prices were stable other than for drywall and concrete, which have increased. The diesel fuel surcharge is being reduced or eliminated. New hiring has diminished appreciably since early November due to the onset of winter weather. Several contractors reported that they are starting seasonal layoffs. Unless business conditions deteriorate, hiring will resume later in the first quarter. Wage pressures are limited to craft workers and more experienced engineers and project managers. Subcontractors are pushing through rate increases at a faster pace than general contractors had anticipated; these increases are needed to cover rising costs, including for labor and to widen margins.
Consumer Spending
Retailers reported that revenues from this year's holiday shopping season were slightly higher than those in 2013. Product lines in highest demand included apparel, electronics, and physical fitness. Retailers continued to run a significant number of promotions, which for some store chains is narrowing profit margins. Reports on the impact of lower gasoline prices were mixed. Many of our contacts were uncertain about sales expectations for the first quarter of 2015. Those making projections believe that same-store revenues will be only mildly higher year-over-year. Vendor and shelf prices held steady, other than anticipated increases for dairy products. Capital spending for 2014 was in-line with budgeted amounts. Capital plans for fiscal year 2015 are still in process, but most retailers are projecting little change in budgeted amounts. Hiring is limited to new store openings.
Year-to-date sales through November of new motor vehicles were about 5 percent higher compared to the same time period in 2013. Across many regions of the District, the share of SUV and truck sales was at its highest level of the year during November. Luxury vehicle purchases also picked up. These strong sales were mainly attributed to declining gasoline prices. Our contacts are satisfied with current inventory. Looking at 2015, dealers anticipate that the year-over-year change in unit volume will be positive, but increases will not be as strong as in 2014. There is some uncertainty as to the impact of sustained lower gasoline prices on new motor vehicle transactions. Little change in payrolls is expected during the winter months. Dealers continue to have difficulty finding skilled labor, especially technicians.
Banking
Bankers reported that demand for business credit exhibited modest to moderate growth during the past six weeks. While demand was described as broad based, it was strongest for commercial real estate and commercial and industrial loans. Consumer credit demand moved slightly higher, especially for auto loans and home equity products. Households are making marginally greater use of credit cards. Though the pricing environment remains competitive, interest rates were mainly steady for business and consumer credit and for residential mortgages. Many of our respondents noted that activity in their residential mortgage business has declined considerably. One banker reported that nonbank entities seem to be the biggest source of growth in residential mortgages and that it is becoming less and less a part of his business. Delinquency rates were stable or improving across loan categories. No changes were made to loan-application standards since the last report. Core deposits were described as good or strong and growing. A majority of bankers indicated that payrolls are rising at a slight pace, especially in the areas of commercial lending, risk management, and regulatory compliance. A few reported that they are beginning to feel some wage pressure and expect that it will intensify in 2015.
Energy
Year-to-date coal production across the District is slightly above prior-year levels. Output is projected to increase in Pennsylvania and northern West Virginia with no material change expected in eastern Kentucky and Ohio. Low natural gas prices have been reducing demand for thermal coals domestically. Spot prices for steam and metallurgical coal have declined since our last report. Activity in the Marcellus and Utica shale formations remains at a high level. However, a sustained decline in oil and gas prices may pose some downside risk to drilling and production, and it is uncertain what the effect will be on hiring and wages in the near term. Overall pricing for materials and equipment is down slightly during the past six weeks. Capital spending is projected to decline in 2015.
Freight Transportation
Freight volume increased since our last report, with demand being described as broad based. Profit margins improved due to lower diesel fuel prices. Although capacity constraints remain an issue industry-wide, carriers are encouraged by amendments to the hours-of-service rules that were included in the recently passed federal omnibus bill. Our contacts are optimistic in their outlook and they believe that strong growth trends should continue into 2015. A pickup in the number of consolidations within the freight industry is expected to continue. Little change in prices for parts and tires was reported. Capital spending in 2015 is projected to be strong, with monies being allocated for replacement and expansion. Hiring drivers is an ongoing process and industry executives agree that their ability to attract and retain truck drivers is critical to their ability to expand capacity.