Beige Book Report: Cleveland
March 4, 2015
On balance, the Fourth District's economy expanded at a modest pace during the past six weeks. Activity at manufacturing plants was mixed. In residential real estate markets, single-family home prices rose, while unit volumes were fairly stable; nonresidential construction markets strengthened. Retailers and auto dealers reported that post-holiday sales were slightly above year-ago levels. Shale gas activity contracted due to low oil and natural gas prices. Freight shipments remained strong, but capacity issues are limiting growth. The demand for business and consumer credit slowly moved higher.
Payrolls were little changed on net, except in manufacturing, where demand for production and sales personnel increased. Staffing firms reported that job openings and placements in financial services, healthcare, and manufacturing 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 steady. We heard reports about declines in steel prices, diesel fuel surcharges, and rising prices for some building materials.
Manufacturing
Factory contacts reported mixed activity during the past six weeks. Apart from seasonal factors affecting demand, declining orders were attributed to lower oil prices, a strengthening dollar, and weakening economic conditions in Europe. Growth in the motor vehicle and construction industries boosted new orders for some contacts. Overall, year-to-date results were generally better compared to those in 2014. Looking forward, manufacturers are fairly bullish about business activity. Factors tempering growth expectations include exposure to foreign markets and the price of oil. Steel producers cited declining prices, a strong dollar, aggressive imports, and a decline in oil and gas drilling as factors contributing to shipments that were softer than expected. Autos are still seen as a strong end market and orders from construction contractors improved. Several of our steel contacts downgraded their 2015 forecasts and cut inventory. Auto production at District assembly plants continued at a robust pace. Total production in 2014 was 4.5 percent higher compared to the previous year.
Capital spending during the past six weeks was mainly for new equipment, including IT, and plant expansion. Several manufacturers noted that they have boosted capital budgets since the beginning of the year primarily because of business acquisitions. A majority of our contacts reported lower raw material prices, especially for petroleum-based products and steel. Several contacts attributed falling prices to lower global demand for commodity metals. Finished goods prices held steady. There was a notable pickup in hiring, especially for production and sales personnel. Wage pressures are limited to engineering and computer-system employees.
Real Estate and Construction
Sales of new and existing single-family homes for all of 2014 were slightly below levels seen in the prior year, while the average sales price was 4 percent higher. Home builders were evenly split in their assessment of market conditions since the start of the year. Softening was attributed to cold weather and a shortage of desirable lots against a backdrop of stringent mortgage standards. New-home contracts were mainly in the move-up price-point categories. The first-time buyer market remains weak. There was a large drop in the number of single-family construction starts since our last report. Nonetheless, as the spring season approaches, homebuilders are fairly optimistic in their outlook. They believe the potential for higher interest rates might serve as an impetus for potential buyers to sign a purchase contract. Most builders have not raised prices since the beginning of the year.
Nonresidential builders reported pre-construction activity generally ranging from moderate to robust, and they indicated that the level of activity has increased relative to a year ago. Customers are more confident in the sustainability of the economy, and they are now ready to move forward on projects that had been postponed. Market demand is broad based, although demand for multi-unit housing and industrial and office space is strongest. Builders are adding to their backlog on a steady basis, and their backlogs are larger than a year ago. Several contacts noted that they are becoming more selective when bidding projects, and they expect margins to widen as the year progresses. Capital spending by general contractors was mainly for replacement of heavy machinery and technology.
Materials prices were stable apart from increases for drywall and concrete. Builders are expecting overall increases of about 3 percent this year. Diesel fuel surcharges were reduced, but lower oil prices have not passed through to other petroleum-based products. Payrolls were flat on net due to the winter weather. As spring approaches, general contractors expect a period of fairly robust hiring, including craft workers, project engineers, and managers. Little wage pressure was reported, and it was limited to experienced craft workers.Subcontractors are pushing through rate increases at a faster pace than general contractors had anticipated; these increases are to cover rising costs, including for labor, and to widen margins.
Consumer Spending
Retailers were generally satisfied with post-holiday sales, and they reported that January revenues were slightly higher than those in January 2014. Product lines in highest demand included cold-weather apparel, electronics, and health and wellness. Most contacts expect second-quarter sales to be somewhat higher year-over-year, as lower gasoline prices begin having a greater impact on consumer spending. The increase in promotions that began early in the fourth quarter has been scaled back, which contributed to slightly higher margins. Vendor and shelf prices were steady, other than for declines in dairy products and apparel. Beef prices remain at historic highs. Several contacts reported reductions in planned capital spending for fiscal year 2015. Spending since the beginning of the year was concentrated in real estate and e-commerce. Hiring is limited to new store openings.
New motor vehicles sales during January were slightly higher than those of a year ago and in December. The share of SUV and truck sales increased by about 7 percentage points compared to last January, which some dealers attributed to significantly lower gasoline prices. 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. New inventory is in line with sales. Used vehicle sales are up slightly over last January. Capital spending this year by dealerships is mainly for maintenance and facility upgrades. Little change in payrolls is expected during the winter months. Dealer service departments are feeling wage pressures because of a lack of qualified technicians and mechanics.
Banking
Bankers reported that demand for business credit showed 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, primarily for home equity products. Auto lending has softened. Interest rates were steady to down slightly for business and consumer credit. Many of our contacts noted an improvement in their residential mortgage business, more so on the refinancing side, which they attributed to a decline in interest rates. Delinquency rates held steady, at very low levels, and bankers expect little change going forward. No changes were made to loan-application standards. Core deposits remain strong. Payrolls were little changed on net. Hiring was mainly for jobs in commercial lending, computer-related services, and regulatory compliance. Wage pressure was felt in each of these job categories.
Energy
Little change in District coal production was reported. Spot prices for metallurgical and steam coal declined since our last report. Activity in the Marcellus and Utica shales contracted due to low oil and natural gas prices. The number of drilling rigs in the District shrank 19 percent since mid-December. Reports indicated that oil and gas producers have made significant cuts to planned capital spending for 2015, though midstream companies involved in the build out of the oil and gas infrastructure have not yet shown an inclination to pull back investment in existing projects. One energy executive said that while oil inventories are high at this time, with a cutback in production, oil stocks should decline at a rapid pace. These events could serve as the impetus for a strengthening of oil prices sometime later in 2015. Overall pricing for materials and equipment was flat. Some layoffs in the oil and gas sector and their supplier industries were reported.
Freight Transportation
On balance, little change was seen in freight volume since our last report, with many carriers operating at a high level. Volume growth was seen in construction materials, crude oil, and natural gas liquids. Any softening was attributed to seasonal factors. Our contacts expect that the economy will continue to expand this year; however, capacity constraints may limit top line growth. Little change in pricing was noted other than lower revenue from fuel surcharges. Capital spending in 2015 is projected to be strong. Some carriers reported increasing existing budgets. Monies are largely allocated for replacing aging equipment. Capacity expansion is limited by driver availability. Difficulty in attracting and retaining drivers and maintenance technicians is putting upward pressure on wages for both job categories. A majority of our contacts cited a significant rise in health insurance premiums at the start of the year.