Beige Book Report: Cleveland
July 15, 2015
Business contacts in the Fourth District reported a steady level of activity over the period, with little change in the pace of growth. Reports by industry sector were mixed. Production at manufacturing plants contracted slightly. Nonresidential building contractors characterized their backlogs as strong; the housing industry saw a pickup in construction starts and purchases of new and existing single-family homes. Sales at stores and restaurants were marginally higher than those of a year ago, while new-car sales fell slightly year over year. Drilling in the Marcellus and Utica Shales declined further. Reports on freight volume were mixed. The demand for business and consumer credit continued to move slowly higher.
Payrolls expanded slightly. Staffing firms reported a pickup in the number of job openings in healthcare and manufacturing; however, placements did not keep pace. Upward pressure on wages is limited mainly to technically-skilled personnel. Overall, input and finished-goods prices were steady. We heard reports about declines in prices for steel and some petroleum-based products.
Manufacturing
Factory contacts reported that overall demand contracted slightly over the period. Key factors tempering output include a strong dollar and the downturn in the oil and gas industry. That said, suppliers to the aerospace, motor vehicle, and construction industries continue to see strong or strengthening demand. Compared to that of a year ago, demand has strengthened to some extent by a pickup in the construction sector. The outlook for the second half of 2015 varied widely. The steel industry continues to experience stiff competition from imports, competition driven in part by the strong dollar. As a result, steel shipments fell more than expected over the period; industry utilization rates declined and now stand about 10 percent below normal. Demand for steel from the auto and construction industries is still relatively strong. Year-to-date auto production at District assembly plants through May fell 3 percent below the prior year's level. This fall may be because of a sharp year-over-year decline in motor vehicle exports from domestic plants, a situation attributable to dollar appreciation.
On balance, capital budgets increased slightly over the period, mainly to take advantage of unforeseen opportunities. Spending was primarily for equipment (machinery and IT) and maintenance projects. Raw material prices were flat or lower. Contacts cited price reductions for steel and petroleum-based products. Final-goods prices were stable. Reports indicated a modest expansion in payrolls, mostly for general labor. Wage pressure was limited to high-skilled jobs.
Real Estate and Construction
Year-to-date sales through May of new and existing single-family homes were moderately higher as compared to those of the same time period in 2014. The average sales price rose about 6 percent. Single-family construction starts picked up across most regions of the District over the period. New-home contracts remain concentrated in the move-up price point categories. Prices are trending higher because of rising labor costs, more stringent building codes, and higher land development costs. Several builders commented that the market for spec homes exists, but is limited by supply side factors, including capacity constraints and difficulty obtaining construction financing. Despite this difficulty, homebuilders remain optimistic about industry prospects for the remainder of the year.
Nonresidential contractors reported continued strong activity over the period, with revenues rising above year-ago levels. The number of inquiries has expanded to the point that general contractors are becoming more selective when bidding. Backlogs were described as strong or strengthening. Several contacts mentioned that their backlogs are at the highest level since prior to the recession, with work booked one to three years out. Demand is greatest for commercial building, healthcare facilities, office space, industrial structures, and multifamily housing (including senior living). Financing is more readily available to successful developers than it has been in the recent past. Banks and non-bank lenders are becoming more proactive in working with developers.
Capital spending by general contractors was mainly for new equipment. Materials prices were stable during the past six weeks. Over the course of the year, builders anticipate that material prices will increase by about 3 to 5 percent, primarily for concrete and drywall. General contracting payrolls increased at a modest pace, mainly for field laborers and craft workers. The construction industry remains challenged by a labor shortage, though carpenters and drywallers are the most difficult to find. As a result, firms are attempting to boost participation in apprenticeship and co-op programs, with mixed results. Reports indicate continued wage pressure for the skilled trades.
Consumer Spending
General merchandise retailers reported that their revenues were flat over the period. Athletic apparel and home furnishings (including electronics) were in highest demand. Restaurateurs experienced an increase in customer visits, an increase which they attributed to lower gasoline prices and heightened promotional activity. Retailers and restaurateurs stated that revenues were marginally better than they were a year ago, and third-quarter sales are expected to be higher than those of last year. Vendor and shelf prices were stable. Hiring is limited to new store openings. Announcements of wage increases by some large chains are providing the impetus to raise compensation levels across the industry in order to remain competitive. One chain noted that its employees are more enthusiastic and turnover is lower as a result of an increase in the hourly wage rate. Another contact said that retail employees will readily change jobs for an additional 10 cents per hour. Capital spending remains on plan for the fiscal year. Expenditures were mainly for remodeling and new store construction.
Year-to-date sales of new motor vehicles through May were slightly below those of a year ago. A strong consumer preference for SUVs and light trucks continued. OEMs and dealers are reportedly increasing incentives on small cars. New inventory is close to matching demand, except for SUVs, where inventory is light. Looking forward, dealers expect unit volume will be on par with that of 2014; however, some voiced concern about the impact of potential interest rate increases. Year-to-date pre-owned vehicle sales are moderately higher compared to those of last year. Dealers are hiring for seasonal sales positions. Skilled service technicians are difficult to attract, a situation which is putting upward pressure on wages.
Banking
Bankers reported that rising confidence in the economy as a whole is not reflected in the pace of growth of their business loan portfolios. This situation was attributed to mounting competition from nonbank lenders and the regulatory environment. CRE lending is growing at a faster rate than C&I lending. The pipeline for M&A financing is strong. Consumer credit continues to expand at a moderate pace, mainly for auto loans and home equity products. Some pickup in installment loans was noted. Interest rates for business and consumer credit were stable. Almost all of our contacts noted a seasonal increase in their residential mortgage business, which was heavily weighted toward new-home purchases. The rapid rise in rental rates was cited as a motivating factor to purchase homes. Little change was reported in delinquencies (already at low levels) and loan-application standards. Core deposit balances remain strong. Capital investment by banks was primarily for technology and acquiring community banks. Payrolls increased on net. Most hires were commercial lenders and risk managers. The number of bank branches continued to trend lower.
Energy
Little change in District coal production was reported over the period. Some reduction is anticipated going forward because of decreased demand. Spot prices for steam and metallurgical coal declined. The number of drilling rigs operating in the Marcellus and Utica Shales trended lower over the period and is now 34 percent below its peak level in the fourth quarter of last year. Natural gas production through the first quarter of 2015 was at a higher rate compared to that of the same period a year ago. Wellhead prices for oil are trending slowly higher, while natural gas prices have stabilized at a low level. Capital budgets held steady or were adjusted downward. Spending is mainly for maintenance projects and equipment. Employment-reduction plans put into effect earlier in the year have been completed. Any new hires are for replacement. Reports indicated some additional cuts in wages and benefits.
Freight Transportation
Reports on freight volume were mixed. Contacts seeing increases attributed them to seasonal factors, higher demand for construction materials, and a dissipation of lingering effects of the West Coast port strikes. Softness in shipments of consumer products, including edibles, contributed to lower top-line growth. The outlook for the next few months is for volume to grow moderately along seasonal trends. Prices for fuel and maintenance items were fairly stable over the period. Fleets continue to replace older equipment aggressively. OEMs are currently working at capacity; tractor deliveries have reportedly lengthened to eight months. The labor shortage (drivers and service technicians) continued industry wide. Hiring over the period was more for replacement than to add capacity. One contact mentioned that in his segment of the industry, fleet owners are no longer attempting to expand labor capacity, but instead are seeking ways of operating more efficiently, including working cooperatively with competitors.