Beige Book Report: Cleveland
October 14, 2015
On balance, the economy in the Fourth District expanded at a modest pace during the past six weeks. Factory output was stable. The housing market improved, with higher unit sales and prices. Nonresidential building contractors reported continued robust activity. Retailers and new-car dealerships saw higher sales on a year-over-year basis. The demand for business and consumer credit moved slowly higher. Exploration in the Marcellus and Utica Shales declined, whereas production remains at historic highs. Freight volume trended lower.
Net gains in employment were seen in the construction sector, banking, and freight hauling. Staffing firms reported a pickup in the number of job openings and placements, mainly in manufacturing and financial services. Wage pressure was little mentioned other than in construction. Overall, input and finished-goods prices were steady.
Manufacturing
Demand for manufactured products was little changed over the period. Key factors tempering output include a strong dollar, the slowdown in the energy and agriculture sectors, softness in developing markets, and growing uncertainty about the domestic economy. That said, suppliers to the motor vehicle, aerospace, and construction industries continue to see strong demand. On balance, capacity utilization rates have contracted slightly. The steel industry continues to struggle against an array of headwinds such as the strength of the dollar, weak international demand for steel, and low demand from the domestic energy sector. Year-to-date auto production at District assembly plants through August increased about 1 percent compared to the prior year’s level. Despite the downside risks, a majority of our contacts are cautiously optimistic in their outlook for the remainder of 2015.
Capital budgets were stable over the period. Spending was largely allocated for maintenance projects, new equipment, and to a lesser extent product development. Steel makers cut budgets to control costs and preserve cash. Automakers reported using overtime and adding shifts to meet demand increases instead of expanding plant capacity. Typically, raw material prices were flat or lower, while finished goods prices were stable. Steel prices continue to fall despite occasional signs that the downward trend might be slowing. A food producer commented that his industry’s prices remained stable, notwithstanding declines in agricultural commodities. Payrolls held steady on net. New hires were primarily production workers and engineers.
Real Estate and Construction
Year-to-date sales through August of new and existing single-family homes rose 9.5 percent compared to those of the same time period in 2014. The average sales price increased by more than 4 percent. Homebuilders cited two downside risks, which they believe could threaten a relatively healthy housing market in the near term: a rise in interest rates and a shortage of skilled labor. Despite these risks, our contacts remain cautiously optimistic and expect new-home sales to continue along recent seasonal trends. New-home contracts remain concentrated in the move-up price point categories. Builders reported that new- home prices increased 5 percent on average over the year, citing larger building footprints and lower existing-home inventory as factors influencing the increase.
Nonresidential contractors reported continued robust activity, with revenues rising above year-ago levels. A majority of our contacts saw an increase in the number of inquiries and backlogs over the period. Demand has been strong across multiple segments, particularly in commercial building, government-sponsored projects, and multifamily housing (including senior living and affordable). General contractors remain optimistic about potential growth in the near term. Several reported that they were able to increase their margins with little pushback. Others believe that a small interest rate increase would have little, if any, impact on the construction industry. Banks are more proactive in working with developers, but they are reluctant to finance spec projects.
Capital spending by general contractors was mainly for capacity expansion and new equipment. Materials prices were stable during the past six weeks. For the remainder of 2015, builders anticipate that price increases will be limited to glass products. Construction payrolls expanded at a moderate pace over the period for field and office jobs. That said, the construction industry remains challenged by a labor shortage, including laborers, skilled craftsmen, and construction professionals. The end result is upward pressure on construction costs, including labor, and a reduction in the overall number of bids.
Consumer Spending
Retailers reported that revenues from late July through early September were higher compared to those of the same time period a year ago. Revenue increases were driven in part by back-to-school sales and lower energy prices, including for gasoline. A majority of our contacts saw rising profit margins during the past couple of months. Active wear, products related to outdoor activities, household durables, and electronics were in highest demand. Revenues during the fourth quarter are expected to be on par or increase in the low to mid-single digits compared to those of the same time period a year ago. Vendor and shelf prices were stable, other than increases for poultry products and some moderation in beef prices. Capital spending was primarily for brick-and-mortar projects. Hiring is limited to new-store openings.
Year-to-date sales of new motor vehicles through August showed a modest increase compared to those of a year ago. A strong consumer preference for SUVs and light trucks continued. One dealer association executive remarked that much of the driving force behind truck and SUV sales has been low fuel prices and affordable financing. Looking forward, dealers expect unit volumes will be on par with that of 2014. Year-to-date pre-owned vehicle sales are moderately higher compared to those of last year. Payrolls were fairly stable over the period, but dealers indicated that labor markets are tight, putting upward pressure on wages.
Banking
Bankers reported a modest increase in demand for business credit, particularly for CRE loans. Several commented that some customers are proceeding more cautiously when using commercial credit products because of concerns about the strong dollar and weakening international demand. Consumer lending expanded modestly over the period, with activity concentrated in auto lending and home equity products. Back-to-school transactions were smaller than expected. Interest rates for business and consumer credit held steady. Contacts reported a moderate expansion in their residential mortgage business, an expansion which was biased toward new-home purchases. 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 enhancements, including security, and acquisitions. Payrolls increased on net. A decline in the number of retail banking jobs at branches was offset by new hires in higher-skilled positions such as IT, risk management, and regulatory compliance.
Energy
The number of drilling rigs operating in the Marcellus and Utica Shales trended lower over the period and is currently almost 50 percent below its peak level in the fourth quarter of last year. Natural gas production remains at elevated levels. Wellhead prices for oil and natural gas continue to decline. Downward adjustments to capital budgets reflecting reductions in exploration and production programs have been completed. An industry executive reported that while midstream investment activities are continuing, weaker companies are increasingly cautious given the recent volatility of energy prices. Hiring within the oil and gas industry remains modest and tightly controlled; most is for replacement.
Freight Transportation
Reports indicated that on net, freight volume contracted over the period. Declines were prevalent in metals and energy-related shipments. One contact said that investments made by railroads to accommodate the fracking industry might now lead to defaults. Another carrier noted that factory volumes remain lackluster. In contrast, volumes grew in the motor vehicle and construction industries. A pick-up in retail and agricultural products was also reported. The former is related to back-to-school sales and the upcoming holiday shopping season. A majority of our contacts see little change in volume along seasonal trends during the next few months. Prices for fuel and maintenance items were stable. Capital spending is mainly for replacing older equipment and maintenance projects. Some reports indicated that future capital expenditures may be curtailed because of the slowdown in the energy sector (coal as well as oil and gas). Payrolls increased slightly over the period. That said, two carriers reported that they are re-evaluating hiring plans because of the slowdown in demand.