Beige Book Report: Cleveland
September 7, 2016
Aggregate business activity in the Fourth District has grown at a modest pace since our last report. Manufacturing output increased on balance, albeit at a slow rate. The housing market improved, with higher unit sales and higher prices. Commercial builders reported some weakening in the industry's strong pace of growth, but they expect that it will be a short-term event. Retailers experienced higher revenues, while sales of new motor vehicles declined. Commercial and retail credit expanded slowly. There is some optimism in the upstream oil and gas business as wellhead prices are showing signs of trending higher. Freight volume remains at a low level.
Payrolls were little changed on balance over the period. Job gains in construction and banking were offset by losses in manufacturing and freight hauling. Wage pressures were most evident in the construction and retail sectors across skill levels. Staffing firms noted an increase in the number of job openings and placements, especially for temporary positions. Other than price increases for steel products and declines in agricultural products, input and finished-goods prices were steady.
Manufacturing
Manufacturing output increased slightly over the period, with the strongest demand coming from domestic markets. Activity for suppliers to the motor vehicle, aerospace, commercial construction, housing, and food industries remains elevated. Mineral extraction, coal, oil and gas, and agricultural equipment suppliers cited weak activity. Year-to-date production through July at District auto assembly plants declined 9 percent when compared to that of the same time period during 2015. Declines were evenly distributed between cars and light trucks. That said, OEMs believe that the auto industry remains strong. Although steel producers are encouraged by the increase in domestic steel prices, one contact noted that the seasonal downturn in July was larger than expected. Manufacturing output is expected to increase at a modest pace on balance in the upcoming months. Contacts anticipating weaker growth attribute the situation to uncertainty and weakness in global markets.
Capital budgets were cut back slightly during the past six weeks. Allocations are primarily for maintenance projects and equipment. The number of contacts citing spending for product development increased. On balance, input costs and finished-goods prices were little changed. On the input side, higher steel prices were offset by lower energy costs. Some manufacturers reduced finished-goods prices in response to competitive pressures. Others raised prices because of higher raw material costs. Manufacturing payrolls shrank across job categories. Firms cutting employment cited weak sales projections or seasonal factors. Several manufacturers noted annual cost-of-living increases. Otherwise, wages were steady.
Real Estate and Construction
Year-to-datesales through June of new and existing single-family homes increased more than 7 percent compared to those of a year earlier. The average sales price rose 4 percent. Builders and real estate agents believe there is pent up demand for homes that is spurred by low interest rates. Year-to-date estimates of single-family construction starts were significantly higher across all regions of the District compared to those of a year ago. New-home contracts were concentrated in the first move-up and high-end price point categories. New-home list prices moved slightly higher during the period to cover higher costs for labor and land development and higher prices for building materials. Contacts expect that home sales will be on par with or rise above seasonal trends for the remainder of the year.
Commercial contractors continue to report favorable business conditions. Although the number of inquiries and backlogs remains elevated, the pace of growth for both metrics has slowed over the period. General contractors attribute the slowing to market uncertainty and to uncertainty about the outcome of the presidential elections. They also noted that their customers' decision-making process is taking longer than it did earlier in the year. General contractors continue to increase their billing rates in order to cover higher labor and development costs. However, they are getting pushback, and the amount of the increase is not enough to widen margins in most cases. Segments with the strongest demand were CRE and higher education. We heard a couple of reports about bankers' moving more cautiously when considering financing multifamily developments out of concern that some markets may be overbuilt. Most contractors expect that the current slowing in the pace of growth will be short-lived and that the industry will see a return to more robust growth in the near term.
Home builders and commercial contractors reported a modest increase in building materials prices, especially for lumber, steel, concrete, and drywall. Field and office payrolls are expanding, but at a more modest pace than in the spring. The industry is experiencing wage pressure across skill levels. Subcontractors remain very busy. They are challenged by labor shortages and, as a result, many are selective when bidding. In order to cover rising labor costs, subcontractors are increasing their rates.
Consumer Spending
Retail chains reported higher revenues early on in the third quarter compared to those of the same time period a year ago. Contacts attributed the increase to improving labor markets, low gas prices, and promotional activity. Products selling particularly well include summer apparel, active wear, and personal items. A reduction in international tourism dampened sales of select lines for a few chains. Restaurateurs reported softening in their retail business that was offset by an increase in corporate event catering. Retailers expect revenues to rise slightly heading into the fall season. Overall, vendor and shelf prices were stable. That said, the prices of food sold to restaurants and chains declined, and one chain started a program that will incrementally reduce shelf prices across product lines. Retailers and restaurateurs are concerned about the implications of minimum wage increases and the new overtime pay law. As wages rise, chains are undertaking initiatives with the objective of improving employee retention.
Year-to-date sales through July of new motor vehicles declined 2 percent when compared to those of the same time period in 2015. Light trucks (including SUVs and crossovers) continue to dominate transactions. Although rising fleet sales partially offset the decline in retail sales, dealer inventories are above normal levels. Demand for new vehicles is expected to remain at current levels for the remainder of the year. Consumers are seeing increasing value in used vehicles. Year-to-date sales of used vehicles rose more than 2 percent compared to those of a year ago. Although dealer payrolls were stable, contacts reported that they have boosted wages over the period because of tight labor market conditions.
Banking
Bankers were generally satisfied with their commercial and retail credit portfolios. Growth was characterized as steady overall, albeit at a slow pace. On the commercial side, highest demand was for CRE loans and M&A financing. C&I lending was slower than desired. Customers are seemingly reluctant to add capacity or to invest in large-scale capital projects. Lending for agricultural equipment is down. Reports from retail banking indicate that demand was strongest for auto loans and home equity products. Bankers noted some dampening in their residential mortgage business because the inventory of existing homes for sale is at a low level. Nonetheless, activity in residential mortgages remains elevated. Several bankers reported that lending is stronger than that of a year ago, a situation which they attributed to both a growing confidence in the economy and a low interest rate environment. Credit quality remains strong, and little change was reported in loan-application standards. Core deposit balances increased during the period, though business deposits grew at a faster pace than did consumer deposits. Banks' capital budgets expanded slightly, with spending allocated primarily for updating branch offices and technology. Banking payrolls showed a small increase. Employment growth was concentrated in compliance and risk. Wage pressures are being felt in select job categories, and employees are becoming more opportunistic in seeking out new jobs.
Energy
Natural gas output from the Marcellus and Utica Shales remains at a historic high; however, the pace of growth has slowed during the past few months. That said, there is more optimism across the industry as wellhead prices are starting to trend slowly higher, and the demand for natural gas is rising because of a decline in the use of coal by electric utilities. Wellhead prices remain below levels that would spur companies to restart drilling programs. Pipeline projects are moving ahead, but investment in midstream projects has slowed. Most midstream plants are built out and can process all the gas that is currently being produced.
Freight Transportation
Freight volume contracted on a year-over-year basis and is at a low level. Our contacts attributed this situation to sluggish growth, especially in the industrial sector, resulting in high inventory levels across the supply chain. A relative bright spot for the industry is shipments of commercial and residential building materials. We heard several reports about overcapacity in the system, and this overcapacity is forcing some haulers to lower shipping rates and to reduce capital budgets. Spending is now primarily for equipment replacement and maintenance projects. Contacts' outlook is cautious, and a majority expects that volume will begin to increase along seasonal trends during the upcoming months. On balance, freight payrolls have declined over the period. Hiring is limited to replacement. Firms continue to pay cost-of-living increases.