Beige Book Report: Cleveland
August 29, 2012
The economy in the Fourth District grew at a modest pace since our last report. On balance, manufacturing output moved slightly lower, while residential and nonresidential construction picked up. Retailers saw a modest rise in sales during July, and motor vehicle purchases held steady. Natural gas producers increased production, though the demand for coal has softened. The slowdown in freight transport volume, which began in the second quarter, has leveled off. And the demand for business credit showed a modest increase.
Little net hiring was reported across industry sectors. Staffing-firm representatives said that the number of job openings has declined during the past six weeks. Open positions were found primarily in engineering, healthcare, and manufacturing. Wage pressures are contained. Input prices were generally stable, although concerns exist about the recent rise in agricultural commodity prices.
Manufacturing
Representatives from District factories reported that new orders and production were flat or down slightly during the past six weeks, with inventories showing a slight uptick. Relative to year-ago levels, output was mainly higher. The outlook by manufacturers was mixed. While many contacts are less certain about growth prospects than they had been a few months earlier, others believe that the abundance of lower-priced energy, especially natural gas, will boost manufacturing activity in the District. A weakening in shipping volume by steel producers and service centers was attributed to seasonal factors, rising imports, and uncertainty. Demand for steel from the energy sector remained solid, while demand from the transportation sector softened. Most of our steel contacts do not expect market conditions to change appreciably in the upcoming months. Steel producers reported lowering their inventories. District auto production showed a substantial decline in July on a month-over-month basis, due to normal seasonal retooling for model changeovers. Compared to a year ago, production figures were unchanged for domestic producers, while showing a sizeable increase for foreign nameplates. The latter is attributable to the abatement of supply chain issues.
Many of our contacts reported reduced capacity utilization rates, which they attributed to weakening demand. Capital spending remains on track; however, some respondents intend to cut back outlays during the upcoming months. Raw material prices were either stable or declined. Several manufacturers and steel producers reported reducing their prices to match the lower material prices. Little change in payrolls was noted, although attracting skilled workers remains difficult. Wage pressures are contained.
Real Estate
Reports from home-builders on single-family housing starts during July were mixed, although all of our contacts said that activity had improved compared to a year ago. Sales contracts were in all price-point categories. Homebuilders anticipate only a modest increase in the construction of single-family homes in the near term; however, opportunities for rehabilitating old buildings into apartments and constructing new apartments and special-needs housing are viewed as strong. Selling prices of new single-family homes were up slightly during the past six months, and rents increased in the low to mid-single digits. The volatility seen in building material prices over the past five months is beginning to subside, although there is still upward pressure on lumber prices. In the eastern third of the District, existing home sales (number of units, average sales price, and volume) showed a modest to moderate increase year-to-date relative to the same period in 2011. Similar results were seen in the southwest region of the District.
Nonresidential contractors described current business conditions as improving and better when compared to a year ago. However, construction activity for small to medium-size builders is still substantially below pre-recession levels, and profit margins are tight. Project work is broad based, driven by industrial (manufacturing and distribution), education, and healthcare clients and multi-family housing. The short-term outlook is fairly positive, but builders are concerned about the domestic political climate, events in Europe, and potential defense cutbacks. Building material prices were stable. Even with the pickup in work, residential and nonresidential builders are reluctant to hire additional workers. Wage pressures are contained. Some residential and commercial subcontractors have attempted to raise their billing rates but were largely unsuccessful.
Consumer Spending
Retailers reported slightly higher sales figures for July relative to results seen in June. However, several reports indicated that consumers, including those in higher-income brackets, are becoming more cautious when buying and are looking for value. One executive commented that retailers are pushing back orders for the upcoming holiday season. Retailers anticipate modest growth at best through the end of the third quarter. Vendor prices were fairly stable, and little change was noted in store prices. There is growing concern about the rise in agricultural commodity prices and the resulting impact on the cost of food products. Inventories continued to rise modestly, but they were described as manageable. Capital spending for the year remains on target, with little change anticipated during the next 12 months. Outlays are mainly for new store construction and technology upgrades. No hiring is expected, other than at new stores, and wage pressures are contained.
Little change was seen in the number of new-vehicle purchases during June and July when compared with the same time period a year ago. Dealers reported that sales of fuel-efficient vehicles and SUVs are doing particularly well. New-vehicle inventories are on the light side, which was attributed in part to model changeovers and tight control by manufacturers. The outlook by dealers for the remainder of 2012 is mixed, although none of our contacts are expecting a substantial drop-off. Purchases of used vehicles improved slightly during July relative to June levels. Capital spending is limited to OEM-mandated remodeling and image programs. Hiring for sales and service positions remains at a very slow pace. Dealers have become more efficient at managing labor needs since prior to the recession resulting in leaner payrolls.
Banking
Bankers reported a modest increase in the demand for business credit, mainly for refinancings and acquisitions. A few contacts cited rising demand for industrial loans and financing multifamily housing developments. Little change in consumer credit was observed. Auto lending remains the bright spot on the consumer side, although a few bankers observed some softening since our last report. In the residential mortgage market, demand was described as stable to very strong, with a high percentage of applicants looking to refinance. Several bankers expressed concern about the low interest rate environment and compliance costs related to new regulations and their effect on profitability. We heard a few reports about a moderate loosening of lending guidelines. Delinquencies were steady or improved. Core deposits rose. Bankers project little change in payrolls for the remainder of this year.
Energy
Conventional oil and natural gas production increased since our last report, with higher production expected to continue in the upcoming months. Some of the increase was attributed to rising demand from electric utilities. Low wellhead prices for natural gas were cited as a reason for a decline in drilling conventional wells. Additional drilling rigs are being moved to Ohio from Pennsylvania to take advantage of the higher-priced wet gas found in the Utica shale. Coal production this year is expected to fall below 2011 levels due to reduced demand for thermal coal from domestic utilities and slowing markets for metallurgical coal in Europe and Asia. Spot prices for steam coal have increased slightly, while prices for export metallurgical coal declined further. Production equipment and materials prices were flat in most categories, and capital outlays remain at projected levels. Moderate layoffs were announced by several coal producers, and conventional oil and gas companies have trimmed back their payrolls.
Transportation
Most reports on freight volume indicated that the slowdown which began mid way through the second quarter has stabilized or started to turn around. The outlook for the remainder of 2012 remains positive, but growth is not expected to be as strong as had been forecasted at the beginning of the year. Apart from fluctuating diesel prices, costs associated with truck maintenance held steady. Some carriers are maintaining their fuel surcharges and successfully negotiated rate increases when contracts came up for renewal. Capital spending for 2012 remained on plan. Outlays are allocated for the replacement of aging units and adding capacity. A few executives reported that rising prices for new trucks combined with difficulty in obtaining credit is limiting growth opportunities, especially for small carriers. Driver recruitment remains difficult, resulting in some wage pressure.