Beige Book Report: Cleveland
October 19, 2016
On balance, the economy in the Fourth District expanded at a modest pace since our last report. Production at manufacturing plants was generally stable, though output from motor vehicle assembly plants trended lower. The housing market improved, with higher unit sales and higher prices. Commercial builders reported that inquiries and backlogs picked up after some weakening early on in the third quarter. Retailers saw little change in same-store sales on a year-over-year basis, while sales of new motor vehicles declined. Commercial and retail credit expanded slowly. The number of drilling rigs operating in the Utica and Marcellus Shales and coal production both increased. Freight volume remains at a low level.
Payrolls were little changed on balance over the period. Job gains in construction were partially offset by losses in manufacturing. Wage pressures were most evident in the construction and retail sectors across skill levels. Reports from staffing firms about job openings and placements were mixed, though all contacts noted an increase in the number of temporary positions. On balance, input and finished-goods prices were steady.
Manufacturing
Manufacturing output was little changed over the period. Activity for suppliers to the motor vehicle, aerospace, commercial construction, housing, and personal consumer products industries remains elevated. Factors tempering output growth for other manufacturing industries include lower business fixed investment, the strong dollar, and weakness in the energy sector. Year-to-date production through August at District auto assembly plants fell about 6 percent when compared to that of the same time period during 2015. Declines were weighted more heavily toward cars. One original equipment manufacturer reported that the lack of light truck inventory, not the decline in demand, is the reason behind a year-over-year unit volume drop. A majority of our steel contacts reported that demand fell over the period. Manufacturers expect that business conditions will show a modest improvement in the upcoming months. Contacts anticipating weaker growth attribute the situation to uncertainty and weakness in global markets.
Cutbacks in capital spending that began mid-year have accelerated. Although firms continue to allocate monies for maintenance projects and product development, they are lowering spending for equipment. On balance, input costs and finished-goods prices declined slightly. On the input side, declines were primarily attributed to weakening commodity prices. Some manufacturers reduced finished-goods prices in response to competitive pressures. Others cut prices because of reduced demand. Manufacturing payrolls were trimmed slightly over the period. Firms cutting employment cited weak sales. Wages held steady.
Real Estate and Construction
Year-to-date sales through August of new and existing single-family homes increased about 5 percent compared to those of a year earlier. The average sales price rose 3.5 percent. Builders believe there is pent up demand for homes that is spurred by low interest rates and rising consumer confidence. 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 distributed across price-point categories. Entry-level contracts ticked higher. New-home list prices moved higher over the period to cover higher costs for labor and land development and higher prices for building materials. Builders expect that home sales will be on par with or fall slightly below seasonal trends for the balance of the year.
Nonresidential contractors are generally satisfied with their current level of activity. Reports indicated that the number of inquiries and backlogs have increased over the period, after both metrics weakened early in the third quarter. Nonetheless, several builders indicated that their customers are postponing investment decisions until after the presidential election. Although demand for construction services is broad-based, segments with the highest demand were CRE, including office space, and higher education. Billing rates are rising at a slower pace when compared to earlier in the year. Other than some tightening in the multifamily segment, construction financing is readily available. Most contractors expect little change in business conditions in the near term.
Home builders and commercial contractors reported little change in building materials prices, except for lumber, the price of which increased. Construction payrolls are expanding at a faster pace than early on in the third quarter. A sizable number of contacts reported creating new positions since our last report. 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, most subcontractors are increasing their rates.
Consumer Spending
Heading into the Labor Day weekend, retailers reported little change in revenues on net compared to those of the same time period a year ago. Although the retail landscape remains very competitive, recent initiatives aimed at adapting to rapidly changing consumer buying habits are helping boost revenues for some chains. The unseasonably warm weather has impacted cold-weather apparel sales. Products selling particularly well include health-and-wellness and personal items. Restaurateurs reported mainly improving sales in their retail operations. One contact noted that increasing competition from nontraditional sources, such as deli counters at grocery stores, is negatively affecting his customer count. For the period between Labor Day and mid-November, our contacts expect little change in revenues compared to the same time period a year ago. Overall, vendor prices were stable. Select retail chains reported that they are continuing with initiatives to incrementally reduce shelf prices. In contrast, some restaurateurs are raising menu prices. Retail payrolls were stable. The labor market for hourly front line and distribution workers is tight, a situation which is driving up wages.
Year-to-date sales through August of new motor vehicles declined 1.5 percent when compared to those of the same time period in 2015. Light trucks (including SUVs and crossovers) continue to dominate transactions, and leasing accounts for more than 40 percent of all new-motor-vehicle transactions within the District. One dealer noted that banks are starting to tighten credit terms on subprime opportunities because delinquencies are beginning to rise with these customers. Some dealers believe that new-motor-vehicle sales are starting to peak and that the industry will experience a slow downward trend in the upcoming months. In contrast, year-to-date sales of used vehicles rose more than 3 percent compared to those of a year ago. Dealer payrolls and wage levels were stable.
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. C&I lending remains slower than desired. Customers are seemingly reluctant to invest in plant expansions or equipment. Reports from retail banking indicated that demand was strongest for auto loans and mortgages and, to a lesser extent, credit cards. A majority of bankers said that lending during the third quarter was stronger than that of a year ago. Credit quality remains strong, and little change was reported in loan-application standards. Core deposit balances continued to increase over the period. Banking payrolls were stable on net. The primary factor affecting staffing levels was bank mergers, with four being reported over the period. Wages were stable. Select increases were awarded in an attempt to retain key employees.
Energy
The number of permits issued and the number of drilling rigs operating in the Marcellus and Utica Shales are showing signs of trending higher as wellhead prices rise at a slow pace. Coal production has increased during the past couple of months because of rising demand for electricity attributable to above normal temperatures and reduced customer inventory at coal-fired power plants. As a result, spot and forward prices for domestic thermal coal have increased. Prices for metallurgical coal have also risen, a situation which has been driven largely by production cuts and increased demand. Energy payrolls increased slightly, though much of the increase was seasonal. Wages were steady.
Freight Transportation
Freight volume contracted on a year-over-year basis and remains at a low level. Our contacts attributed this situation to sluggish growth, especially in the industrial sector, and rapid changes in retail distribution. One contact noted that shipment counts industry wide were flat for the first eight months of 2016 except for select carriers who contract with large on line retailers. In the latter case, volume is rising. 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 maintenance projects and equipment replacement. On balance, our contacts expect little change in volume during the upcoming months. In general, freight payrolls have declined over the period. Hiring is limited to replacement. Firms continue to pay cost-of-living increases.