Beige Book Report: Cleveland
November 30, 2016
Economic activity grew slightly on balance across the Fourth District since our last report. Production at manufacturing plants was generally stable, though output from motor vehicle assembly plants continued to trend lower. The housing market improved, with higher unit sales and higher prices. Commercial builders reported a strong pick-up in backlogs. Retailers saw weakening 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 increased. Freight volume expanded over the period, but it remains at a low level.
Payrolls were little changed on balance since our last report. Job gains in construction and banking were partially offset by losses in manufacturing. Wage pressures were most evident in the construction, retail, and banking sectors, both for low- and high-skilled jobs. Staffing firms reported that the number of job openings and placements declined, a situation they attributed to jitters about the presidential election. Contacts noted an increase in the number of temporary positions. Input costs moved slightly higher, while selling prices were little changed.
Manufacturing
Manufacturing output was little changed over the period. Activity for suppliers to the motor vehicle, construction, and personal consumer products industries remains elevated. Factors tempering output growth for other manufacturing industries include a general malaise in the industrial products market, weakness in the energy sector, and uncertainty about the economic health of offshore markets. Year-to-date production through September at District auto assembly plants fell more than 5 percent when compared to that of the same time period during 2015. A growing number of contacts are expressing concern about a sustained decline in new motor vehicle sales. The steel industry, while benefitting from price increases attributable to recently enacted tariffs, does not see this resolution as sustainable. The strong dollar continues to put downward pressure on steel exports. Manufacturers expect little change in business conditions during the upcoming months.
Although there were scattered reports about a pickup in equipment purchases, overall capital spending continues to decline. Two contacts said that firms are postponing investment decisions until more is known about the tax policies of the incoming president. Input costs rose since our last report primarily because of increasing prices for raw materials and employee health insurance. Competitive pressures kept finished-goods prices stable on balance. Manufacturing payrolls were trimmed slightly over the period. Firms cutting employment cited weak sales and a need to cut costs. Other firms noted that while they are not proactively reducing payrolls, they are not replacing employees who leave voluntarily. Attracting and retaining low-skilled employees remains challenging. Wages held steady.
Real Estate and Construction
Year-to-date unit sales through September of new and existing single-family homes increased about 5 percent compared to those of a year earlier. The average sales price rose almost 4 percent. Real estate agents cited low existing-home inventory as the primary factor driving up prices. First-time buyer contracts moved higher. Homebuilders and real estate agents reported that the presidential election dampened housing market activity over the period. However, they believe the slowing is temporary. One builder pointed to an increase in his finished-home prices as a factor for weakening demand. Year-to-date estimates of single-family construction starts were much higher in Ohio and Kentucky compared to those of a year ago.
Nonresidential contractors reported an elevated level of activity. They believe that a strong rise in backlogs over the period was due to aggressive bidding on their part and by customers' suddenly moving projects out of the pipeline and into the construction phase. That said, several builders believe that market uncertainty is increasing. This uncertainty is driven seemingly by the regulatory environment, presidential election jitters, and, to a lesser extent, a potential rise in interest rates. Demand for construction services was seen across market segments. A majority of general contractors and subcontractors increased billing rates to cover rising labor costs and to increase margins.
Homebuilders and commercial contractors reported modest increases in building material prices, particularly for framing lumber, drywall, and concrete. Hiring continues at an aggressive pace, both for replacement and for newly created positions. The industry continues to experience some wage pressure, especially from high-skilled workers. Subcontractors remain very busy. They are challenged by labor shortages, and, as a result, many are selective when bidding.
Consumer Spending
For the period from mid-September through late October, retailers reported weakening sales on balance when compared to those of the same time period a year ago. Declines were seen in apparel purchases, while sales of personal care products and furniture were higher. Retailers cited the unusually warm autumn weather, uncertainty surrounding the presidential election, and stiff competition from Internet retail options as factors contributing to transaction declines. With the presidential election behind them and the holiday shopping season approaching, retailers are looking for sales to improve. Vendor and shelf prices were stable, except for slight declines in food products and gasoline. A producer of consumer electronics noted that traditional brick-and-mortar retailers are facing a significant challenge from Internet sellers for control of product pricing. Payrolls increased over the period as stores are hiring for the holiday season. The market for distribution workers remains tight, a situation which is driving up wages.
Year-to-date sales through September of new motor vehicles declined almost 2 percent when compared to those of the same time period in 2015. Light trucks and SUVs continue to dominate transactions. In contrast, used motor vehicle transactions have increased more than 3 percent. Seasonal staffing declines at dealerships have been completed for the most part. Our contacts reported that attracting and retaining qualified service technicians and entry-level employees remains difficult. Dealers have been forced to increase wages for both job categories.
Banking
Bankers were generally satisfied with their commercial and retail credit portfolios. Growth was characterized as slow but steady. Credit quality remains strong, and little change was reported in loan-application standards. On the commercial side, the strongest demand was for CRE loans. Several bankers mentioned uncertainty as a headwind to more robust commercial lending. One contact said that although customers have confidence in the sustainability of their businesses, they have less confidence in the political environment. As a result, they are cautious before making an investment. Reports from retail banking indicated that demand was strongest for auto, mortgage, and home equity products. Core deposit balances continued to increase over the period. While banking payrolls increased on net, the rise in payrolls was tempered by mergers and branch cutbacks. A majority of our contacts reported increasing wages over the period, mainly because of competition for qualified workers.
Energy
The number of permits issued and the number of drilling rigs operating in the Marcellus and Utica Shales are trending slowly higher as wellhead prices rise at a slow pace. Nevertheless, upstream activity remains significantly below levels seen a couple of years ago. Coal production and prices continue to move higher as customers respond to their low inventories and improving market (domestic and foreign) conditions. Energy payrolls and wages were stable.
Freight Transportation
Freight volume expanded over the period on balance, but volume was flat compared to that of the same time period a year ago. Some of the increase was attributed to seasonal factors and, to a lesser extent, an uptick in steel shipments. One contact observed that Internet retailers are making greater use of on-demand delivery service providers for shipping versus contracting with traditional ground transportation providers. As a result, it is possible that not all shipments are being captured by conventional metrics. Several contacts noted they have been able to raise shipping rates over the period. Payrolls were flat on balance; hiring is limited to replacement and some seasonal employees. Firms continue to pay cost-of-living increases. Capital spending was primarily for new equipment.