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Federal Reserve Districts

Fourth District--Cleveland

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The economy in the Fourth District has shown some signs of improvement since our last report, although overall activity remains at a low level. Reports from manufacturers indicated that production was stable or slightly up, with several citing growth opportunities in off-shore markets. Little change was seen in new-home construction, whereas non-residential builders reported a small increase in contract awards. Financing remains a major issue for residential and commercial contractors. Sales by District retailers and auto dealers were flat. Energy production held steady, and reports showed a slight upturn in freight transport volume. Business and consumer lending activity remains soft, while the growth rate in core deposits is starting to decline.

The labor market remains weak, but some business owners started recalling a few workers or increased production hours. Staffing-firm representatives reported an increased number of job openings, especially in the healthcare industry. Given the weak labor market, wage pressures are contained. We heard many reports of rising prices for metals, especially steel. Otherwise, raw material and product pricing were relatively stable. Capital spending and inventories remain under tight control.

Reports from District factories showed that production was largely stable or slightly up during the past six weeks, with any reductions being attributed to seasonal factors. Comparing on a year-over-year basis, most of our contacts told us that production levels have not changed or have showed a moderate rise. Manufacturers are more upbeat in their outlook since our last report, and many expect volume to slowly increase during 2010, with several citing opportunities in export markets. Steel shipments were in line with expectations or exceeded them, although volume reports varied widely. Increased volume was attributed primarily to military spending and other government-funded projects. Our steel contacts expect slow growth and are uncertain about which industries will drive demand. District auto production showed a modest decline during November on a month-over-month and year-over-year basis for domestic and foreign nameplates.

Manufacturers reported that they have completed rebalancing their inventories. Capacity utilization is holding steady, but at rates substantially below pre-recession levels. Investment in capital projects remains weak, with spending expected to continue on the low side during 2010. We heard many reports of a rise in metal prices (especially steel). Steel increases were attributed to rising scrap costs, which prompted steel producers and service centers to raise their own prices. Otherwise, the cost of raw materials was generally stable. About half of our respondents said that they have increased work hours or recalled a few production employees, and wage pressures are contained.

Real Estate
Reports indicate little change in new-home construction during the past six weeks, while sales on a year-over-year basis are slightly better. Purchases of entry-level homes continue to do well, and a few builders reported a recovery in the move-up category. Looking forward, about half of our contacts characterized themselves as cautiously optimistic. Other contractors see little improvement, which they attributed in part to downward pressure on prices resulting from a new wave of foreclosures. Home builders reported that banks are unwilling to lend money for purchasing land or constructing spec houses, resulting in a substantial depletion of inventories. List prices of new homes remained stable or were reduced slightly during the past few months, while construction material costs held steady. General contractors continue to operate with skeleton crews, and many subcontractors are struggling to keep busy.

Reports on activity in non-residential construction, including public works, were mixed. Although most of our contacts said that business has fallen on a year-over-year basis and many have nearly depleted their backlogs, inquiries have improved and we heard several reports of contract awards. A majority of contractors now expect at least a slight improvement in activity during 2010. We continue to hear numerous accounts of difficulties in obtaining financing and refinancing. Construction material prices were stable. Half of our respondents reported that they have reduced their workforces since our last report. Many subcontractors are struggling and are charging substantially lower rates.

Consumer Spending
Most District retailers characterized sales for the period from mid-November to mid-December as flat, when compared to the previous 30-day period. The exception was a restaurant chain, which showed a moderate increase in revenues. Results of a year-over-year sales comparison tended toward the down side. Although holiday shopping gave a modest boost to the purchase of discretionary items, consumers continue to focus on buying necessities and are looking for value-priced substitutes. Several of our contacts are uncertain about future sales. Others expect sales for the first quarter of 2010 to remain flat or to rise slightly at best. Vendor pricing has been relatively stable, although we heard some reports of rollbacks in store prices for basics. A few contacts told us that they are making less use of promotions and markdowns. Retail inventories continued on the lean side. Auto dealers reported that new-vehicle sales have flattened out at a low level since the cash-for-clunkers program ended. On a year-over-year comparison, most vehicle sales figures showed no change or were slightly up. Used-vehicle purchases were characterized as good, if not better, than those for new-vehicles, resulting in some upward pressure on prices. Dealers were evenly split in their expectations of future sales: flat in the first quarter of 2010 versus a modest increase. Several dealers cited lean inventories and difficulties in obtaining floor-plan financing as reasons for low sales. There has been little change in staffing levels other than seasonal hiring by retailers and job losses at dealerships that closed.

Demand for business loans remains weak, and lines of credit are underutilized. Bankers experiencing increased lending volume attributed it to refinancing existing debt from other institutions. Interest rates and spreads were steady to slightly up. On the consumer side, conventional loan demand was generally characterized as weak to steady at best, while activity in the residential mortgage market slowed further due to seasonal factors. On balance, core deposits continued to grow, although a few bankers said that the rate of growth has tapered off. Interest margins are steady to slightly up. Credit availability remains tight, with some additional incremental tightening of lending standards, especially for commercial real estate loans. In general, the credit quality of loan applicants remains weak or has deteriorated further. Consumer loan delinquencies are relatively stable, while delinquencies among commercial borrowers (especially real estate) remain elevated or are rising. Most banks have not changed the size of their workforces. However, three of our contacts said that they are in a long-term process to reduce employment as a result of restructurings and mergers.

Little change in oil and gas production was reported, although it is expected to increase slightly due to seasonal factors. Spot prices for oil are stable within a narrow range, while those for natural gas were up a little. Coal executives told us that the sharp decline in output has flattened out, with no upturn expected during the next few months. The cost of production equipment and materials remains stable. Capital spending by oil and gas producers was on plan or a little higher than expected, whereas investments in coal production remain at depressed levels. Oil and gas employment held steady, while coal saw some additional workforce reductions. Wage pressures are contained.

Freight transport executives reported a slight improvement in shipping volume since our last report. However, shipments are below year-ago levels and margins remain depressed. Most of our contacts expressed uncertainty about near-term activity and expect only modest improvements in volume during 2010. A few executives attributed potential changes in federal government regulations and policies as the driving force behind the uncertainty. Capital spending remains at low levels, although some pickup is anticipated during the next six months. Hiring was limited to replacement only.

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Last update: January 13, 2010