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Federal Reserve Districts

Fourth District--Cleveland

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On balance, economic activity in the Fourth District held steady during the past six weeks. Manufacturers reported that new orders and production rose modestly. An uptick in residential construction, retail sales, and new car buying that began in mid-summer has tapered off. Nonresidential building activity showed little change. Reports from energy companies indicated stable production, while freight carriers saw a small decline in volume. Demand for business loans showed some signs of a pickup, and consumer borrowing remained weak.

New hiring continues at a slower pace than seen earlier in the year. There were scattered reports of increased payrolls in manufacturing, energy, and banking. Overall, staffing-firm representatives noted that the number of new job openings declined slightly, with available openings concentrated in healthcare and professional business services. Wage pressures continue to be contained. Apart from volatility in steel and commodity prices, raw materials and product pricing were fairly steady.

Reports from District factories showed that new orders and production rose modestly during the past six weeks. Production was also higher on a year-over-year basis, with many contacts experiencing double-digit increases. Several manufacturers commented that opportunities are growing faster in offshore markets than domestically. Almost all of our respondents expect business activity to follow current seasonal trends for the near term. Most steel producers and service centers reported that volume was either flat or trending up. Shipments are being driven by energy-related, auto, and heavy equipment industries. Two contacts noted that exports are gaining strength. All of our steel contacts expect little change in business activity in the near term. District auto production showed a large increase during August on a month-over-month basis, due to production starts on the 2011 models. In terms of year-over-year comparisons, production was little changed for both domestic and foreign nameplates.

Capacity utilization is slowly rising for several manufacturers and steel producers, but it continues below pre-recession levels across the board. Inventories are balanced with incoming orders. Capital outlays remain at relatively low levels, with many of our contacts reporting that they have postponed starting projects until they are certain of a sustainable recovery. Other than volatility in steel and commodity prices, the cost of raw materials has been relatively stable. Several manufacturers announced product cost adjustments to reflect changes in steel, copper, and agricultural prices. We heard only scattered reports of companies hiring new workers, although several firms have extended work hours. Wage pressures are contained.

Real Estate
New home sales have slowed during the past six weeks, and all of our contacts expect construction to remain very sluggish going into 2011. Builders continue to point to tight credit, foreclosures, and a large inventory of existing homes as reasons for the depressed market. Most homebuilders are intentionally keeping their spec inventories at low levels, and those who want to build are unable to obtain financing. Our contacts tell us that the entry-level price-point category is seeing the least activity, with most sales occurring in the move-up buyer categories. The list prices of new homes and construction material costs have shown little movement since our last report. Several builders said that they are increasing the use of discounting to close sales. General contractors and subcontractors continue to work with very lean crews.

Discussions with nonresidential builders showed little change in construction activity since our last report and from year-ago levels. One contractor, who noted a slow down, attributed it to seasonal factors. A few builders commented that although their backlogs have slipped, they are encouraged by the number of inquiries. New projects generally fall into the industrial category. Most of our contacts expect little change in business conditions in the near-term, with several mentioning that they are concerned about prospects for the recovery. Reports indicated stable construction material costs. New hiring by general contractors has diminished, while subcontractors are still struggling and bidding at very competitive rates.

Consumer Spending
On balance, there was little change in retail sales for the period from mid-August through mid-September, when compared to the previous 30-day period. Consumers remain price sensitive and focused on buying necessities. When given the option, they prefer private-label to premium brands. Retailers expect conservative sales growth at best, going through the holiday season. Several retailers noted modest price increases from their suppliers, which they passed through selectively to consumers. Half of our contacts reported on plans to increase capital budgets in 2011 relative to this year. Hiring will be limited to temporary holiday workers.

Auto dealers characterized new vehicle sales during August as decent, although they were slower than those seen during the peak summer season. Many sellers reported that August sales were down compared to year-ago levels due to the cash-for-clunkers program. Looking toward the year's end, dealers expect modest sales increases at best. New car inventories remain on the light side, especially for popular models. Used vehicle purchases have picked up since our last report, although supplies are tight and prices remain high. The number of financing options is growing across the District, and pricing is competitive. Still, credit standards are tight, and potential buyers often find themselves unqualified for the vehicle they want to purchase. The incremental hiring at auto stores that began in mid-summer has tapered off.

The business-lending environment remains soft; however, almost half of the bankers we spoke with noted that demand showed some signs of a pickup across industries. On the consumer side, conventional loan demand remains very weak, with most of the activity found in indirect auto lending and home equity lines of credit. Interest rates for business and consumer credit moved by only a few basis points, with a slight bias to the downside, as competitive pressures are growing. Most of our contacts said that the demand for residential mortgage refinancing is very strong, while new-purchase mortgage originations remain at a slow pace. Residential mortgage rates continued their downward trend. Core deposits increased at almost all banks, with most of the growth occurring in nonmaturing products. Credit quality was generally characterized as either stable or deteriorating, while most reports on delinquencies indicated rates were stable or showed a modest decline. Several bankers noted that they have slowly increased their payrolls during the past few months.

Reports indicate that oil and gas output was mainly steady during the past six weeks, with output expected to remain at current levels in the near term. Companies not participating in Marcellus shale drilling, a largely untapped natural gas reserve, see the industry slowing down during the next several months due to slumping gas prices. Nonetheless, some gas producers reported increasing their capital outlays for additional drilling. Spot prices for oil are holding up. Coal production has been fairly stable since our last report, with little change in demand expected. Coal executives commented that rising government intervention into permitting and compliance issues may dampen capacity. Prices for coal were mixed but are tending to the down side. Equipment and material costs have been relatively flat. We heard scattered reports of companies hiring new workers.

Freight transport executives reported steady to declining volume during the past six weeks. Still, bottom lines have improved for some carriers due to better pricing and higher productivity. Looking forward, carriers expect that any further volume decline will be modest, with a few anticipating a return to slow growth. Due to a drop in capacity attributed to carriers exiting the industry and the enactment of additional federal safety regulations, executives believe they will be able to successfully negotiate more favorable rates as demand rises. A few of our contacts reported rising prices for fuel. The cost of new tractors is substantially higher, while used equipment prices are falling. Capital outlays are expected to increase at a modest rate going into 2011, with most monies allocated for equipment replacement. Current hiring is due to attrition.

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Last update: October 20, 2010