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Federal Reserve Districts

Fourth District--Cleveland

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On balance, economic activity in the Fourth District continued to expand at a modest pace. Manufacturers reported some improvement in new orders and production. Information received from retailers and auto dealers on the post-holiday shopping season was generally positive. Energy production and freight transport volume were stable. Residential and nonresidential construction remained sluggish. And while demand for business loans showed some signs of a pickup, consumer borrowing was weak.

Rising payrolls were limited to the manufacturing and retailing sectors. Staffing-firm representatives noted some growth in the number of new job openings, with vacancies concentrated in health care, manufacturing, and professional business services. Wage pressures continue to be contained. Reports of increasing prices for commodities and steel were widespread. As a result, manufacturers and retailers felt mounting pressure to pass through some of their rising input costs to their customers.

Reports from District factories indicate continued improvement in new orders and production during the past six weeks. Any declines were attributed to seasonal factors. Compared with year-ago levels, production was generally higher, with many of our contacts experiencing low double-digit increases. Manufacturers are fairly optimistic and expect at least modest growth during 2011. Steel producers and service centers reported that shipping volume rose, with shipments being driven by energy-related, auto, and heavy equipment industries. Looking forward, expectations call for continued growth through at least the first half of 2011. District auto production showed a moderate increase during January on a month-over-month basis. Compared with a year ago, domestic auto makers showed a substantial rise in production, while foreign nameplates posted a slight decline.

A majority of our contacts indicated that capacity utilization rates continue to trend higher. Inventories remain close to targeted levels. The number of manufacturers who expect to increase capital spending during 2011 has increased significantly since our last report. Reasons for the increase include stronger cash flows and a willingness to go ahead with projects that had been postponed during 2010. Prices for metal and agricultural commodities and steel increased, while the cost of most other raw materials has been relatively stable. Many of our contacts reported passing rising input prices through to their customers. Most manufacturers said that they have expanded their payrolls slightly since our last survey, and they expect to continue hiring at the same pace in the near term. Wage pressures are contained. Companies continue to reverse wage/salary cuts and restore payments to 401K plans.

Real Estate
New home construction was generally flat at a low level during the past six weeks, with purchases mainly in the move-up buyer categories. A few builders noted that most of their revenues now come from remodeling work. On a year-over-year basis, sales were mainly lower. Contractors expect construction to remain sluggish through at least the first half of 2011. List prices of new homes and discounting have shown little change, while some upward pressure on the cost of building materials was reported. Little movement was seen in land positions or spec inventories. We heard many reports of subcontractors struggling to stay in business due to very thin margins. General contractors continue to work with lean crews, and no hiring is expected in the near term.

Discussions with nonresidential builders drew mixed responses, with a majority of our contacts reporting weaker activity than a year ago. However, the number of inquiries has picked up modestly since our last report. Backlogs remain reasonably healthy, though two builders noted that their backlogs are being depleted at a rapid pace. Half of our contacts do not expect any near term improvement in business conditions, while others are much more positive. One builder noted that he is beginning to notice a sense of urgency to expand on the part of some of his industrial customers. We heard widespread reports of increased prices for building materials, with most contractors expecting continued upward pressure. These price increases are eroding already narrow margins. Two general contractors noted that they reduced payrolls and may lay off additional employees if business does not improve. Subcontractors continue to cope with very difficult industry conditions.

Consumer Spending
Reports from retailers indicate that post-holiday sales were on or ahead of plan and were generally higher than year-ago levels. Cold-weather apparel is selling particularly well, and purchases of select high-ticket items were better than expected. A few of our contacts reported that the low- to mid-market segments still face considerable stress. Looking forward to the second quarter of 2011, retailers expect transactions to rise on a year-over-year basis, with several anticipating low to mid-single digit gains. We heard several reports about increasing prices from vendors, which were attributed to a rise in the cost of agricultural commodities and labor issues in Asia. Accordingly, some retailers are considering raising their prices, especially for apparel and food products. Inventories are in line with demand. Some of our contacts plan to increase capital spending during 2011 for new stores, distribution centers, and e-business expansion, with a corresponding rise in payrolls.

Most auto dealers reported that new vehicle purchases dropped slightly in January when compared with December levels, while on a year-over-year basis, vehicle purchases rose moderately. Looking forward, dealers expect 2011 sales trends to improve over those seen last year. A few of our contacts noted an increase in leasing activity. Reports on new car inventories were mixed. Used vehicle inventories are somewhat lean, with upward pressure on prices. We heard two reports about banks beginning to loosen credit requirements for vehicle purchases. Dealers are waiting for more details from automakers before committing to capital investments in their facilities, with some dealers reporting that they are better prepared financially to make these investments. Little change in staffing levels is expected during the next few months.

In general, bankers reported that commercial loan demand was stable or showed modest growth since our last survey. Some bankers commented that demand is strongest from health care providers, small manufacturers, and energy companies. On the consumer side, conventional loan demand remains soft, although a few of our contacts told us that they are seeing a modest pickup. Direct and indirect auto lending continues to show strength, while reports on the use of home equity lines of credit were mixed. Interest rates for business and consumer credit were generally stable. Most of our contacts said that activity in the residential mortgage market has slowed (refinancings and new-purchase originations) due to rising interest rates and seasonal factors. Core deposits continue to grow, with most of the growth occurring in nonmaturing products. The credit quality of businesses and consumer applicants was characterized as stable to improving, while delinquency rates were trending down across most portfolios. Staffing levels have shown little change during the past few weeks. Selective hiring is expected during 2011.

Reports indicate that oil and gas output from conventional wells was fairly steady during the past six weeks, with little change expected in the near term. Leasing activity for Marcellus and Utica shale in eastern Ohio continues to expand, but few drilling permits have been issued. Spot prices for natural gas were flat, while wellhead prices paid to independent oil producers showed a modest increase. Coal production has been fairly steady since our last report, with little change anticipated in the near term. Prices for steam and metallurgical coal rose slightly. We heard several reports of a small rise in equipment and material costs, which was attributed to increasing commodity prices. Payrolls are expected to remain at current levels during the next few months.

Reports on freight transport volume were mixed. Several contacts said that January's seasonal volume decline was greater than expected due to unusually severe winter weather. Looking ahead, carriers expect that markets will continue to recover and that sales growth in 2011 will be somewhat stronger than year-ago levels. Almost all of our contacts reported rising prices for diesel fuel, some of which were passed through to customers via a surcharge. Nonetheless, rising fuel prices continue to erode margins. Capital outlays are expected to rise during 2011 to replace aging equipment. However, the amount spent will be dependent on the availability of financing. Hiring thus far has been for replacement only, but two of our contacts noted that they are considering hiring additional drivers to add capacity. Slight wage pressures are emerging due to a growing problem with driver turnover and a tightening of the driver pool.

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Last update: March 2, 2011