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Federal Reserve Districts

Fourth District--Cleveland

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The economy in the Fourth District grew at a slow pace during the past six weeks, with many of our contacts downgrading their near-term outlooks. Manufacturers reported stable production but a decline in new orders and backlogs. Freight transport volume trended slightly higher. Retailers said that their sales were on or ahead of plan and new-car purchases increased. Energy companies noted little change in output. New-home construction remains sluggish, and inquiries made to nonresidential builders have dropped off. The demand for business credit picked up, while consumer lending was weak.

Modest increases in payrolls were mainly limited to the manufacturing and energy sectors. Staffing-firm representatives noted moderate growth in the number of new job openings, with vacancies concentrated in technical occupations and healthcare. Almost all openings were for experienced workers. Wage pressures are contained. Prices for raw materials used by manufacturers and construction materials have generally stabilized or declined slightly.

Production at District factories was stable during the past six weeks, although reports indicated declines in new orders and backlogs. Many of our contacts expect additional slowing in demand, which they attributed to uncertainty and caution on the part of their customers. Almost all steel producers and service centers reported that the weakening in shipping volume that began during the second quarter has continued. However, some of our contacts are looking for a pickup in new orders due to low supply chain inventories. Steel shipments are being driven primarily by transportation- and energy-related industries. District auto production decreased in July on a month-over-month basis, due to normal seasonal retooling for model changeovers. Year-over-year production also fell, but declines were limited to foreign nameplates, as supply disruptions caused by events in Japan persist.

Manufacturers remain committed to their capital spending plans for 2011, with half of our contacts expecting to increase outlays in the upcoming months relative to prior-year levels. Little movement was seen in capacity utilization rates. Reports on raw materials indicated that prices have stabilized or declined slightly. Product pricing was fairly steady. Several of our respondents expect steel prices to begin rising in the near future. Hiring continued at a modest pace, with some manufacturers reporting difficulty in finding high-skilled workers. Wage pressures are contained.

Single-family home construction remains at a low level, with purchases mainly in the move-up buyer categories. Contractors reported that a lack of confidence is keeping potential buyers on the side-lines, even with mortgage interest rates at very low levels. A few of our contacts noted that multi-family construction and remodeling now accounts for a substantial part of their backlogs. Expectations call for little change in residential building in the near term. List prices of new homes held steady, while builders shifted away from discounting. The upward pressure on building material prices that was seen in early summer has diminished. Two builders reported some easing in credit restrictions for financing multi-family and spec construction. Aggressive pricing on the part of subcontractors was widespread. One contact reported that monies from the 2009 stimulus package earmarked for home weatherization programs have been exhausted, which could lead to further job cutbacks in residential construction. General contractors continue to work with lean crews.

Activity in nonresidential construction has weakened slightly since our last report. Although the number of inquiries has dropped off, several builders noted that they have recently added to their backlogs. One contractor reported that the rising incidence of stop-work orders on federal projects is contributing to marketplace uncertainty. Most construction was contracted with manufacturers, energy producers, or for infrastructure projects. Looking forward, several of our contacts remain cautiously optimistic, while others believe an industry rebound will not occur until 2013. Building material prices were mainly steady. Little change in construction payrolls was noted, while union negotiations led to a small increase in wages. Accounts of subcontractors struggling to stay in business were common.

Consumer Spending
Retailers reported that sales for the period from early July through mid-August were on or ahead of plan, and that transactions increased in single-digits relative to year-ago levels. Many of our contacts said that rising sales included necessities and discretionary items, especially for new and innovative products. Looking ahead to the fourth quarter, most contacts expect their sales to rise in the low- to mid-single digits on a year-over-year basis. However, grocers we spoke with anticipate little improvement in sales volume for the remainder of this year. We continue to hear about upward pressure on supplier prices, although it mainly affects meat and dairy products and items produced from cotton. Retailers attributed some of the pressure to higher costs for transportation, packaging, and certain commodities. Grocers passed through the increases to their customers, while other retailers were more selective in adjusting prices. Reports on profit margins were mixed. Capital outlays remain on plan. Half of our contacts said that they are in the process of expanding the number of their retail outlets. However, no change in payrolls is expected at existing stores.

Most auto dealers reported that new-vehicle sales from early July through mid-August were higher than the previous six-week period. On a year-over-year basis, vehicle purchases improved for almost all of our contacts, with a few noting double-digit increases. Demand for fuel-efficient, less-expensive cars continued to grow, although the market for smaller SUVs remains stable. Inventories are still at low levels, especially for Japanese brands. Dealers are cautious in their outlook due to uncertainty about the economy and the availability of vehicles that consumers want to buy. Demand for used cars remained fairly strong; however, scarce inventory is contributing to higher prices. We heard a few reports of some easing in credit restrictions, while the use of leasing continues to grow. Many dealers are in the process of initiating factory-mandated programs for showroom upgrades and reimaging, and two contacts said that they are expanding their current facilities. The number of dealers who are hiring sales and service personnel has picked up slightly since our last report.

Overall demand for business loans showed a modest improvement, with requests coming from a broad range of industries. Reports indicated downward pressure on interest rates for business credit. Consumer credit was driven by indirect auto lending and home equity lines of credit. Other installment loan categories remained weak. Applications for residential mortgages have picked up, with bankers citing falling interest rates as the reason. Submissions were fairly mixed but leaned toward refinancing. Core deposits continued to increase, driven by inflows from business customers. Several bankers commented that the rate of growth in consumer deposits has weakened. Credit standards were largely unchanged. Delinquencies declined across all loan categories. No significant changes in employment levels were cited, and little new hiring is expected in the near-term.

Conventional oil and natural gas drilling and production were stable during the past six weeks, while activity in Marcellus and Utica shales continued to expand. Shale gas produced in Pennsylvania grew by almost 60 percent in the first six months of 2011 relative to the prior six-month period. Wellhead prices paid to independent producers declined slightly. Little change in coal output is anticipated for the remainder of this year. Rising demand for coal in overseas markets has been offset by a lessening in demand from domestic utilities and production constraints due to increased governmental oversight in permitting and environmental compliance. Spot prices for coal increased between 1 percent and 3 percent. Capital outlays are on target, with moderate increases projected by oil and gas companies in the upcoming months for drilling new wells. The cost of production equipment and materials was fairly stable; however, prices increased for tubular products and tires. A modest rise in payrolls was reported.

Overall, freight transport volume continued on a slight upward trend, although a few of our contacts characterized volume over the past couple of months as inconsistent. As a result, they revised their near-term growth projections down slightly. Several respondents have successfully increased their shipping rates as customer contracts came up for renewal. Prices for diesel fuel have been trending lower, while maintenance costs are rising, especially for tires. Capital outlays have accelerated during 2011 relative to prior-year levels. Spending is mainly to replace aging transport equipment and to support demand growth from energy customers. Hiring has been largely for driver replacement; however, we heard two reports about carriers adding capacity. Wage pressures are emerging due to a tightening of the driver pool.

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Last update: September 7, 2011