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Federal Reserve Districts

Fourth District--Cleveland

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Economic activity in the Fourth District has slowed somewhat since early January. Overall, factory output was flat though shipments by steel producers and service centers rose. Production at auto assembly plants increased. The housing industry remains weak with little expectation of improvement in the near future. Nonresidential builders reported business was steady to increasing. Sales by District retailers weakened and fell below plan. Bankers cited a pickup in business lending while consumer loan demand was flat to declining. Further, deterioration in credit quality and a small rise in delinquencies were indicated. Energy production was steady to increasing. Truck freight volume slowed.

Employment levels across the District were largely unchanged, though workforce levels fell at a number of national banks and trucking companies. Staffing firms reported a modest increase in the number of job openings while the number of job seekers was unchanged. Demand was greatest in nursing and allied health professions. Apart from energy producers, little upward pressure on wages was noted. Almost all manufacturers cited increased costs for raw materials while homebuilders and nonresidential contractors noted rising metal prices.

Overall, factory output has been flat during the past six weeks. Reports of increased production were generally attributed to seasonal adjustments. On a year-over-year basis, reports showed output levels were the same to up slightly. Outlook by manufacturers is best described as cautious. In general, steel shipments were on the rise for both producers and steel service centers. Expectations are for steel demand to remain at current levels or increase. The strongest end markets for steel include energy, aerospace, and defense. District auto production increased in January. Output by foreign nameplates increased while their domestic counterparts held production levels steady. In terms of year-over-year comparisons, auto production was down slightly.

Reports on capacity utilization were mixed. Capital spending remains on plan with most producers saying that spending in 2008 will be at or slightly above 2007 levels. However, four of our contacts told us they plan to dramatically increase spending on new buildings and equipment. Almost all of our respondents reported increasing prices for raw materials, especially metals. Further, half of them told us that they have either raised prices or added surcharges since our last report. However, only a few contacts said they plan to raise prices in the near future. Most manufacturers also expect modest inflationary pressures to continue. On balance, there was little change in employment levels and limited hiring is expected in the near future. Minimal wage pressure was reported.

Real Estate
Residential contractors reported new home sales were flat, albeit at low levels, during the past six weeks. Year-over-year, sales activity was flat to down. Looking forward, home builders had mixed opinions. Half our contacts believe an upturn in the housing market will not occur for another 12-18 months while others think market activity may begin to increase late in 2008. Some of the latter group's optimism is based on an across-the-board pickup in traffic during the past couple of months. Inventories remain above desirable levels for most builders. New home prices and material costs--outside of metals--were largely unchanged. A small decline in homebuilding staffing levels was noted.

Almost all commercial contractors reported that business has been steady to slightly increasing since our last report and on a year-over-year basis. Current backlogs are at acceptable levels. Expectations for 2008 suggest that building activity will equal that seen in 2007. We heard some reports that residential contractors are beginning to move into the commercial sector, resulting in a more competitive bidding process. With the exception of a rise in steel prices, material costs have been stable. On net, workforce levels remain largely unchanged; however, a few builders said they may add workers in the second half of 2008. Little upward pressure on wages was reported.

Consumer Spending
Most District retailers reported a decline in January sales when compared to the previous month and on a year-over-year basis. The only segments showing strength were foods and pharmaceuticals. Expectations for the second quarter (2008) are for sales to remain flat or to increase slightly. Auto dealers cited weakness in new vehicle sales during the past six weeks, with little change anticipated in the upcoming months. For the most part, vendor prices were unchanged. Employment levels were adjusted to meet seasonal demands or for staffing new stores. Capital expenditures met projections during the past few months; however, half of our contacts told us that spending in 2008 would fall below 2007 levels.

Almost all bankers reported a pickup in business lending during the past six weeks. Several contacts attributed the rise to commercial real estate loans. In contrast, consumer loan demand--including autos and home equity--was characterized as flat to declining. The residential mortgage market remains sluggish; however, most of our contacts experienced a boost in refinancing activity. A majority of bankers told us that credit quality for business customers and consumers has deteriorated. Further, a small rise in delinquencies, especially for all types of real estate loans, was reported. Net margins were either stable or had narrowed a little with a few bankers expecting their margins to contract even further. Employment levels at community banks were steady although a number of national banks reported significant employment reductions related to mortgage lending and cost controls. Several contacts expressed concern about increased benefit costs, especially for health care.

Oil, gas, and coal production has been steady to increasing slightly over the past six weeks. Looking forward, over half of our energy contacts told us they expect demand to rise. However, tightening credit standards, regulatory issues, and price pressures were cited as impediments to increasing production. Reports indicated the price received for coal went up while oil prices were steady to declining and gas prices were stable to increasing. Equipment and material costs were stable while capital expenditures remained on plan. Several of our respondents said that they plan to increase capital spending during the next few months. Net employment levels increased slightly and some additional hiring is expected. Oil and gas producers reported upward pressure on wages.

Trucking executives reported freight volume has declined somewhat over the past six weeks and they anticipate little change in the upcoming months. Nevertheless, a few contacts believe a turnaround might occur in the second half of 2008. Rising fuel prices continue to plague the industry. Cost recovery through surcharges is becoming increasingly difficult. Some weakening in capital spending was reported and only modest increases are expected, primarily in the second half of 2008. Employment levels continue to decline as carriers are in the process of reducing capacity. No wage pressures were reported.

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Last update: March 5, 2008