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Federal Reserve Districts

Fourth District--Cleveland

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Overall economic activity in the Fourth District has weakened markedly since early October. The downward trend in factory output and steel shipments that began in the middle of the third quarter continued. Residential construction remains very weak, with no improvement expected during 2009. Commercial builders told us that inquiries have been falling off, and they anticipate a slowdown in business through at least the first half of next year. Sales by District retailers were characterized as flat to down, while reports from auto dealers indicate that purchases of new and used cars have dropped. Business loan volume has been steady to up, while consumer lending activity has weakened. Energy production is stable. And freight transport volume declined across most industry sectors.

Reports show a drop in employment levels, primarily in manufacturing, residential construction, and auto dealerships. Staffing firms reported that job openings were flat to slightly down, with openings concentrated in health care and financial services. Wage pressures remain contained across all industry sectors. Almost all respondents affiliated with manufacturing, construction, and energy companies said that raw materials prices were stable or showed a moderate decline.

Output at District factories was flat to down during the past six weeks, with several reports indicating double-digit reductions in orders. On a year-over-year basis, a majority of our contacts said that production fell. Most respondents expect that output will continue to slow going into 2009. Capacity utilization was at or below normal levels. Almost all steel producers and service centers reported a worse-than-expected slump in shipping volume. The only end markets showing some strength are energy and aircraft. All of our contacts believe that market conditions for steel will weaken further in the upcoming months. In contrast, the data show a rise in District auto production during October on a month-over month basis, with foreign makers accounting for most of the increase. October's increase reflects a normal seasonal adjustment from lower production levels during September. In terms of year-over-year comparisons, production fell, with domestic nameplates absorbing the entire downturn.

Capital spending remains on plan; however, two-thirds of our respondents reported that they plan to cut back on capital expenditures during 2009. Companies with strong balance sheets were successful in renewing credit lines. However, the agreements contained additional covenants and the cost of credit was higher. Almost all of our respondents said that the prices they pay for raw materials have declined, some significantly. Moreover, only one producer raised his prices during the past six weeks, while several reported lowering the prices of their products. Looking forward, a majority of our contacts expect that cost pressures will continue to subside. Half of our respondents said they have either laid off employees or intend to do so in the near future. Further, we heard several reports of companies eliminating overtime or initiating hiring freezes. Wage pressures are not an issue.

Real Estate
Residential contractors reported extremely weak home sales during the past six weeks, with Internet and foot traffic showing steep declines. Looking forward, builders are not expecting any industry turnaround through 2009. Credit remains available to homebuilders and buyers, especially from community banks. However, lending standards have tightened, rates have increased, and banks are requiring higher down payments. Prices for building materials continue to moderate, especially lumber and drywall. Half of our respondents told us that they have marked down the list prices of their houses, and inventories have been pared to match current sales levels. General contractors and subcontractors reported reductions in staff levels and no wage pressures.

Most commercial builders told us that business started to slow down during the past six weeks, and they expect the decline will continue through at least the first half of 2009. Several firms attributed the slowdown, in part, to difficulties in financing projects. Backlogs remain relatively strong, while inquiries have been falling off. Contractors reported holding their prices steady; however, a few expect some margin contraction in 2009. Construction materials prices have stabilized. Workforce levels were largely unchanged, and no wage pressure was reported.

Consumer Spending
District retailers reported October sales were flat to down on a month-over-month basis across all industry segments. The sole exception was a national discount chain, which reported increased sales. Looking forward, respondents expect a relatively weak holiday shopping season. Apart from paper products, vendor prices were stable. Sellers of paper products told us that they are passing through price increases to their customers. Reports from auto dealers indicate that purchases of new and used cars have declined over the past six weeks. Low-priced models that get good gas mileage had the highest sales volume. Dealers do not expect much improvement in the upcoming months. Capital expenditures by retailers remain on target; however, half of our contacts said they plan to cut back on spending during the next 6 to 12 months. For the most part, staffing levels at retail stores have not changed; however, seasonal hiring will be less than last year. Several auto dealers said they have cut additional staff since our last report. No wage pressures were reported.

In general, business loan volume has been steady to up, with some of the increase attributed to drawdowns on existing lines of credit. Interest rates trended upward, reflecting higher pricing of risk and a pass-through of increased bank borrowing costs. On the consumer side, installment loans were flat to down, while the use of home equity lines of credit remained solid. Pricing for consumer loans also showed a slight increase. Several bankers told us that they are actively marketing their loan business. Nonetheless, they are cautious in extending new loans, with credit standards continuing to tighten. Credit quality of incoming applicants was characterized as stable to slightly down. For a majority of our respondents, spreads have widened a bit during the past six weeks. Overall, core deposits are growing, especially at banks that are paying competitive rates on CDs and money market accounts. Staffing levels remain steady and no wage pressure was reported.

On the whole, energy production has been stable during the past six weeks. Expectations call for oil and natural gas production to remain steady or increase, while coal production is expected to weaken during the upcoming months. Reports indicate that the prices received for oil and natural gas fell significantly since their July peaks. Materials and equipment costs have moderated, especially for diesel fuel. Capital expenditures are on plan, with little change expected during the next few months. Workforce levels held steady, and no hiring is expected in the near future. Wage pressures that existed earlier in the year have diminished.

Freight transport service companies experienced an overall decline in shipping volume and revenues since our last report. Company officials told us that the housing, auto, consumer products, and steel industries are primarily responsible for the drop-off. Expectations call for activity to remain weak through at least the first quarter of 2009. Transport pricing remains competitive, and there are reports that fuel surcharges are being removed in some places. Capital spending remains on target but at low levels for most companies. Almost all expenditures are allocated solely for equipment replacement. Little change in capital spending is expected during the upcoming months. For the most part, hiring was limited to driver turnover. However, we heard several reports of potential layoffs due to industry-wide capacity reduction. Any wage increases fell within industry norms.

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