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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 was generally positive. Freight transport volume increased, while energy producers noted little change in output. New home construction remains sluggish, whereas nonresidential building showed some pickup in activity. The demand for business and consumer credit rose slightly.

Rising payrolls were limited to the manufacturing and retail sectors. Staffing-firm representatives noted moderate growth in the number of new job openings, with vacancies concentrated in health care, professional business services, and energy. Wage pressures remain contained. Reports of elevated prices for commodities, steel, fuel, and other raw materials were widespread. As a result, manufacturers, retailers, and freight carriers felt mounting pressure to pass through some of their rising input costs to their customers.

Reports from District factories indicate that new orders and production were mainly steady or up slightly during the past six weeks. Declines were attributed to seasonal factors. Compared to a year ago, production was generally higher, with some of our contacts experiencing low double-digit increases. Manufacturers have a favorable outlook, and they expect at least modest growth during 2011. Steel producers and service centers reported that shipping volume met or exceeded expectations, with shipments being driven by energy-related, transportation, and heavy equipment industries. They anticipate volume remaining at current levels through at least the first half of this year. District auto production dipped slightly during February on a month-over-month basis. Compared to a year ago, domestic auto makers showed a substantial rise in production, while foreign nameplates posted a modest decline.

A majority of our contacts indicated that capacity utilization rates continue to trend higher but are somewhat below normal levels. Inventories are balanced with incoming orders. Many of the manufacturers we spoke with said that capital outlays will be higher in the upcoming months relative to year-ago levels. Some noted that projects delayed in 2010 will be started this year. Others said that business conditions warranted raising capital budgets for 2011. Prices for metal and agricultural commodities, steel, and petroleum-based products remain elevated. Many of our contacts reported passing rising input costs through to their customers. A few manufacturers commented that they expect steel prices to begin falling back during the second half of this year. The pace of hiring among manufacturers has picked up since our last report; however, several contacts said that they are using temporary workers instead of creating new positions. Wage pressures are generally contained, with some companies planning to reinstate merit increases.

Real Estate
Although new home construction remained overall at a low level, a few general contractors noted a pick up in traffic and sales. Purchases were mainly in the move-up buyer categories. Little change in sales was noted on a year-over-year basis. Home builders expressed somewhat more of an optimistic outlook than during the past several months, which they attributed to seasonal factors and slightly better-than-expected activity during February. List prices and discounting of new homes have held steady since our last report, while some upward pressure on the cost of building materials was reported. Little movement was seen in land positions or spec inventories. A few builders said they want to construct more spec houses, but they are unable to obtain financing. We heard many reports of subcontractors struggling to stay in business, while general contractors continue to work with lean crews. No hiring is expected in the near term.

Activity in nonresidential construction is being driven primarily by healthcare projects, and to a lesser degree, by manufacturing and energy. Information on current business conditions varied widely, though a number of high-end projects (greater than $100 million) are now entering the construction phase, after several years of planning. Most of our contacts expect that activity will slowly improve as the year progresses. Two builders noted that banks must loosen credit restrictions in order for projects to move into the construction phase. Another builder said that some of his manufacturing clients have the cash, but there is no sense of urgency on their part to begin construction. We heard widespread reports of increased prices for building materials, particularly steel and petroleum-based components. Contractors are absorbing these rising costs in their margins. Other than seasonal employment, general contractors held payrolls steady, and they do not expect any new permanent hiring in the upcoming months.

Consumer Spending
Reports from retailers indicate that sales for the period from mid-February through mid-March were generally on or ahead of plan, and were mostly higher relative to year-ago levels. Sales of warm-weather apparel and recreational products have picked up. A few of our contacts reported that the low- to mid-market segments still face considerable stress. For 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 continued to hear about increasing prices from vendors, which were primarily attributed to a rise in the cost of agricultural commodities. Accordingly, some retailers have raised their prices, especially for food products. Profit margins were generally steady or showed a slight improvement. Capital spending is mainly for store remodeling, new store openings, and e-business expansion, with a corresponding increase in payrolls. No change in employment is expected at existing stores.

Auto dealers reported that new-vehicle sales improved between mid-February and mid-March when compared to the prior 30-day period, while on a year-over-year basis, vehicle purchases rose substantially for most of our contacts. Several noted that they are beginning to see a pickup in sales of more fuel-efficient cars. Dealers expressed concern about a potential slowdown in the pace of the recovery. As a result, they are more cautious in their outlook for vehicle purchases during the spring and summer months. A majority of our contacts said that new- and used-vehicle inventories are too lean. Used-vehicle prices are trending up. Reports about lenders loosening credit requirements were fairly widespread, with credit prices remaining very competitive. Dealers are waiting for more details from automakers before committing to major capital investments in their facilities. However, several of our contacts said that they are currently undertaking some minor upgrades. Most auto dealers are beginning to hire on a selective basis.

Bankers reported that demand for business loans grew at a modest pace since our last survey. Although demand was characterized as broad-based, some bankers commented that applications were strongest from health-care providers and energy companies. On the consumer side, a majority of our contacts indicated that credit demand has picked up slightly, primarily for vehicle purchases (direct and indirect) and home equity lines of credit. Interest rates for business and consumer credit were stable, but competitive. Demand in the residential mortgage market is mainly for refinancings, although applications have slowed due to rising interest rates. Core deposits continue to grow, but at a lower rate, with almost all growth occurring in nonmaturing products. Credit standards were unchanged. The credit quality of businesses and consumer applicants was characterized as stable or improving, while delinquency rates were steady or trending down across most portfolios. Staffing levels have shown little change during the past few weeks, and only 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. Spot prices for natural gas were steady to trending down, while wellhead prices paid to independent oil producers showed a modest increase. Coal production was stable to moderately lower since our last report, with little change anticipated in the near term. Coal prices held steady. We heard widespread reports of increased costs for diesel fuel and other equipment and materials used in coal production. Energy payrolls are expected to remain at current levels.

Freight transport executives reported that shipping volume rose from early February through mid-March, after a greater-than-expected seasonal decline during January. Two of our contacts noted that they are seeing a slight pickup in shipments of residential construction materials. Looking ahead, carriers expect that markets will continue to recover. The price for diesel fuel remains elevated, with most of the increase being passed through to customers via surcharges. We also heard about rising prices for tires and packaging materials. One executive said that he plans to increase his shipping prices as customer contracts come up for renewal. Capital outlays are expected to rise modestly during 2011 to replace aging equipment. Little capacity expansion is expected. Hiring has been for replacement and seasonal work. Slight wage pressures are emerging due to a tightening of the driver pool.

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Last update: April 13, 2011