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Federal Reserve Districts

Fourth District--Cleveland

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Business activity in the Fourth District continued to expand at a modest pace, albeit at a slower rate since our last report. Manufacturers reported a slight rise in production and new orders, while freight transport volume continued to grow. Retail sales increased, but were below plan for some chains. New car sales weakened slightly. Energy companies noted little change in output. New-home construction is sluggish, whereas nonresidential building showed continued improvement. The demand for business and consumer credit remains low.

Rising 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 manufacturing and professional business services. Wage pressures are largely contained. We heard fewer reports about rising prices for commodities and other raw materials. In particular, steel firms noted a leveling off in prices for their products, while food producers reported a slow decline in some agricultural commodity prices.

Reports from District factories indicate that production was stable or rose slightly during the past six weeks. About half of our respondents noted a rise in new orders. Many of our contacts expect some slowing in the third quarter due to seasonal factors, followed by a modest pick-up later in the year. Almost all steel producers and service centers reported that shipping volume declined during the second quarter, which they attributed in part to weakening in the auto sector. Steel representatives anticipate volume remaining close to current levels through the end of the third quarter. Shipments are being driven primarily by heavy equipment and energy-related industries. District auto production showed a moderate rise in June on a month-over-month basis, as supply disruptions caused by events in Japan diminished. Year-over-year production fell, but declines were mainly limited to foreign nameplates.

Manufacturers remain committed to raising capital outlays in the upcoming months relative to year-ago levels. The number of contacts who earlier reported delaying the start of projects due to slowing in the recovery has declined considerably. Capacity utilization rates remain below what is considered normal for a majority of manufacturers. Reports on raw material pricing were mixed, and only a few of our contacts said that they had passed through price increases. Steel prices leveled off, while food producers reported a slow decline in some agricultural commodity prices. In general, manufacturers continued hiring at a modest pace. Wage pressures are contained.

Real Estate
New-home construction remains at a low level, with only two of our contacts reporting an uptick in sales during June. Purchases were mainly in the move-up buyer categories. Contractors expect that single-family construction will remain depressed until potential buyers can more easily sell their existing homes and the job market begins to gain some traction. List prices of new homes held steady, while the use of discounting grew. Upward pressure on the cost of building materials was reported by almost all of our contacts. Spec inventories were reduced further relative to year-ago levels. General contractors continue to work with lean crews, and no hiring is expected in the near term. Many subcontractors are struggling to stay in business and are bidding jobs below cost.

Activity in nonresidential construction strengthened somewhat during the past couple of months, with a few of our contacts noting a significant improvement when compared to year-ago levels. Inquiries are on the rise, and several contractors reported growing backlogs, albeit with weak margins. Construction is taking place in a broad range of industry sectors. Almost all of our contacts expect that activity will continue to slowly improve as the year progresses. Financing is available, though underwriting standards remain high. Banks are unwilling to lend for speculative projects, and they require additional equity when refinancing an existing property. Most of our contacts reported normal price fluctuations for building materials. Aggressive pricing on the part of both general contractors and subcontractors was widespread. Construction payrolls held steady, and little permanent hiring is expected in the upcoming months.

Consumer Spending
Reports from retailers indicate that sales for the period from mid-May through late June rose in the low to mid-single digits. However, for a few chains, the rate of growth was lower than expected. This was attributed mainly to inclement weather. Transactions were mostly higher relative to year-ago levels. Several of our contacts noted that rising sales included some higher-priced discretionary items. One retailer said that her overall sales were up due to elevated gasoline prices. Looking forward, retailers' expectations for the third quarter were mixed. We continue to hear about upward pressure on supplier prices, although it mainly affects food- and fuel-related products. Retailers passed through some of their increases to consumers. Reports on profit margins were mixed, with declines taken primarily by grocers. Capital outlays remain on plan and are slightly higher than year-ago levels. A majority of our contacts reported that they plan to expand 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 mid-May through late June were below those recorded during the previous six-week period. On a year-over-year basis, vehicle purchases increased for almost all of our contacts. Demand for smaller, fuel-efficient cars continues to grow. However, with some retrenchment in gasoline prices, consumers are beginning to take a second look at SUVs and trucks. Inventories were characterized as low by many dealers, and they believe this may be a major contributor to slower sales. Dealers are cautious in their outlook due to uncertainty about gas prices, the economy, and the availability of vehicles that consumers want to buy. Demand for used cars remains fairly strong; however, scarce inventory is contributing to rising prices. Credit pricing remains very competitive, and the use of leasing as a credit alternative is growing. Many dealers are in the process of initiating factory-mandated programs for showroom upgrades and reimaging. Little change in dealer payrolls was reported.

Demand for business loans was generally soft, with activity driven by non profits and energy companies. A few of our contacts noted a pick-up in construction-loan requests for multi-family dwellings. On the consumer side, indirect auto lending was strong, while draw-downs on home equity lines of credit tapered off. Other installment loan categories remain weak. Many of our contacts reported downward pressure on interest rates for business and consumer credit. Applications for residential mortgages declined since our last report, with submissions equally distributed between refinancing and new purchases. Overall core deposits continue to increase, but the rate of growth has declined. We heard a few reports of easing credit standards for commercial and industrial loans, especially for attractive credits. The credit quality of business and consumer applicants was characterized as steady or improving. Most bankers reported a modest improvement in delinquency rates. No significant changes in employment levels were reported. However, about half of our respondents said that they expect selective hiring to occur this year.

Reports indicate that oil and natural gas drilling and production showed little change during the past six weeks, with activity in Marcellus and Utica shales continuing to grow. Wellhead prices paid to independent producers have declined. Demand for coal is rising, especially in overseas markets. However, due to transport issues and increasing governmental oversight in permitting and environmental compliance, production remained flat. Little change is anticipated for the remainder of the year. Spot prices for coal, particularly steam, moved slightly higher. Capital outlays are on target, with moderate increases projected by oil and gas companies in the upcoming months. The cost of production equipment and materials increased slightly since our last report. A modest rise in payrolls by oil and gas producers was reported.

Freight transport executives told us that shipping volume expanded slightly, as the effects of supply chain disruptions due to events in Japan and severe spring weather in the U.S. dissipate. Expectations call for markets to continue growing at a modest pace in the upcoming months. The price for diesel fuel remains elevated, with most of the increase being passed through to customers via surcharges. Capital outlays are expected to accelerate during 2011. Spending is mainly to replace units that were in service longer than expected. Hiring has been largely for driver replacement. However, we heard a couple of reports that carriers are adding capacity, which remains below pre-recession levels industry-wide. Wage pressures are emerging due to a tightening of the driver pool.

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Last update: July 27, 2011