July 29, 2009 Federal Reserve Districts Fourth District--Cleveland

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The economy in the Fourth District has shown signs of stabilizing since our last report, though activity remains sluggish. Reports from factories indicated that production stabilized at low levels, with manufacturers expecting little change in demand during the upcoming months. New home construction remains weak, while non-residential building activity was mixed. Credit availability continues to be an issue for residential and commercial contractors. Sales by District retailers were flat to slightly down. New motor vehicle sales remained weak, whereas purchases of used vehicles were relatively strong. Coal production fell, with little change noted in oil and gas output. Freight transport volume remains at low levels. Commercial and industrial loan activity was mixed. Refinancing applications for residential mortgages have slowed, though other types of consumer lending were generally characterized as stable. Core deposits increased across the District. Employment declines were reported in manufacturing, regional banking, and coal mining. Staffing firms noted a fall-off in job openings, with the exception of healthcare and call centers. Given the weak labor market, wage pressures are contained. We heard widespread reports of increased prices for metals and residential construction materials. Capital spending was frozen or trimmed back to mainly critical maintenance projects. Manufacturing Reports from District factories showed that production stabilized at low levels in June and early July. Any increases cited were attributed to a slight improvement in market demand or seasonal factors. On a year-over-year basis, factory output was sharply lower. Manufacturers expect little change in demand during the upcoming months. Steel producers and service centers reported that the sharp decline in shipping volume has leveled off, but volume remains at depressed levels. The only end market showing growth was defense. Half of our steel respondents anticipate a slight pickup through the third quarter; nevertheless, the industry is not expecting a substantial turnaround through year's end. District auto production rose modestly during June on a month-over-month basis due to an increase in foreign nameplate output. On a year-over-year basis, both domestic makers and foreign nameplates experienced a sharp drop in production. Capacity utilization has changed little since our last report, with most contacts saying that it is well below historic norms. Capital budgets remain frozen or have been severely curtailed. Capital expenditures are expected to stay at depressed levels through the remainder of 2009. We heard widespread reports of an uptick in metals prices, which is putting some upward pressure on product pricing. A majority of our respondents made further reductions in payroll costs through layoffs, wage cuts, and reductions in production hours. Predictably, wage pressures are contained. Real Estate The residential construction industry remains weak. Although most builders continued to experience a slight increase in sales, their outlook is less optimistic than in the second quarter. Foot and Internet traffic was characterized as stable or declining, and sales trends are expected to remain at current levels or fall off slightly through year's end. Builders reported that a recovery in the housing industry is being impeded by financing difficulties (contractors and home buyers), low appraisal values, and limiting of tax credits to first-time buyers. Discounting has been reduced significantly. We heard widespread reports of increased prices for lumber, shingles, and concrete; these were attributed to seasonal factors. General contractors continue to operate with skeleton crews, and subcontractors are readily available at very competitive prices. Reports on nonresidential construction activity were mixed, with some improvement seen by contractors participating in public works and education projects. We heard several reports of a slight pickup in backlogs and inquiries. All of our respondents said that business has dropped below its level a year ago. Looking forward to 2010, half of our contacts expect construction activity will be very weak. Although a few contractors anticipate some growth next year, they do not expect a return to 2008 levels. We continued to hear numerous accounts of difficulties in obtaining financing for private-sector projects. Any increases cited in construction materials prices were attributed to seasonal factors and the recent run-up in oil prices. Apart from seasonal help, only two general contractors noted that they have hired a few workers due to increased project work. Subcontractors are readily available at very competitive rates. Consumer Spending June sales for District retailers were flat to slightly down on a month-over-month basis. Further, consumers continued to focus on purchasing less expensive necessities. Most retailers expect little change during the third quarter, with some pick-up toward year's end. On balance, vendor and retail pricing has been stable. Accounts from auto dealers indicated that new vehicle sales remained weak for the most part during June and were down sharply on a year-over-year basis. However, reports showed considerable differences across brands in sales and dealer inventories. Purchases of used vehicles remain relatively strong, which is putting some upward pressure on prices at auctions and dealer lots. Most dealers are uncertain about future sales due to weak economic activity, stringent credit conditions (floor plan and buyer), and the fallout from the Chrysler and GM bankruptcies. On balance, there has been little change in staffing levels at retailers. Capital expenditures by retailers remain on plan but have been trimmed back from 2008 levels. Banking Commercial and industrial (C&I) loan demand is decidedly mixed. Regional banks reported declining loan demand and balances, while community bankers commented that their C&I pipelines are filling up, in part because they are attracting business from large regional banks. Spreads on business loans are steady to increasing. On the consumer side, loan demand was characterized as stable to up slightly, with steady interest rates. A few community bankers told us that indirect lending is doing very well. Applications for refinancing residential mortgages have slowed. Core deposits increased across the District. Credit quality deteriorated somewhat on the consumer and business sides. Delinquencies at many banks continued to rise, particularly for commercial and residential real estate loans. Higher lending standards remain firmly in place, with no easing expected. Several bankers expect credit to tighten further going forward. Staffing levels at a few regional banks are being reduced due to mergers and a contraction of specific business lines. In contrast, some community banks are hiring ahead of foreseeable growth. Energy Coal executives reported continuing production declines, which they attributed to weakening demand from electric utilities. One executive noted that contract prices for coal have dropped 50 percent since the beginning of the year. Little change in oil and gas production was reported, though drilling activity has fallen off substantially in some regions. Spot prices for natural gas and oil are trending downward. For the most part, the costs of production equipment and materials have fallen. Capital spending by coal producers has been cut back and is restricted to some critical maintenance projects, while expenditures by oil and gas producers remain as projected. Employment levels in the oil and gas industry were largely stable, although coal executives reported workforce reductions and cuts in overtime Transportation Freight transport executives reported that shipping volume remains at low levels and is down substantially on a year-over-year basis across all market segments. Any pickup cited was attributed to seasonal factors or competitors exiting the market. A majority of our contacts expect activity to stay at current levels through year's end. Nevertheless, a few executives anticipate that volume will begin to gradually pickup during the third quarter but remain well below 2008 levels. Shipping rates remain very competitive, and capital spending is restricted to replacement only. On the labor front, we heard a few reports of wage cuts or freezes and minimal hiring for spot shortages. Return to top Philadelphia Richmond