WASHINGTON (MNI) – The following is the latest Beige Book survey of
economic conditions in the Federal Reserve’s Fourth District, published
Wednesday:

FOURTH DISTRICT CLEVELAND

The economy in the Fourth District grew at a slow pace during the
past six weeks. Manufacturers reported that new orders and production
were stable. Single-family home construction improved slightly, while
nonresidential builders saw a drop-off in inquiries and weak backlogs.
November retail and motor vehicle sales were little changed from the
prior month. Activity in shale gas drilling and production expanded.
Freight transport volume slowed along seasonal trends. The demand for
credit by businesses and households was characterized as either steady
or increasing slightly.

Labor market reports indicated that hiring remains at a low level,
while recruiting highskilled workers was difficult. Staffing-firm
representatives saw growth in the number of new job openings, with
vacancies concentrated in healthcare and energy. Wage pressures were
largely contained. Other than a boost in steel prices, upward pressure
on raw material prices has abated.

Manufacturing. New orders and production at District factories were
mainly stable during the past six weeks. Any declines were attributed to
seasonal factors or lessening demand from European and Chinese
customers. Compared to year-ago levels, the majority of our contacts
noted a moderate improvement in output. However, they are cautious in
their outlook and expect little change in demand during the upcoming
months. Most steel producers and service centers reported that shipping
volume was steady along seasonal trends, although two of our contacts
noted an unexpected pickup for this time of year. Demand is being driven
by autos, energy, and heavy equipment industries. Steel representatives
are hopeful about the first quarter of 2012, and most expect to see at
least modest growth. District auto production showed a substantial
decline during November on a month-over-month basis, more so for foreign
nameplates. Most of the decline was attributed to supply chain issues.
Year-over-year, domestic auto producers’ output rose significantly,
while their foreign counterparts posted moderate declines.

Capacity utilization was below normal at most factories, while
steel producers saw their utilization rates at or near normal levels.
Inventories were in line with sales for the majority of our contacts.
Manufacturers told us that their capital outlays have reached targeted
levels for the year. Only a few respondents indicated that they expect
to significantly raise their capital budgets for 2012. Other than steel,
raw material prices were steady during the past few weeks. We heard
several reports about steel producers raising their prices and the
possibility of a second round of increases early in 2012. New hiring
remained at a low level. Those adding to payrolls found it difficult to
recruit professional and high-skilled production workers. Wage pressures
are contained.

Construction.

Single-family home construction was described as better during the
past couple of months, with sales contracts distributed across all
price-point categories. Builders were slightly more optimistic in their
outlook, but they are not expecting an industry turnaround in the near
term. We heard a report that homebuilders’ inventories are on a decline
in some parts of the District, which should help boost new-home
construction during 2012. Not much change was seen in the list prices of
new homes, though two of our contacts noted a greater use of
discounting. A few subcontractors attempted to raise billing rates, but
they were unsuccessful. Employment and wages were stable.

Activity in nonresidential construction for small to medium-size
builders was steady, although the number of inquiries has fallen off
during the past few weeks. The biggest challenges facing nonresidential
contractors continue to be financing projects and adding to backlog.
Construction contracts were primarily with manufacturers and health-care
providers. Builders are uncertain about future prospects. One contractor
noted that he does not expect a major pick-up through at least the first
half of 2012. On balance, building material prices were stable. The
number of reports about sub contractors going out of businesses rose,
while general contracting payrolls showed a slight decline.

Consumer Spending.

Retailers reported that November sales were stable or slightly
higher relative to October sales. According to a few of our contacts, a
milder than expected autumn was holding back purchases of cold
weather-related items, while purchases of electronics and home
furnishings were better than expected. On a year-over-year basis,
results were mixed. Sales for the first quarter of 2012 are generally
expected to improve over prior-year levels, mainly in the low- to
mid-single digits. Some retailers expressed caution about 2012 given the
fragility of household balance sheets. Upward pressure on supplier costs
has abated during the past six weeks. Inventories were characterized as
good except for apparel items, which are higher than desired. Capital
budgets were on plan. Most of our contacts said that outlays during 2012
will not change appreciably from this year’s levels and that outlays
will be used mainly for technology enhancements and remodeling. Other
than seasonal hiring, there was little change in employment at existing
stores.

Auto dealers reported that new-vehicle sales during November
remained strong. On a year-over-year basis, sales volume was largely
higher. Dealers saw robust demand for all vehicle types. A few dealers
noted that their inventories are now adequate. Others said that
inventories are low, which they attributed to brisk sales. The outlook
for 2012 is somewhat tentative, mainly because of uncertainty. Purchases
of used vehicles have fallen off slightly, due in part to a supply
shortage. We heard reports about some easing of credit restrictions,
while interest rates were very competitive. Dealers are investing in
manufacturer-mandated facility upgrades and imaging programs. The few
dealers looking to hire reported that it is difficult to find qualified
candidates, especially sales representatives and service technicians.

Banking.

Demand for business loans was characterized as either stable or
increasing. Requests are being driven by commercial real estate, notably
multifamily housing, and healthcare. On the consumer side, our contacts
described installment loan activity as flat or up a bit. Auto lending
(direct and indirect) and home equity lines of credit continued to show
strength. Bankers said that they have not seen a bump up in the use of
credit cards during the holiday shopping season. Interest rates for
business and consumer credit were very competitive. Activity in the
residential mortgage market has been solid in the fourth quarter, driven
by low interest rates. Most applicants are looking to refinance. No
changes were made to loan application standards. Delinquencies were
steady or declined across most loan categories; any stress was found in
real estate portfolios and credit cards. Overall core deposits grew,
although a few bankers commented that growth is being driven by business
customers. Payrolls were stable, with little hiring expected in the near
term.

Energy.

Conventional oil and natural gas production was mainly steady
during the past few weeks, with little change expected in the upcoming
months. Our contacts were uncertain about future gas drilling due to
eroding natural gas prices. Well-head prices for oil were flat, but
remained elevated. Activity in shale-gas extraction expanded. Coal
output was stable, though it may decline during 2012 due to an easing in
demand for thermal and metallurgical coals from European customers and
domestic power producers. The latter was attributed to abundant supplies
of low-priced natural gas and regulatory compliance issues for
coal-fired generators. Spot prices for several types of coal have fallen
off. 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 was generally flat during the past six weeks.
Energy payrolls held steady. A few small oil and gas producers are
beginning to experience wage pressures brought on by competition from
large firms engaged in shale gas exploration and production.
Transportation. Freight transport volume has slowed during the past few
weeks, following seasonal trends. Strong demand was still seen from the
energy and manufacturing sectors. Our contacts expect volume to grow at
a slow, steady pace during 2012, with predictions in the mid-single
digits. We heard numerous reports of rising prices for parts, especially
tires, and of some volatility in fuel prices. Much of the cost increase
was recovered via fuel surcharges and rate adjustments when contracts
came due. Capital outlays were on plan for 2011. Most of our contacts
expect to increase their capital budgets during 2012 for fleet expansion
and to replace aging equipment. Operators reported hiring for driver
replacement or adding capacity, although recruiting qualified drivers is
difficult. Wage pressures exist due to a tightening of the driver pool.

** Market News International Washington Bureau: 202-371-2121 **

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