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Stronger Pipelines, Lessened Uncertainty, and Investing in Fun

As a new year begins, so too do the year-in-reviews: How were the economic conditions as last year came to a close different from a year ago? Had optimism climbed? Had spending risen?

“It depends on the industry sector you’re talking about,” replies Bob Sadowski, the senior economic analyst who manages the production of the Cleveland Fed’s Beige Book report. “I would say, in general, things are somewhat improved.”

Sadowski has some context: He’s spent 9 years overseeing the Beige Book, a compilation of anecdotal business conditions in the Cleveland Fed’s District, which includes Ohio, western Pennsylvania, the northern panhandle of West Virginia, and eastern Kentucky. (For more on the Beige Book, see “The Beige Book, explained.”)

Below, we highlight some of the more meaningful changes between the last Beige Book of 2014 and the last one of 2013.

Did you witness these changes, too, or something different altogether? And, do you expect these trends to continue in 2015? Use the hashtag #BeigeBook to be sure we (and others) see your views.

Builders get busy | Manufacturers expand | Retail sales disappoint as consumers opt for experiences | More of the same for bankers | All’s not quiet on the hiring front | The Beige Book, explained | All’s not quiet on the hiring front | Most recent Beige Book


Builders get busy

Construction

Probably the biggest change year over year occurred for nonresidential construction, Sadowski says. Whereas many developers in late 2013 said they were reluctant to start large projects, “that sentiment has largely disappeared.”

“A year ago in nonresidential construction, so many of our contacts would tell us, ‘Our clients aren’t building; they are keeping the projects in the pipeline, but won’t release them to construction phase. They don’t want to make that big investment yet,’” he recalls. “The reason they were reluctant in 2013 is they still had a lot of concerns about the economy, about fiscal issues, and so on. If you come forward 12 months, you’ll see that most of our contacts say that projects are moving more freely through their pipelines.”

Market demand is much broader, too, with vacancy rates starting to decline for retail, office, and industrial spaces, Sadowski adds.

One corner of construction seemed strong in both late 2013 and late 2014, and it’s multifamily construction, which includes apartments, senior housing, and student housing. Sadowski attributes that persistent strength, in part, to millennials not wanting (or being able) to buy.

“A lot of millennials simply aren’t interested in buying a house; they want the mobility,” he says. “Plus, many young people have so much college debt, and the credit markets for homebuyers are extremely tight.”

Marous Brothers Construction Inc., a Willoughby, Ohio-based construction service provider that builds in several states, including Ohio and Pennsylvania, is seeing “a lot more multifamily projects across all subsectors,” including student and senior housing and affordable and market-rate apartments, reports Arne F. Goldman, director of business development.

That multifamily momentum picked up in 2014, he adds.

Driven to attract and retain students, colleges and universities are feeding increased demand for high-quality, suite-style housing unlike their cinder-block, group-bathroom predecessors. As baby boomers age, they’re seeking different alternatives in senior housing. And, the appetite for new apartments in both urban and suburban areas is up for several reasons, Goldman says, not the least of which is the fallout of the recent housing crisis.

“There are people who have lost their homes who can no longer buy for credit reasons, or they just don’t want to own a home,” Goldman says.

The availability of capital from banks coupled with the lower land costs in Ohio and western Pennsylvania makes those areas “very, very attractive, especially to out-of-state developers,” he adds.

Expectations for 2015:

The need for subcontractors (or those who do work in trades such as electrical, plumbing, carpentry, and masonry) is increasing, but the pool of skilled tradesmen shrunk as a result of the recent recession. Thus, subcontractor pricing has increased, making it more expensive to build in parts of the Cleveland Fed’s region (namely Ohio and western Pennsylvania), Marous Brothers’ Goldman says. The shortage of skilled tradesman is likely to become more acute, too, as a number of developers rev up to complete their projects by spring 2016, before Cleveland hosts the Republican National Convention.

“The trades are so busy right now because there’s a lot of work out there, so it’s getting more expensive for us to hire them,” he says.

He expects the appetite for new market-rate and affordable apartments to continue to grow, too, especially as more empty-nesters and millennials decide to roost in urban centers.

“Studies have shown that Cleveland is still underserved in terms of market-rate apartments,” Goldman says. “Until that pent-up demand is met, I don’t see that this trend is going to slow down. The key is not to overbuild.”

The number of companies moving their operations to downtown centers such as Cleveland is an indicator to Goldman that this time, developers are building units to meet the demand created by jobs, instead of repeating the overbuilding that happened in Cleveland in the 1990s.

Your turn: Tweet us to share what you’re seeing, and what you expect in 2015. Use the hashtag: #BeigeBook


Manufacturers expand

Construction

The major change that becomes clear when comparing the reports of manufacturers in the last Beige Book of 2014 to that of 2013 is they are more willing to spend money on equipment and plant expansions, the Cleveland Fed’s Sadowski says.

“A year ago, there was this uncertainty working its way in manufacturing,” he adds. “People were simply reluctant to commit dollars. That uncertainty has lessened.”

Eric L. Burkland, president of the Ohio Manufacturers’ Association, which represents roughly 1,500 member companies throughout the state, large and small, agrees.

“There’s growing confidence in the economy and the opportunity for return on investments on equipment and new technologies,” he explains. “The other factor is that these technologies are advancing so rapidly that manufacturers are able to sometimes, in some instances, dramatically reduce costs or increase product design capabilities, (and) investments are paying off more quickly.”

Reports of manufacturers purchasing productivity-enhancing technologies really jumped in 2014, Burkland says.

“There’s more investment going on across the board, really,” Burkland notes. “All different kinds of companies. There’s an increasing imperative to invest because the technology is advancing so quickly, and companies that aren’t investing are falling behind pretty quickly.”

Similar to the year-ago Beige Book reports, oil and gas remains a big driver of manufacturing demand, as does motor vehicle production.

“This last year was a terrific year for automobile sales across North America, and 2015’s projected to be the same,” Burkland says.

Also driving up manufacturers’ confidence is the willingness of families to spend on household goods, such as appliances, in the wake of the mortgage crisis, Burkland reports.

Still, in late 2014, those compiling the Beige Book actually downgraded their assessment of manufacturing conditions to modest from moderate because sales weren’t quite as good as people expected, the Cleveland Fed’s Sadowski says.

Something positive stuck out to him, though, as “very significant” in last year’s final Beige Book.

“We had many manufacturers late last year tell us that the source of their growth is organic, meaning that their revenues are not just new orders from repeat customers, but that they have been gaining new customers,” Sadowski explains. “We haven’t heard that lately -- in a long time.”

Expectations for 2015:

From his perspective, the Ohio Manufacturers’ Association’s Burkland says “all signs are for more of the same in 2015.” And he means increased investment and increased economic output.

But, he cautions, things can change pretty quickly. Presently, manufacturers here have access to more affordable energy, and can produce and export goods at a lower price than some major trading partners can do it for themselves.

There’s also the challenge manufacturers face in finding the skilled workers they need.

“We’ve got to do a better job of recruiting kids into technical fields, in working with educators to get students into programs, into the pipeline, into manufacturing careers,” he stresses. “If we don’t, it will stall our economy for a long time.”

Capital investments by and growth of manufacturers ripple throughout their economies, both in terms of the demand they pass through supply chains and the purchasing power of their employees, according to Burkland.

“It’s something to celebrate because the economic effects go well beyond the factory walls into the supply chain, into the community,” he says.

Your turn: Tweet us to share what you’re seeing, and what you expect in 2015. Use the hashtag: #BeigeBook


Retail sales disappoint as consumers opt for experiences

Retail sales disappoint as consumers opt for experiences

While retailers had complaints in late 2014, hotel operators and restaurateurs were telling a different story.

The contacts for the Beige Book say that while consumers are spending their disposable income, it’s not necessarily on shoes and sofas, the Cleveland Fed’s Sadowski says.

“Retailers observed that even though lower gasoline prices are helping to boost spending, consumers are more interested in buying motor vehicles and experiences, such as vacations, rather than merchandise,” the last Beige Book of 2014 reports.

The same goes for dining out, according to Sadowski.

In one regard, the late 2014 report is similar to the last one of 2013: Sales of motor vehicles were up, year over year. And the part about people wanting to spend their money on intangible pleasures?

“That’s nothing new,” Sadowski says. “We started hearing about that 2 years ago already. But I will say, lately, in the past couple months, we’ve been hearing more about that than I ever have before. We are hearing a lot of anecdotal reports that especially millennials want to buy experiences. They don’t want to buy stuff.

“If you look at your traditional retailers, be it department stores, furniture dealers, sellers like that, they’re not seeing the kind of growth they want,” he adds. “If you go to a restaurant, they’re seeing growth in sales. If you talk to hotel owners, they’re seeing an increase in business. They are finding their customers are willing to pay more.”

So says Anton Giovanetto, who owns the Lyndon House Bed and Breakfast in downtown Lexington, Kentucky. This past year has been his best year yet out of 13 years he’s operated in the historic building. He estimates he enjoyed a 20% increase in room bookings in 2014 compared to 2013.

“I think easy, convenient, and fun is what Americans are experiencing with this rediscovery of their country,” he says. “People in the middle class, they’re traveling more because it’s one way to deal with their stress. It’s recreation therapy. A lot of this is discussed at breakfast. The middle class is very clear: ‘I want to have fun, and I only have so much money to do it with.’ They want an experience.”

And according to Giovanetto, he heard similar feedback from others at the Bed & Breakfast Association of Kentucky’s annual conference in November.

One result, according to Sadowski, is that hotel owners and others in the hospitality field are upgrading their properties, which is good news for the construction industry. Meanwhile, retailers are running more promotions to get people inside their stores and investing in something they also said they were investing in back in 2013: ecommerce.

“People just like buying online, (so) many of the people retailers are hiring will be for jobs linked to ecommerce,” he explains.

Expectations for 2015:

Bed and breakfast owner Giovanetto expects his increased business to continue, but he notes, “Interest rates will affect a lot.”

Lower rates have given people more money to do things they enjoy, he asserts.

Your turn: Tweet us to share what you’re seeing, and what you expect in 2015. Use the hashtag: #BeigeBook


More of the same for bankers

More of the same for bankers

For bankers, things in late 2014 were a lot like they were in late 2013.

Home equity loans were again cited as a product households were using more, but overall, bankers’ reports about consumer credit demand (that it was “roughly stable”) roughly mirrored what they said a year ago.

Similarly, delinquency rates, which reveal the ratio of loans not being paid per their terms, and credit standards, which bankers use to determine to whom they will lend, hadn’t really changed.

Words like “modest” and “slight” were used in both year-end Beige Books to describe the growth in demand for loans and lines of credit from businesses.

That’s not to say, however, that businesses aren’t spending, the Cleveland Fed’s Sadowski cautions.

“A lot of even small businesses, when we ask them about credit, they say, ‘I don’t go to a bank, I have cash,’” he explains.

Where the last Beige Book of 2014 does cite strong growth in demand is for commercial real estate (CRE in industry speak) loans.

Tom Fraser, president and CEO of First Federal Lakewood, a Lakewood, Ohio-based bank that lends mostly in Northeast Ohio but also in Toledo and Columbus, can attest to the CRE demand.

“There’s more requests for new projects going online, especially multifamily (construction) and small businesses and middle-market companies looking to expand their facilities,” he reports.

Almost every one of the bank’s commercial and industrial loan and CRE loan customers is having a better year than last year in terms of financial performance, according to Fraser. And while it’s certainly positive that there’s demand, in particular for CRE loans, bankers and builders “have to be careful that it doesn’t become too frothy,” he notes.

If real estate demand is overestimated and too many units go online, he warns, it could affect building values and, potentially, the ability of owners to pay on the debts they owe.

While Fraser agrees that demand for nonresidential consumer credit had been flat, he says loans for purchases of single-family homes have been noticeably strong.

“We’re seeing purchase demand in November and December right now as if it were June or July,” he notes. “So it’s a real outlier.”

The only thing Fraser anticipates could be discouraging home loan applicants is the perception that the regulatory burden on mortgage loans has increased. (It was roughly a year ago, in early 2014, when new home loan regulations called ability-to-repay and qualified mortgage came online.)

“We do get comments through the process that there’s more paperwork,” he says.

Expectations for 2015:

First Federal Lakewood’s Fraser expects demand for loans for commercial real estate projects to stay strong, particularly in downtown Cleveland and adjacent neighborhoods. He’s not so sure about the demand for it as one moves farther out into the suburbs.

He expects demand to continue, too, for single-family home loans.

“We’ve gone several years with low purchase activity and low consumer confidence,” Fraser begins. “It (the demand) has been so repressed for the last seven years, it would seem the combination of optimism and pent-up demand will keep things strong. The bigger challenge is inventory of homes for sale. Inventory seems tight, so increasing demand and tight supply suggests that home prices will continue to increase.”

Your turn: Tweet us to share what you’re seeing, and what you expect in 2015. Use the hashtag: #BeigeBook


All’s not quiet on the hiring front

All's not quiet on the hiring front

A near majority of the Cleveland Fed’s contacts reported in late 2014 that they planned to hire in the next 12 months, driving an upward trend that’s lasted roughly 24 months now, the Cleveland Fed’s Sadowski says.

That’s despite the fact that staffing firms reported in the last Beige Book of 2014 that the number of job openings and placements had fallen in recent weeks, though they attributed that, in part, to pseasonal effects.

Danny Spitz echoes the growth story, though. And Spitz, the CEO of EverStaff International, a recruiting and staffing firm that serves clients in 20 states, including Ohio, Pennsylvania, and West Virginia, says this is no longer limited to project-to-project hiring.

As opposed to adding temporary workers only to handle what they perceive as temporary assignments, more EverStaff clients are hiring temp-to-hire workers in full-time. Plus, the firm’s “direct-hire” placements, or the number of full-time people it’s found for clients who hired it to conduct specialized searches, grew probably 60% from 2013 to 2014.

“What it means is there’s continuous growth,” Spitz says. “That’s the major difference that we’ve seen, is businesses actually feeling comfortable and confident that their business is on the rise and growing, compared to just sustaining it.”

That contrasts with recent years, particularly 2012, when companies were hesitant to make any “true hires,” he adds.

And the growth EverStaff is enjoying spans all 4 of its divisions: professional services, light industrial, call center, and retail.

“As the economy gets stronger, each feeds off of each other,” Spitz says. “As one gets stronger, it creates growth across others, and they’re able to expand their business lines.”

Another reason for the improvements in hiring, particularly in parts of the Midwest, is the recovery for manufacturers, which now are investing.

Already employed? This piece of year-over-year news carries impact for you, too, because as the market tightens up for talent, it’s more likely that companies are willing to pay more for top talent. (Read: Wages improve, but that’s not all. Some employers, Spitz says, already are offering more vacation time, touting the growth potential available to employees, and allowing more flexibility in schedules.)

“The continued increases in employment … mean there is more job security in America today than there has been,” says Richard Wahlquist, president and CEO of the American Staffing Association out of Alexandria, Virginia. “People with skills in demand are back in the driver’s seat.”

Expectations for 2015:

Forecasts, at least for EverStaff International clients, predict a continued increase in the number of people they are hiring, Spitz says.

Wahlquist expects much the same, “assuming that the US economy and the global economy don’t all of a sudden go into the tank.”

“We don’t believe we’ve hit saturation or capacity,” he adds.

Your turn: Tweet us to share what you’re seeing, and what you expect in 2015. Use the hashtag: #BeigeBook


The Beige Book, explained

Who: Those informing the Beige Book include people from businesses of all sizes – from micro firms to Fortune 500 corporations. In all, the Federal Reserve Bank of Cleveland counts approximately 230 Beige Book contacts, including members of its three boards of directors and its business advisory councils.

What: The Beige Book, or as it’s formally called, the Summary of Commentary on Current Economic Conditions , is drawn up based on telephone and online surveys. We ask our contacts in six industry sectors -- real estate, manufacturing, freight transportation, banking, energy, and retail -- about demand, expectations, investment, and more. Each of the 12 Federal Reserve Banks does its own canvassing and reporting about the region it serves.

When: The Beige Book publishes 8 times a year.

Where: Our contacts hail from the Fourth Federal Reserve District, which the Cleveland Fed serves. It comprises Ohio, western Pennsylvania, the northern panhandle of West Virginia, and eastern Kentucky.

Why: We use the Beige Book to inform those making monetary policy decisions for our country: the members of the Board of Governors and the presidents of the 12 Federal Reserve Banks. It’s also made public for all to see. Bookmark this page to keep your eye on our Beige Book reports, and others from across the country: http://www.federalreserve.gov/monetarypolicy/beigebook/.

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