January 19, 2005 Federal Reserve Districts Fourth District--Cleveland

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For the final six weeks of 2004, economic conditions were mixed across major sectors of the Fourth District. Retailers' reports varied by retail segment, while activity among the District's durable and nondurable goods facilities was steady. Though residential and nonresidential construction continued to slow somewhat, the slowdown was probably partially due to seasonal variation. And while borrowing from banks in the District remained steady, demand for shipping services was "surprisingly strong." In general, input cost increases were modest and retail price pressures remained limited. Finally, staffing services companies reported an increase in demand for workers from manufacturing firms. Manufacturing Production at the District's durable goods manufacturers was generally steady at a high level toward the end of 2004. Some small declines were reported, but seemed to be the product of a seasonal slowing in demand. Automobile industry suppliers reported slowing sales at year-end, and domestic steel producers acknowledged that, aside from seasonal fluctuations, inventories have risen somewhat. Nevertheless, most manufacturers reported higher levels of production than at this time last year. And though growth in new orders was weak, firms' expectations for the future improved in December. In addition, unlike in recent reports, several firms reported that they plan to hire in the coming months. Nondurable goods makers generally reported that production levels were flat for the last six weeks of 2004. Some firms also reported a rebound in production in January, but noted that this may be from seasonal fluctuations in demand. Production levels were reported to be the same as or less than at this time last year. Regarding expectations, several chemicals producers expect the economic environment to improve in the near term; however, paper producers were less sanguine in their assessment of the outlook. Most firms indicated that they had little intention to hire in the coming months, or to add to their capital stock. Input costs continued to increase in recent weeks for nearly all nondurable goods makers, and they are also higher on a year-over-year basis. By contrast, durable goods producers generally reported that their input costs were flat throughout the recent period, though their costs also remained above year-ago levels. Finally, many durable goods producers reported rising wages and indicated continued concerns about increasing health care costs. Retail Sales The economic environment for retailers in the District was mixed, with some retail segments seeing strong gains and other reporting disappointing December sales. For some firms, this year's holiday selling season was worse than last year's, which itself was weak. Some contacts suggested that poor weather in the Midwest may have been a factor. Sales at District department stores were generally weak, while sales at specialty apparel shops were more mixed. A few firms noted strong sales in early January, though these firms indicated that they were sharply discounting some of their merchandise. In particular, apparel retailers reported aggressive promotional activity in the wake of sluggish sales. Discounters reported sales growth that was consistent with their expectations. And grocers reported strong sales during the holiday season, while restaurateurs reported weaker conditions. While personal care products generally sold well, furniture and other home products sold poorly. Sales at auto dealerships improved in December after a weak November. New automobile sales strengthened throughout the month of December, as dealerships employed discounts and incentives in an attempt to move merchandise. Nevertheless, dealerships generally reported that their inventories of new cars remained above acceptable levels. Used car sales were generally flat for the last six weeks of 2004. Construction Residential builders reported continuing declines in activity, often exceeding the expected seasonal slowing in sales. Building activity also appeared to be down from the levels of this time a year ago. Big builders discounted prices and provided incentives in an attempt to spur buying, but sales stayed weak throughout the District, especially in the Columbus and Cincinnati areas. Overall, builders' costs remained flat for the most part in December. Regarding hiring, several builders said that they have reduced or will reduce workforce sizes, as the expectations for future sales have diminished: Most builders expect 2005 sales to be below those in 2004. Accounting for the usual seasonal slowing in activity, nonresidential construction was largely flat throughout the last six weeks of 2004, though customer inquiries improved modestly during December. On a year-over-year basis, building activity saw a slight increase. Regarding specific sectors, education-related construction remained robust at year-end, and several contractors also indicated increasing demand from firms in the manufacturing sector. Input prices for nonresidential builders have been flat for several months. Few firms expected to add to their workforces in the coming months, and most contacts think that activity in 2005 will be at least as strong as in 2004. Banking District banks described loan demand as steady, in general, throughout the six weeks ending 2004. While many smaller banks experienced a slight slowdown in commercial borrowing, they attributed this primarily to seasonal factors. Larger banks reported moderate improvement in their commercial clients' borrowing. Banking contacts generally characterized consumer borrowing as flat. Across all borrowers, most contacts reported that their delinquency rates remained low. Deposit growth differed across District institutions, with banks describing the deposit market as "very competitive." Trucking and Shipping Demand for trucking and shipping services remained strong through the six weeks ending 2004. In fact, a number of contacts characterized conditions as "surprisingly strong." Though demand continued to come from an array of sectors, manufacturers were noted as having especially high demand. And while fuel prices fell in recent weeks, shipping firms' fuel surcharges continued to protect them against any adverse fluctuations in fuel expenses. Companies continued their attempts to add to capacity through new truck purchases. The increase in demand for new trucks has created long lead times for their delivery. Companies also continued attempts to add to their payrolls by raising wage rates, as well as offering prospective personnel nonpecuniary enticements. Return to top Philadelphia Richmond