October 12, 2006 Federal Reserve Districts Fourth District--Cleveland

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The District's economy showed modest growth since mid-August; however, growth was mixed and there is concern about the sustainability of lower energy prices and a continuing slowdown in the auto sector and residential construction. Most district manufacturers reported steady production with production forecasted to remain at current levels for the next six months. However, reduced activity in the auto sector is tempering the outlook for some manufacturers. Retailers experienced mixed sales activity with lower gas prices and cooler weather helping boost sales at some District outlets. Commercial builders reported strong activity but were concerned that inquiries were beginning to taper off. New home sales continued to be soft with several builders saying they have no backlog. Banking contacts reported a gain in core deposits and an increase in corporate borrowing. And the demand for trucking and shipping services continues to soften. On net, hiring across the District was steady. Staffing firms reported job openings were moderately increasing in August and September with demand coming from professional business services and healthcare. Wage pressures were not seen as an issue at this time. Almost all contacts said that the rise in input costs has moderated and cite a drop in energy prices as the reason. Manufacturers attempting to raise their prices met with a mixed degree of success. Retailers generally reported holding their prices steady. Manufacturing Since mid-August, production by the District's durable goods manufacturers was stable or up slightly with higher production levels reported on a year-over-year basis. Overall demand for steel products is softening with almost all contacts noting weakness in the auto industry; however, electric utilities and heavy machinery are still growth areas for steel producers. District auto production showed an overall decline on a year-over-year basis. The outlook by durable manufacturers is for production to remain at current levels over the next six months. Almost all contacts said they were operating at normal capacity and that capital expenditures remain on target. A majority of the producers expect little change in the level of capital spending for the next few months. Input costs are reported to have moderated due primarily to decreases in energy prices. Hiring has been relatively flat over the last six weeks with half the contacts saying they anticipate limited hiring in the near future. Wage pressures in durable manufacturing remained contained. Production at the District's nondurable goods facilities has been stable since mid-August with higher levels reported on a year-over-year basis. Expectations for the next six months are flat to up with some manufacturers saying that the auto industry could affect their production levels. Most contacts reported idle capacity--food producers being the exception. A majority of manufacturers said capital expenditures were on target with no increases anticipated during the next few months. Input costs were mixed following oil price fluctuations. None of the contacts reported increasing employment in the past six weeks and few said they plan to hire in the near future. Wage pressures are contained. Retail Sales by District retail contacts continued to be mixed with some retailers saying that cooler weather and lower gas prices helped boost sales. Contacts have reported lowering prices in some stores and increasing promotions as means of improving sales. Apparel retailers and big box stores experienced sales increases; however, sales trends were tied to the store brand. Drug stores reported strong sales driven primarily by prescriptions. Some restaurant owners continued to see a decline in customers but were optimistic due to the drop in gas prices. Overall, vendor prices have remained stable since mid-August which is reflected in stable prices for customers. Contacts reported limited wage pressures and are planning normal Christmas hiring. Most contacts said that new car sales improved in August, but fell in September. August is normally closeout time as dealers make a push to sell the remaining prior year's inventory. SUVs continued to sell poorly and used car sales were consistent with sales in past months. Construction Residential contractors reported new home sales are down or flat when compared to earlier this year. Year-over-year sales declines of 10 percent or more are common with a few contacts saying the market is down by as much as 60 percent. Several contractors reported that they no longer have any backlog. Most home builders expect sales to remain soft for the remainder of the year with 2006 totals to be below those in 2005. Many contacts said that material costs have stabilized over the past couple months with a few noting a drop in the price of lumber. About half the homebuilders contacted reported reducing their labor force through direct layoffs or by not replacing workers that leave. The District's commercial contractors reported strong activity since mid-August with an increase in business on a year-over-year basis. Most contacts anticipate activity will remain strong through the first half of 2007 due to project backlogs which remain at high levels--for one contractor, the highest in five years. However, inquiries seem to be tapering off slightly which could result in slowness about a year out. Segments reporting stronger activity were health care, education, and public works. Material cost increases that were prevalent over the past few months are slowing or have stabilized. Margins for a few contacts have increased slightly due to a slower acceleration in costs. Contractors reported little change in the size of their labor force. Banking Since mid-August, District banks experienced an increase in corporate borrowing primarily in commercial real estate while consumer loan activity was mixed. Activity in the mortgage market continues to show an overall decline; however, two contacts reported a slight increase in demand after a three-month slowdown. Although most bankers said credit quality remains stable and characterized it as high, almost half experienced a slight increase in delinquencies related to commercial loans and residential real estate. Finally, nearly all contacts reported a gain in core deposits primarily in CDs and money market accounts. Transportation Demand for trucking and shipping services has softened since mid-August with a slight decrease in volume on a year-over-year basis. Trucking companies continue to pass on high fuel costs using surcharges. One contact reported his revenues have held up due to the increase in the fuel surcharge. Most trucking companies were hiring, but activity was limited to finding replacements due to normal industry turnover. None of our contacts reported wage increases over the past six weeks. Return to top Philadelphia Richmond