May 3, 2000 Federal Reserve Districts Fourth District - Cleveland

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Growth in economic production in the District is moderately strong, with continued low rates of joblessness and steady growth in wages. The prices for consumer goods and construction materials are stable. However, the prices of steel and health care are increasing. Strong demand for temporary workers continues unabated and contacts reported a significant increase in unfilled customer orders over the past two months. Contacts reported that while demand for temporary workers has not increased substantially, it is becoming increasingly difficult to find and retain qualified workers. Contacts noted only small increases in wages. Demand continues to be especially strong for administrative assistants, legal secretaries, and workers with technical and computer skills. Clerical, payroll, manufacturing, and production workers are also in high demand. Contacts also noted a growing trend for firms to retain qualified temporary workers on a permanent basis, with some firms increasingly using temporary employment agencies to find full-time employees. Strong demand for temporary workers is expected to continue into the near future. Unions reported that wage growth remains fairly constant at an annual rate of about 3 percent for most industries and slightly higher in those requiring higher-than-average skill levels. Driven by surging pharmaceutical costs, health-care premiums have reportedly increased between 6-10 percent since last year. Construction Some District homebuilders reported a significant slowing in housing sales. They attributed this to recent declines in equity prices for buyers at the high end of the market and higher interest rates for those at the low end. While sales have not fallen dramatically, most contacts regard the slowdown as coming at an inopportune time; March, April, and May are usually peak selling months. Residential builders reported no significant changes in labor and materials costs, although drywall prices are expected to fall in the near term as two new production facilities in the District add to the supply. Commercial building activity remains mixed across the District. Contractors involved in publicly funded construction continued to report substantial growth. Office construction continues to be at a high level, particularly in the downtown sections of the District's larger cities, but not at the brisk pace of public-sector projects. Retail space construction is at the same level as last quarter. Warehouse and industrial construction has declined, but contractors expect stronger conditions by the summer. Industrial Activity The demand for steel products is strong, especially by the automobile-manufacturing and construction sectors. All contacts reported strong sales in the first quarter and strong orders booked for the second quarter. Most companies are operating at full capacity to meet the demand. Most contacts reported price increases of $20-$25 a ton (equivalent to a 5-6 percent rise) for hot- and flat-rolled steel products. For some companies, this is the second increase this year. Other companies plan to increase prices again in the second or third quarter. One steel company announced a 10 percent increase in finished goods inventory, but other contacts reported no change in inventory. Purchasing managers in the District reported higher commodity prices in March, especially in primary metals, petroleum products, and paper products. Production levels increased slightly, while new orders remained at roughly the same levels as last month. High gasoline prices are expected to cause a steep decline in sales of heavy trucks, but current production and sales are still good. Consumer Spending Most District retailers reported modest sales growth in March and April. In general, specialty retailers fared better than their department-store counterparts, although higher-end department stores continued to perform particularly well. General merchandisers reported steady sales growth across all product lines, although overall growth in apparel sales did not match the high rates of the first quarter. Home furnishings and furniture sales were particularly strong, with year-over-year increases on the order of 10-12 percent. Retailers noted no significant cost pressures from suppliers, though some in the grocery segment reported that some shipping companies have assessed surcharges for increased fuel costs. At the retail level, most have noted an inability to increase prices due to competition. After record sales in 1999, District auto dealers reported that brisk sales of new vehicles continued into the first quarter. Most dealers reported between 5 percent and 15 percent year-over-year sales growth. District dealers were optimistic that strong sales would continue over the second quarter, and they expect a very robust summer. March sales are said to be particularly strong, while April sales are mixed relative to March. The current inventory position of District dealers is ample, and no shortages were reported. Despite the continued strength of new car sales, sales of used vehicles have also surged in 2000. Agriculture Corn planting is reportedly 28 percent complete in Kentucky. (This compares to 17 percent planted by April 21 last year and 19 percent planted by April 21 on average over the past five years.) In Ohio, corn planting is scheduled for the last week of April; however, rain may delay planting by one week. Some expansion is reported in Ohio livestock herds. Crop prices are low compared to a year ago, but prices for hogs, pigs, and beef have increased from low levels in the past months. In agricultural labor markets, wages have been increasing in line with other industries and with inflation. Most farmers are working hard to attract seasonal workers. Tobacco planting has declined due to the recently announced Federal tobacco quota cuts of 45 percent, the largest drop in the tobacco quota in a decade. Banking and Finance Commercial lending activity in the District is described as strong. On the other hand, the demand for consumer loans is down. Some contacts reported that this may be due to competition from credit unions and manufacturing finance corporations. Although many sources described their credit quality as "high," some banks reported a very high loan-to-deposits ratio, which is causing them to lend less. Most bankers reported that they are expecting to attract more deposits in light of the recent volatility in the stock market. At this time, however, they have not observed unusual increases in deposits. The reported spread between borrowing and lending rates is small. Return to top Philadelphia Richmond