November 28, 2001
Federal Reserve Districts
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Reports gathered in early November suggest the Fourth District economy has bottomed out. None of the contacts surveyed expects economic conditions to worsen, and signs of recovery are beginning to emerge: Manufacturers reported some improvement in the level of new orders, steelmakers reported that prices have stabilized, retailers reported strong sales among discount chains and improved forecasts for holiday sales, bankers reported improvement in their net interest margins, residential builders reported business is near the same levels as last year, and commercial builders expect prospects to brighten with the new year. While business in December may remain sluggish, most industries expect conditions to improve markedly during the first half of 2002. In the labor market, however, job security continues to be a serious concern. Some industries have suffered major losses in employment as a result of the economic downturn and the September 11 attacks. Other industries that were not able to shed jobs through layoffs and restructuring have stopped filling open positions to reduce labor costs. The demand for temporary workers has slowed considerably over the past few weeks. Wage pressures have eased, reportedly because workers are more uncertain about their jobs. Benefits costs are rising, with most contacts specifically identifying increasing health care costs. Skilled labor is easily available, and open positions are being filled with minimal recruiting efforts.
Manufacturing Contacts in the steel industry noted that prices stabilized in October and November, but did so at very low levels. Most companies reported selling steel at or below cost, and contacts noted that companies operating under bankruptcy protection are pricing their products artificially low to keep their contracts, contributing to the downward price pressures in the industry. Steelmakers that produce niche products reported for the first time that business was sluggish, but noted that they do not expect this weakness to persist.
Retail Sales Retailer forecasts for the holiday season have improved since the last report, reportedly due to positive consumer response to aggressive advertising, increased discounts, and special promotions. In our last report, retailers were generally pessimistic about the holiday season, but now most retailers are characterizing their outlook as "cautiously" or "guardedly" optimistic. Discount retailers have a more optimistic outlook, and expect above average-sales this year. Apparel retailers appear to be an exception to the increasing optimism in the District, with most still forecasting year-over-year sales to be down around 5 percent. Automobile dealers reported that manufacturers' offers of zero-percent financing led to record sales in October, and initial reports for November suggest that, although sales have begun to slow, this month's sales figures will also be higher year-over-year. Strong sales during the last quarter of 2001 are expected to result in a significant drop in sales for first quarter 2002, but dealers expect sales to return to "normal" levels during second quarter 2002.
Construction Most homebuilders reported that sales improved in October and early November and levels were similar to those at this time last year. The current pace of sales, however, is still substantially slower than earlier in the year. Nevertheless, customer traffic continues to improve, causing most homebuilders to be "cautiously optimistic."
Trucking and Shipping The outlook offered by our contacts indicates that activity will remain weak at least through first quarter 2002. Both carriers and their customers have moved in recent weeks to protect their declining profit margins against increasing cost pressures. Customers continue to transfer freight hauling from air to ground. Carriers are curtailing capital expenditures, and some are phasing in slight rate increases. Although the industry is very competitive, these price increases have stuck because customers appear to be willing to pay a premium for reliable and financially stable carriers during a time when many trucking companies have gone, and continue to go, bankrupt.
Banking
Travel and Tourism
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