March 6, 2002 Federal Reserve Districts Fourth District - Cleveland

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According to reports gathered the third week of February, business conditions during the first six weeks of 2002 remained much the same as in the last six weeks of 2001. Very few signs of further deterioration in conditions were evident in reports from our contacts, and signs of modest improvement continued to emerge throughout the District. The manufacturing sector continued to report slight improvement, retail noted strong sales of home-related items, construction activity remained strong, and, for the first time in more than a year, some improvement was reported in the trucking and shipping industry. Labor markets, however, continue to struggle. Demand for temporary workers softened again in January, with some contacts reporting that demand for temporary workers was down at least 50 percent from a year earlier. Modest improvement was seen in requests for the first two weeks of February, and most contacts believe conditions will improve during the second quarter, because they are beginning to receive inquiries and initial business proposals requesting temporary help for later in the spring. Job security is still the number-one concern among organized labor. Hiring freezes remain in effect across most industries, but contacts noted that widespread layoffs in industries such as steel and aerospace during the last three months of 2001 appear to have subsided. Some bargaining units in the public sector reported substantial wage increases (from 5 percent to 8 percent annually). Health care continued to be a point of contention in labor negotiations because employers attempted to pass through some of the increasing costs of health care to their workers. In some cases, disputes over health care benefits have led to strikes. Manufacturing Modest improvements were seen in manufacturing over the last six weeks, as slightly more manufacturers reported an increase in new orders, and there were slight increases in production throughout the District. Most manufacturers reported lower employment levels than in previous months, but indicated that they did not anticipate more layoffs. None of the District's automakers reported plant closings during the first six weeks of the year, and a few plants reported three consecutive weeks of scheduled overtime to meet booming demand for their models, the first time this has occurred in the District in more than six months. In the steel industry, conditions remained mixed. Several companies reported that they had implemented 3 percent to 5 percent price increases for hot-rolled steel. On the other hand, contacts noted that the length of time it takes to collect accounts receivable has been increasing. Plans for capital improvements remain on hold until steelmakers see substantial improvement in industry conditions. Most contacts believe that this will not occur until fourth quarter 2002: although improvement already has been seen in spot market prices, changes will not be complete until contract prices (which comprise over 60 percent of industry sales) are renegotiated at the end of this year. Retail Sales As in the last six weeks of 2001, the first six weeks of 2002 showed mixed conditions in the retail sector. Discount retailers continued to report significant improvement in conditions (one contact reported year-over-year sales were up almost 17 percent). Apparel retailers, however, reported continuing declines in year-over-year sales figures, with reports of declines as high as 14 percent for the first six weeks of the year. In general, items related to the home, such as furniture and decorations, electronics, and appliances, have shown strong sales over the last six weeks. Nearly all retailers noted that their conservative sales plans have led to solid inventory positions. One contact noted that inventories are currently running 25 percent below the same period last year. Most retailers continue to run promotions at a normal pace and have not resorted to heavy discounting. Most retailers' plans for capital expansion remain in effect, but some have scaled back the number of store openings planned for this year. In general, contacts continue to expect retail sales for the first half of 2002 to be flat or slightly better than the first half 2001 and to improve in the second half of the year. While some auto retailers reported slight increases in January sales compared with December, most reported that sales were flat compared with January 2001. Although dealers do not expect year-over-year increases for 2002 (sales for 2001 were the second-highest on record), they are optimistic that the pace of sales will improve substantially in late March or early April, and that the higher level of sales will persist throughout the year. Construction Both commercial and residential builders throughout the District continued to characterize business conditions as "favorable." Most homebuilders reported that customer traffic continues to be strong, with year-to-date sales for 2002 comparable to those the first six weeks of 2001. Commercial builders are optimistic about business in the months ahead. Like residential homebuilders, they have seen the number of customer inquiries remain unusually strong since the year started. Many expect demand to accelerate in the latter part of 2002; several contacts noted that architects appear to be very busy, a sign that companies are going ahead with plans for expansions. Trucking and Shipping Nearly equal shares of contacts reported a decline, constant activity, and an improvement in industry conditions over the first six weeks of 2002. This report is the first time in more than a year that a significant number of contacts noted improvement in the industry. Overall, shipping activity for the first six weeks was slightly off from the same period last year, but the year-over-year decrease has narrowed compared with the year-over-year decline seen during the last six weeks of 2001, suggesting some improvement in conditions. Many carriers also reported that the first two weeks of February showed an increase from January. While most contacts noted that no single product area has been doing relatively well or poorly, some noted that shipping of manufacturing-related goods did not decline and may have been up slightly compared with the last six weeks of 2001. Some companies have been able to phase in minor rate increases, but competition has kept companies from raising rates significantly, with some contacts even reporting rate decreases. Diesel prices and associated surcharges remain low and are still less of a concern to carriers than insurance costs, which have increased substantially. Rather than replacing existing trucks and trailers, companies are spending to maintain existing equipment as much as possible to manage costs. Capital expenditures are not likely to show an increase over the low levels reported for 2001. Banking Competition for borrowers continued to be very aggressive across all lines of lending as the demand for commercial and consumer loans remained soft. Most contacts reported a decrease in demand for commercial loans, while trends in consumer loan demand were mixed among contacts. Roughly half of contacts reported that the credit quality of loan applicants had diminished; the other half reported an unchanged credit quality. Although one contact reported an improvement in the loan delinquency rate, all others reported no change. Most banks reported either no change or a tightening of the net interest margin. Return to top Philadelphia Richmond