June 12, 2002 Federal Reserve Districts Fourth District - Cleveland

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With a few exceptions, economic conditions in the Fourth District during the last half of April and the month of May remained much the same as in the last report. Manufacturing, retail, and banking contacts continued to report mixed conditions, while improvements continued in the trucking and shipping industry. Unlike the last report, however, commercial construction, an industry that fared surprisingly well during the recession, experienced worsening conditions. On the other hand, the situation in the automotive industry has improved substantially. Area automakers reported that production activity was strong, as did suppliers of raw materials and parts for the industry. Auto-related shipping has expanded as well. Labor markets showed little change since the last report. Contacts in automobile manufacturing and trucking and shipping reported increases in hours worked, but for the most part, hours remained stable. Demand for temporary labor was flat. Job security continues to be the principal concern of organized labor. As was the case in the last report, very few contacts plan to hire new workers or recall temporarily laid-off workers. Most prices in the District appear to be holding fairly steady, but health care, insurance, and steel prices were notable exceptions. While in previous reports it was mostly union contacts who mentioned rising health care costs, in this report contacts across industries, including retail, trucking and shipping, and manufacturing, did so. Both construction and trucking and shipping contacts noted large increases in insurance costs. Spot prices for steel were up an average 33 percent in April from the start of the year, but these increases have not completely taken effect in the market. The increases are estimated to affect between 20 and 50 percent of total steel sales. Manufacturing Typically, manufacturing conditions are similar throughout the District, but this year growth rates appear erratic between the northern and southern parts of the District. The northern region, which had reported deceleration in growth and only modest improvement in the last report, experienced strong growth during this survey period. Although the southern area reported strong growth in April, reports suggested a slight contraction in May. Conditions throughout the District have fluctuated monthly between contraction and expansion. Automakers in the District reported significant amounts of overtime, with one plant reporting overtime during all seven weeks beginning April 15, two reporting six weeks with overtime activity, and another reporting five weeks with overtime. No plants reported closing during the last half of April or the month of May. In the steel industry, reports ranged from "fairly strong" to "very slow" activity. In general, steelmakers that supply materials and parts to automakers reported strong conditions; those that supply construction companies reported stable conditions; and those that sell to others reported poor conditions (others include oil, tubular goods, commercial aerospace, and power generation companies). While steel producers still reported excess capacity in the industry, area contacts noted that capacity utilization has increased for most area plants. Retail Sales Area retailers continued to report mixed conditions. Adjusting for the seasonality associated with Easter, discount chains continued to report year-over-year sales increases, while declining sales persisted in specialty and department stores. Contacts offered mixed reports regarding apparel: some characterized sales as "very solid," while others noted year-over-year declines. Sales in furniture, appliances, electronics, and jewelry were strong. Most contacts reported lean inventory positions (one contact noted inventories were down 19 percent from the previous April) and as a result, some retailers reported running fewer promotions and making fewer markdowns on products than they did one year ago. Several contacts who have stores located outside the District noted that sales in the Fourth District were generally weaker than sales for the country as a whole. Area automobile dealers noted that while showroom traffic has slowed considerably from the start of the year, current customers are more likely to purchase a vehicle. On balance, the pace of auto sales in the District slowed in April compared with March, but registered above April 2001 levels. Dealers noted that a large part of the fluctuations in current year-over-year figures are due to high volatility in sales throughout 2001--monthly sales in 2002 have been much more steady. Construction District homebuilders reported that they remain guardedly optimistic amid fairly stable business conditions, with sales near their projections for 2002 (most plans projected slight increases in sales compared with 2001). Commercial builders, on the other hand, noted a significant worsening in activity and outlook since the last report. Many projects that were in the planning stages remain delayed, and some clients have completely cancelled projects. Not only are commercial builders less busy than anticipated, their future prospects also appear to be poor. Contacts noted that work available for bid is attracting at least twice as many bids as usual, and companies are bidding for projects that they would normally not consider because they promise so little in revenue. The Pittsburgh area is an exception for commercial builders, as activity remains robust there, but reports suggest that the construction boom in the area is nearing an end. Retail projects are becoming more infrequent as a glut of retail space has begun to develop in the area, and some concerns are emerging about the ability of the market to support more apartment space. Trucking and Shipping Trucking and shipping activity in the District increased significantly during the last two weeks of April and the month of May. Shipping of manufacturing goods, especially those that are auto-related, showed the strongest gains. Contacts believe that activity should continue to increase for the next several months, and they are much more confident about the recovery in their industry than they were at the start of the year. Banking Area bankers observed little change in banking conditions during the last half of April and the month of May. Competition for borrowers across all lines of lending continued to be very aggressive. Overall demand for consumer loans, especially home equity loans, remained strong, but demand for commercial loans has remained stagnant, with some contacts reporting no change and some reporting a decrease in demand. Most reported that the creditworthiness of applicants was stable over the survey period. Most banks reported no change or only a slight increase in the rate of loan delinquencies. Travel and Tourism While the number of conferences and conventions occurring in the District has been consistent compared with prior years, contacts in travel and tourism noted that the number of attendees has dropped. Overall, the demand for hotel rooms during first quarter 2002 was lower than fourth quarter 2001, and notably down from first quarter 2001 (hotel revenues in some areas dropped by more than 10 percent). Despite a weak first quarter, however, most area visitor bureaus and amusement parks are optimistic regarding leisure travel and tourism during the summer, based on a strong number of inquiries about travel to their areas. Return to top Philadelphia Richmond