September 3, 2003 Federal Reserve Districts Fourth District--Cleveland

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Most Fourth District contacts reported increased economic activity since the last report, although growth appears to be modest. For the third consecutive report, manufacturers cited steady or improving production and sales. Residential homebuilders reported continued sales growth. Demand for commercial loans increased since the last report, while consumer loans remained constant. Reports from other areas of the economy were mixed. Retailers and auto dealers experienced continued slow sales, though these were not necessarily unanticipated. Activity in commercial construction accelerated in parts of the District, but it remained sluggish in others. After a more optimistic report in July, conditions in steel did not show further improvement. Though overall prices of inputs were flat or declining, utility prices rose. Employment levels did not change for most contacts; some added employees, and a few firms reported layoffs. While there is plenty available labor, contacts stated there is less available now than during the same time last year. Rising insurance costs have caused a number of firms to change features in benefits offered to employees, both by passing some costs to employees and curtailing some benefits. Most contacts in manufacturing, residential construction, banking, and trucking and shipping expect conditions to continue improving throughout the rest of the year, while contacts in steel, commercial construction, and retail were more mixed with regard to continued activity. This District was affected by the blackout in mid-August. Though most contacts could not immediately discern the total impact, retail and manufacturing experienced the greatest impact as a result of closures. Other sectors of the economy experienced minor or no problems due to the electricity problems. Manufacturing Most manufacturing contacts reported continued improving conditions in July and August. However, unlike the previous report, a few contacts did note declines in both production and sales. Overall, both production and sales were higher during this period than in the most recent report and during the same time last year, with nondurable goods manufacturers generally citing more favorable conditions than durable goods producers. Inventory levels were flat during this time period, with idle capacity remaining relatively the same as well. While most manufacturers said they were maintaining their current workforce levels, the proportion of firms reporting new hires was greater than those cutting payrolls. Most contacts still anticipate moderate sales and production growth by year's end. Auto production fell again at most District plants in July and early August compared with June, but it should be noted that many facilities re-tooled in early July. Regardless, same-model production was about 4 percent lower than 2002 levels. In July, three new models began production in the District. A few facilities reported the use of overtime. In the steel industry, production was fairly stable between July and August, though there was some mention of increased sales between July and August. However, overall demand was characterized as "soft" in August, and both sales and production levels during this period were substantially down from last year. Inventories are down from a year ago, and firms anticipate holding inventories at their current low level. New orders for steel for the fall are coming at a steady rate, and contacts expect the demand to remain the same till the end of the year. To meet current demand, plants are running normal-to-shortened work schedules. Most contacts have held employment levels constant since the previous report although a few are reducing jobs. Steel prices were mixed, with slight movement in both directions. Many manufacturers in the areas affected by the blackout were closed up to three days; however, most firms stated that they were able to tap into inventories and anticipated being able to use overtime production, as needed, to make up for the loss. Manufacturing contacts stated that supply chains were largely uninterrupted and orders were unaffected. Retail Sales Economic conditions were again mixed in retailing during July and early August compared to the previous report, with small increases and decreases in sales activity reported. However, all contacts noted sales declines of slightly lower to almost 15 percent down since the same period last year. Discounting and promotional activity continued, as many retailers geared up for back-to-school shopping. Sales were in-line with retailers' expectations, and all contacts reported favorable inventory positions. Though activity in apparel remains generally sluggish, contacts stated that sales of furniture, cosmetics and personal care items, shoes, and career wear (men's and women's suits) were strong during this period. Most contacts are expecting sales to be flat or slightly higher this year relative to last. Retailers in the District reported electricity-related losses on Thursday, though many were able to open on Friday. Overall impact on the sector is not yet known. Restaurants were particularly hard hit because of the water problems that continued after electricity was restored. Automobile dealers noted flat-to-declining new car sales throughout the District. Overall sales this period were lower than during the same time last year. Sales continue to be dependent on incentives, though their impact on consumers has deteriorated. Used car sales, on the other hand, continued to increase. New car inventory levels are more favorable than in previous months. Construction Continued strong sales were cited by homebuilders in the District, as in last month's report. Growth in sales has continued since the spring and, while not uniform, some contacts cited this period being one of the strongest ever. Sales for most builders are above plans, which anticipated sales increases of about 3 to 5 percent during 2003 relative to 2002. Commercial building continues to be slow, though parts of the District show signs of improvement. Within the last several weeks in the Cleveland area, the number of new projects in several building segments, including manufacturing, warehousing, and distribution had accelerated. There also appears to be increased activity in the Pittsburgh area, while in the Columbus area and the southern part of the District demand remained sluggish. Trucking and Shipping Demand for trucking and shipping held constant again since the previous report, and conditions were flat compared to the same time last year. Consolidation in the industry points to further increases in capacity utilization. Increased demand from retail and consumer goods was reported, while manufacturing demand continues its flat-to-negative trend of recent years. Most contacts anticipate at least limited growth over the next months, though capital expenditures will generally be targeted toward replacing current vehicle stock rather than increasing capacity. The electricity problems delayed some shipments, but due to available capacity the backlog was alleviated within twenty-four hours. Some likened it to a one-day snowstorm. Banking Both commercial and consumer loan activity remained steady or increased since the last report. Most contacts reported increased demand for commercial loans relative to both June and the same period last year. Consumer loan activity remained strong because of mortgage refinancing. There was no change in the number of applicants, and reports on the credit quality of applicants were mixed. There were also mixed reports regarding core deposits, with contacts reporting both slight increases and decreases. Business and mortgage loan delinquencies increased during this time period for most contacts. The squeeze on net interest margins continued into this report, as loan rates have adjusted downward and funding rates remained relatively constant. Contacts observed that business confidence has improved, evidenced by interest in borrowing for new capital expenditures, while general consumer confidence has not changed. During the blackout, many banks lost ATMs and some branches closed, though it was toward the end of the business day, and most areas had power restored by the following morning for business. Return to top Philadelphia Richmond