October 15, 2003 Federal Reserve Districts Fourth District--Cleveland

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Business conditions in the Fourth District remained mixed in August and September. Residential construction activity and mortgage-related lending remained at high levels, although some contacts noted a slight deceleration in September. Modest improvements were noted in nondurable manufacturing, some retail categories, trucking and shipping, and commercial lending. Conditions remained steady or weak in durable goods manufacturing, apparel and auto retailing, and commercial construction. Input prices remained the same or rose during these months. Manufacturers in particular noted sharp increases in energy prices, while builders noted an increase in some of their materials costs. Trucking companies reported that fuel costs had leveled off. At worst, contacts expect annual economic activity to be the same as in 2002, but many contacts expect higher levels of sales and production. Manufacturing Manufacturing contacts continued to report mixed conditions in August and September. Durable goods producers reported steady conditions compared with one month ago, but they often reported lower sales and production compared with a year ago. On the other hand, nondurable manufacturers consistently reported at least modest increases in both production and sales. For all contacts, inventory levels were flat or lower compared with a year ago. Few contacts in nondurable manufacturing reported excess idle capacity, but durable manufacturers reported excess capacity ranging from 5 to 40 percent. About half of the contacts stated that overtime was used, and most experienced no change in their employment levels. Input prices were higher than last year but were flat relative to July. Increasing prices for utilities was of particular concern. A few contacts have increased the prices of goods with some success, but most producers left their prices unchanged. Most contacts anticipate flat or increasing sales and production through the rest of the year. Auto production increased overall throughout the District in September (up 6.6 percent in the last month and up 2 percent since a year ago), though a few producers experienced declines. This increased production appeared to run counter to national trends. Most facilities in the District used overtime hours more than usual during the survey period. Steel production and sales were mixed during August and September. Firms in different market sectors continued to experience different trends, with those supplying the defense industry maintaining high levels of demand while demand from aerospace, power generation, and non-residential construction continues to be weak. Idle capacity is in the range of 10 to 40 percent. Inventory levels are low, and most contacts were satisfied with current levels. Due to increases in some input prices including natural gas, electricity, and ferrous metals, steel prices have climbed as well for some contacts. New orders are coming at a very slow rate and are flat for most contacts. Contacts generally anticipate flat to moderately rising production and sales through the rest of 2003. Retail Sales Retail sales were flat to slightly higher than last year during August and September, in some cases, better than expected. Apparel sales were again soft, while food and drink, personal care items, furniture, and home appliances sold well. Inventories continue to be tightly managed and are low compared with historical standards. As usual, discount stores fared better than other retail chains. Vendor and retail prices continued to be flat in general, although sharp increases in meat prices hurt some restaurants. As retailers prepare for seasonal hiring, staffing is not expected to be a problem this quarter; labor turnover remains low, and prospective workers are easily found. Sales for the rest of the year are expected to be steady and flat to slightly up from last year. Auto dealers indicated that September sales were poor, much lower than August and September 2002. Used vehicles continued to sell well, as did new trucks. Dealer inventories have risen and become somewhat "bloated" because of soft sales and increased shipments from manufacturers attempting to reduce their own inventories as the model-year ends. Construction Sales were strong in residential construction in August and September. In Ohio, August home sales were up 18 percent over last year. Some of the increase was attributable to customers purchasing in anticipation of rising interest rates. Since rates have since flattened, there were some indications activity may have slowed slightly in September. Overall, contacts expect sales will be strong for the rest of the year and at least as high as fourth quarter 2002. Profit margins were somewhat strained by rising material costs. Plywood and lumber prices have been rising sharply. Contacts indicated that events outside the District, particularly rebuilding efforts after Hurricane Isabel and recent military purchases of plywood for operations in Iraq, were partly responsible for some of the price increases. Commercial construction was slow during this period, and increases noted in the last report appear to have been transitory. Conditions have not changed much from the early summer. However, most contacts continue to be optimistic about future contracts, as discussions about projects have picked up and appear to be less tentative than in the past. Several contacts noted new project possibilities in manufacturing areas. Profit margins continue to be low because of fierce competition for the available construction opportunities. A few contacts noted slight increases in materials costs. Trucking and Shipping Activity in trucking and shipping in August and September showed modest improvements compared with the same period in 2002. Most contacts believed that the uptick in activity represented more than just seasonal factors. Retail customers increased their demand for trucking and shipping services, while demand from manufacturers continued its flat-to-negative trend of the last several years. Most firms have an optimistic outlook for the remainder of this year and into 2003. Fuel input costs rose during the summer driving season, but have since leveled off. Banking Conditions were again mixed for commercial and consumer loans. Contacts reported stable-to-increased demand for commercial loans (which are at low levels), while consumer loan activity was steady to declining from the high levels seen earlier in the year. This drop in demand for consumer loans was driven by the drop in refinancing activity, which was caused by the recent rise in mortgage rates. Reports regarding the rate of loan delinquencies for mortgage, installment, and business loans were mixed. Return to top Philadelphia Richmond