April 21, 2004 Federal Reserve Districts Fourth District--Cleveland

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Business conditions continued to improve in the Fourth District, and the pace of improvement appears to have accelerated in recent weeks. More manufacturers reported expanded production in the last several weeks than earlier in the year, and most expect growth to continue in the months ahead. Steel producers continued to see strong demand. Retailers reported improved sales this spring. In the construction industry, residential builders continued to report strong sales, and conditions for commercial contractors appear to have improved in some areas of the District. District banks reported rising commercial loan demand and falling delinquency rates. Finally, shipping firms reported that activity continues to expand, at year-over-year rates on the order of 10 percent. Despite these signs of improvement in the economic environment, the hiring plans of most firms remain modest. Reports of rising input prices that began earlier in the year became more widespread in recent weeks, and firms indicated that they have been more successful at passing these input-cost increases along to their end consumers. Manufacturing For February and March 2004, a majority of manufacturers reported increases in month-over-month production levels. Domestic steel producers again reported robust orders in recent weeks, and many steel mills are said to be running at or close to capacity. Those firms that did not report an increase in production said that production levels stayed steady in the last eight weeks. This follows reports from earlier in the year in which production levels were characterized as flat for the majority of manufacturers over the first few weeks of 2004. More than half of those surveyed reported higher production levels than at this time last year. Most manufacturing firms expect modest growth in the months ahead. Manufacturers' inventories remained at acceptable levels in recent weeks according to most contacts. However, some steel buying is said to be to supplement low levels of inventoried steel, as concerns about the availability of steel supplies intensify and production lead-times remain long. Manufacturers reported limited additions to their payrolls in the last several weeks. Nearly all manufacturers who sought new hires reported being able to find workers without difficulty and at no significant increase in wages. Any concerns about labor costs related mainly to rising health care and other benefits costs. Rising materials costs, however, were a common theme from many manufacturing contacts, though these reports were more widespread among durable-goods producers. Prices reportedly rose in recent weeks for petroleum-based products and items such as steel and aluminum. Prices for both flat-rolled and structural steel have continued to rise in recent weeks. And as shortages persist, prices for scrap steel are still about twice what they were a year ago, though some reports suggested that these prices may have peaked in March. Several firms indicated that they had successfully raised their prices to compensate for these input-cost increases and indicated their intention to continue raising prices in order to offset additional increases in input costs. Retail Sales District retailers reported that sales strengthened in recent weeks. Contacts attributed the improvement to strengthening consumer sentiment. Discount and department stores in the District reported that sales had increased from a year ago. This marks a departure for department stores, which had consistently reported sluggish sales in previous reports. Contacts at both discount and department stores anticipate that sales will continue to improve in the weeks ahead. Sales growth at specialty retailers was more varied: Apparel and personal care products reportedly sold well in recent weeks. Some retailers noted that merchandise is being marked down less and promotions are being offered less often, while firms are said to be spending more on advertising. Contacts continued to characterize inventories as mostly flat on a year-over-year basis. There were no reports of significant wage changes; however, contacts continued to report rising health care costs. The pace of automobile sales has risen slightly since the beginning of the year. Contacts attributed the improvement in part to the poor weather that persisted earlier this year. Nevertheless, sales in March were said to be similar to those from this time a year ago. Inventory levels reportedly remain high. Used car sales are said to be steady. Construction Residential builders reported that sales rose in recent weeks, though some of this was attributed to seasonality. Several builders reported that starter homes continue to sell well. Sales growth so far in 2004 remains on a par with the pace of sales seen in 2003. However, rising materials costs remain a concern for many homebuilders; prices for lumber, plywood, drywall, and steel have reportedly risen significantly recently. Homebuilders have been able to offset these input-cost increases to a considerable extent by raising the prices to their customers, but are becoming concerned about additional cost increases. For commercial builders, conditions appear to be improving in some areas of the District. Reports suggested that sales may be reviving in the Cleveland and Pittsburgh markets after a period of prolonged weakness. District-wide, however, conditions remain rather weak. Some contacts expect the economic environment to improve in the months ahead, reporting renewed customer interest. Of concern, however, are rising materials costs, particularly for steel-related products. Commercial builders have been less successful than homebuilders at passing input-cost increases along to their customers. Banking Commercial loan demand reportedly increased in March from the levels that prevailed earlier in the year. Real estate lending has been particularly strong recently. Consumer loan demand, by contrast, has been largely flat in the last two months. However, mortgage originations and refinancings are said to have revived recently. Core deposit growth was reportedly flat in recent weeks. Several institutions indicated that holdings in their most liquid instruments, such as savings and checking accounts, were increasing, while their certificate-of-deposit balances were declining because of low rates of return. Many contacts noted that delinquencies have declined in the past two months and are lower than in the first quarter of 2003. Trucking and Shipping Trucking and shipping firms reported an increase in activity in recent weeks, continuing the upward trend from earlier in the year. Many contacts reported an increase in activity on the order of 10 percent relative to this time a year ago. Several firms reported that they are running their fleets near capacity. Firms are attempting to hire additional drivers, but it is reported that finding qualified drivers is difficult, and retaining drivers is difficult as well. Some carriers have changed operational procedures to try to offset increased costs stemming from the revised hours-of-service regulations that took effect in January. Firms are also replacing trucks in their fleets, partly in anticipation of scheduled changes in emissions standards. Rising fuel costs are a concern to many carriers, but firms have generally been able to pass along these increased costs to customers through surcharges. Return to top Philadelphia Richmond