October 27, 2004 Federal Reserve Districts Fourth District--Cleveland

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With some exceptions, growth in economic activity appeared to moderate in the Fourth District through the six weeks ending September. For most District manufacturers, production levels were steady in late August and September, while sales were weak for most retailers. Residential construction continued to slow as in recent reports, though nonresidential builders began to see signs of improvement. District banks reported rising loan demand among their commercial clients, and the transportation sector continued to see strong demand for its services. Elevated input costs remained a persistent feature of the economic environment. In addition, plans for increases in hiring and capital spending continued to be isolated. Staffing services companies reported strong demand for workers with backgrounds in health care and engineering; however, demand from manufacturing firms for workers was weak. Manufacturers The District's durable goods manufacturers reported steady production through the six weeks ending September. Relative to the same time a year ago, production levels were higher for most firms. The outlook, however, has been somewhat diminished by domestic auto producers' announcements of production cuts. Some steel producers, among other auto industry suppliers, noted declining demand from automakers. Steel shipments in general, however, continued to be strong, despite some slowing from the pace of growth in the first half of 2004. Nondurable goods producers generally characterized production levels as flat for the last few weeks, but above the levels of this time last year. However, expectations for future activity have fallen somewhat. More durable goods producers than in the past--about half--reported that they had higher inventory levels than desired. Durable goods producers generally planned to reduce capital spending through the next twelve months, and most planned to keep staffing levels stable in the near term. Few nondurable goods producers planned to hire soon. Rising input costs continued to confront both durable and nondurable goods manufacturers. The most prominent increases in input costs were for steel and petroleum-based products. However, it was reported that the available supply of steel is growing, and that steel price pressures may abate as a result. Retail Sales For the period from mid-August through September, District retailers generally reported sluggish sales. This conforms to the pattern of recent reports, which have depicted a sluggish retail sector since the late spring. Sales at discount stores were stronger than sales at department stores in the six weeks ending September, while sales at specialty stores were mixed by category. Personal care products and accessories continued to sell well, while automobile sales were generally weak throughout the District in September. Apparel items also sold poorly in recent weeks. A few contacts noted that unexpectedly warm weather may have dampened demand for fall and winter apparel. Overall, contacts attributed the slowdown in spending at the District's retailers to uncertainty related to the upcoming presidential election and energy price changes. Nevertheless, some retailers reported improving sales in early October, while others were optimistic about the approaching holiday selling season. Outside of energy and health-care costs, price pressures were generally muted at the retail and wholesale levels. For food-service firms and grocers, food prices reportedly stabilized recently, though some produce prices were affected by the recent rash of hurricanes. Regarding apparel retailers, a few indicated that they have increased markdowns in an attempt to reduce excess inventories. Generally, however, inventory levels were reported to be the same as or less than those from a year ago. Construction Residential construction continued to slow in the last several weeks. Sales also fell for most District homebuilders on a year-over-year basis. As in the previous report, this slowing sales pace was reflected across practically all price points. Customer traffic has also fallen since the summer. As a result, some builders have been reducing prices to spur demand. Residential builders also reported rising materials costs, for items such as steel, lumber, and concrete, as well as direct and indirect increases in costs from rising petroleum prices. These developments have reduced residential builders' profit margins. By contrast, commercial builders began to see some improvement in business conditions in late August and September. While sales are still at low levels, the economic environment has improved in recent weeks, and sales for most firms are higher than at this time a year ago. Accordingly, contacts are cautiously optimistic about the future. Though it is reported that demand came from an array of sectors, a few contacts specifically cited increases in demand for industrial projects. The increases in materials costs cited by homebuilders also affected commercial builders, and many contacts reported that they cannot completely offset these increases in costs by raising their prices. Banking As in the most recent report, District banks continued to characterize consumer loan demand as steady to slightly increasing. However, despite declining mortgage rates in recent weeks, mortgage borrowing remained muted. By contrast, commercial loan demand--though still at low levels--seemed to strengthen through the last several weeks. Moreover, many banks reported that the number of their prospective loans to commercial clients also increased. Delinquencies reportedly remained at low levels. Finally, at most institutions in the District, deposit growth was flat. Trucking and Shipping Demand for trucking and shipping services continued to be strong throughout the District in August and September. Demand was so strong, in fact, that one contact reported turning business away because of a lack of personnel. While most firms attempted to augment their staffs, many found it difficult to attract and retain workers. Some firms reported recently increasing their wages as a result. Firms also reported increases in planned equipment purchases; an increase in the demand for new trucks has led to longer truck delivery times. Although contacts reported concern over rising petroleum prices, surcharges have allowed firms, in large part, to pass these price increases on to their consumers. Return to top Philadelphia Richmond