December 1, 2004 Federal Reserve Districts Fourth District--Cleveland

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For the six-week period through the middle of November, economic activity appeared to expand little in the Fourth District. Production levels at the District's durable and nondurable goods manufacturers remained flat, as in August and September. Sales at the District's retailers also remained largely unchanged throughout this period, conforming to the pattern of reports since late spring. Residential construction continued to slow, while seasonal declines in demand weakened some of the momentum that nonresidential builders had been reporting. District banks reported steady loan demand among their commercial and consumer clients. Finally, shipping firms continued to report robust demand. There were some signs that input costs began to stabilize for manufacturers, and retail price pressures remained limited. While hiring still seemed to be modest among many business contacts, staffing services companies are optimistic about their prospects for the first quarter. Contacts at staffing services companies also reported an increase in the number of employed workers interested in switching to a new job. Manufacturing Most of the District's durable goods producers continued to see steady levels of production in October and through the middle of November. However, year-over-year comparisons were less favorable for firms through this period than in the recent past: Almost half reported less production than at this time last year. Some of the slowing can be traced to auto producers' production cuts. Domestic steel shipments also slowed somewhat, but they are still substantially higher than at this time a year ago. Contacts attributed the slowing shipments largely to seasonal changes in demand. However, increases in steel inventories and imports are also likely having an effect. Nondurable goods producers described production levels as steady in recent weeks, as well as relative to this time last year. Nevertheless, most expect weaker activity through the next several months. By contrast, expectations among durable goods producers are almost evenly split between those anticipating more production and those anticipating less. As in the most recent report, roughly half of the respondents from durable goods manufacturers reported having higher inventories than desired. By contrast, most nondurable goods producers reported that their inventories were not above acceptable levels. In general, durable and nondurable goods producers are planning little hiring and few increases in capital outlays over the near term. For the first time in months, cost pressures appeared to moderate for many manufacturers through the six weeks ending in mid-November. In fact, several firms reported that their input costs were flat throughout this period. Lower prices for petroleum-based products and steel appeared to account for much of the change. Nevertheless, manufacturers' materials costs remain higher than at this time last year, and, accordingly, firms continue to attempt to raise their prices--many successfully so--to recover the increases in input costs. Retail Sales The economic environment for the District's retailers remained largely unchanged in recent weeks. Most contacts continued to characterize sales as flat, with business conditions little changed since the spring. On a year-over-year basis, specialty stores and discounters reported a slight increase in sales, while department stores saw sales decline. Auto dealers reported falling sales for the six weeks through the middle of November. Finally, it was reported that cosmetics and other personal care products, home appliances, and certain apparel categories sold well. Some contacts had expected sales to strengthen following the presidential election, but sales through the first half of November don't appear appreciably better than before. Accordingly, firms are cautious in their forecasts for the upcoming holiday selling season, anticipating, at most, only slightly better sales than at this time a year ago. Most retailers reported that their inventories were well-managed and about the same as a year ago, though auto dealers generally had higher inventory levels than desired. Automobile dealerships continued to offer an array of sometimes substantial incentives. One newly introduced incentive allows buyers to lock in current interest rates on a subsequent purchase for a five-year period. Prices for used cars also continued to fall. For other retailers, reports regarding changes in prices were mixed. For firms that attempted to increase some product prices, these changes were reportedly resisted by consumers. Regarding hiring, seasonal workforce additions were expected to be about the same as at this time a year ago; plans for permanent staff additions are still few. Construction The pace of residential construction continued to weaken slightly throughout the District, even after accounting for the typical seasonal slowing. Reports of declines in activity were particularly prominent in the Cincinnati area. Building also appeared to be down for most firms on a year-over-year basis. Nevertheless, nearly half of the firms contacted continued to expect their sales in 2004 to ultimately surpass those seen in 2003. Contractors' costs for most materials declined throughout the fall, but often are still above their levels from a year ago. Increases in cement and concrete prices have also been reported. Finally, firms that were expanding planned to continue to add to their staffs. After recent reports indicated better business conditions for nonresidential builders, activity appeared to slow in the six weeks through the middle of November. However, many contacts attributed this to a normal seasonal slowing. While many firms don't anticipate much more activity through the remainder of this year, there is optimism about stronger activity in 2005. Materials costs were flat for most firms in recent weeks, though higher than at this time last year. No nonresidential builders reported plans to hire, but several indicated that they may shed some workers in the weeks ahead. Banking Most institutions in the District reported moderate increases in deposit growth through the six weeks ending in mid-November. Throughout this period, District banks also characterized their commercial clients' demand for credit as steady. There were some isolated indications that commercial clients were seeking funding for expansions, as some bankers suggested that business confidence had improved in recent weeks. Lending to consumer clients was also characterized as steady, though mortgage activity appeared to vary by region. Finally, credit quality continued to be good at most institutions in the District. Trucking and Shipping Demand for trucking and shipping services remained robust in October and through the middle of November. As has been the case in recent reports, demand continued to come from an array of sectors, with demand from retailers especially strong in advance of the holiday selling season. Shipping firms' fuel surcharges continued to insulate them from increases in fuel expenses. Many shippers are also beginning to increase their base rates. As firms attempted to expand capacity, they continued to report trouble hiring drivers. Wage rates have risen as a result, and one firm reported attempting to attract drivers by offering benefits such as routes closer to a prospective hire's home. Capital spending by shipping firms continued to be strong through the middle of November. Return to top Philadelphia Richmond