June 13, 2007 Federal Reserve Districts Fourth District--Cleveland

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Economic activity in the Fourth District grew at a modest pace during the past six weeks. In general, manufacturing output was stable to increasing, although District auto plants reported decreased production during April. Activity in commercial construction held steady with backlogs reportedly at acceptable levels. New home inventories are moving toward more normal levels, but sales remain at low levels. Further, there is a general consensus among builders we spoke with that residential construction has yet to bottom out. Most District retailers reported disappointing sales which were attributed to unseasonable weather and high gasoline prices. Loan demand at banks has been flat to slightly up with stronger demand in the commercial sector. Energy production was mixed. On balance, the demand for trucking and shipping services has softened a bit. On net, reports point to a slight increase in employment levels across the District with little wage pressure. Staffing firms reported positive trends in job openings with an increase in the number of permanent openings; however, our contacts told us that the number of job seekers declined since mid-April and year-over-year. Hiring demand was greatest in the service industries including health care, insurance, finance, and administrative. Manufacturing openings decreased. Almost all manufacturers, commercial builders, and coal producers reported that input prices are rising especially for metals and petroleum-based products. Manufacturing Most District manufacturers reported production levels were stable to increasing during the past six weeks and on a year-over-year basis. Top performers were found in the aerospace, power generation, chemicals, and food processing industries. Looking forward, almost all our contacts anticipate production remaining at current levels or increasing. Auto assembly plants reported decreased production between March and April with foreign brands showing higher production cuts than their domestic counterparts. On a year-over-year basis, total auto production increased with domestic makers increasing production at a higher rate than their foreign brand competitors. Shipments by steel producers and service centers were reported as softening to up slightly and expectations for the second quarter varied widely. Stronger markets for steel include industrial equipment and machinery, commercial construction, rail cars, energy, and chemical processing. Almost all manufacturers reported that capital expenditures were on plan since mid-April with half of the respondents saying they expect to increase spending in the next 12 months. Our contacts tell us that funding is readily available--primary sources include equity and bond issuance or internal resources. Industries planning increased capital expenditures include machinery, aerospace, food processing, structural metal products, autos, and petrochemicals. Although some of the additional capital spending is aimed at increasing production efficiencies, less than half of the manufacturers expect to see higher productivity. A majority of producers reported a rise in input prices--particularly for metals--over the past six weeks and on a year-over-year basis. In response, about half of our contacts said they increased their prices or used surcharges to pass through increased costs. Only a few of our contacts reported increasing the size of their workforce during the past six weeks including those who recalled laid-off workers. Hiring in the near future is expected to be very slow. Little wage pressure was reported. Construction New home sales over the past six weeks were reportedly stable--but at low levels--and down on a year-over-year basis. There is a general consensus among respondents that residential construction has yet to bottom out. Looking forward, builders aren't sure when the housing market will turn around--late 2007 may be the earliest. Although builders were in agreement that new home inventories remain high, several reported that they are moving toward more normal levels. In general, new home prices were down slightly since mid-April, although some builders have discounted as high as 10 percent. Prices of construction materials were mixed. Some contacts said prices have stabilized while others reported increases for copper and petroleum-based products such as roofing. Most of our commercial contractors tell us that business has been stable to very good since mid-April; however, on a year-over-year basis their reports were more mixed with a third saying business is down. Segments showing strong activity include retail, public works, education, and some manufacturing. When questioned about new business inquiries, a majority of respondents said they were stable or declining. Opinions regarding backlogs varied, but overall they are at acceptable levels. Almost all contractors reported price increases for building materials--especially steel and concrete--and fuel. Profit margins were unchanged as builders were able to pass on most of the increased costs. Access to capital is readily available with banks being cited as the primary source. Retail In general, District retailers reported disappointing sales on a year-over-year basis. Much of the decline was attributed to unseasonable weather and high gasoline prices. Two bright spots were grocery stores and home centers. At the home centers, sales increases were attributed to seasonal items. Looking forward, retailers anticipate sales will remain flat or increase modestly--up about two percent. With the exception of some food stocks, supplier prices and other input costs have remained steady over the past six weeks, although a few contacts expressed concern over rising energy prices. New car sales have been steady since mid-April. Dealers reported that showroom traffic has picked up, although it's not at a very high level. Further, they don't expect sales trends to change very much in either direction over the next few months. SUV sales were hard to come by, especially for the larger models. Banking Since mid-April overall loan demand has been flat to slightly up. On the consumer side, auto and marine lending is picking up modestly while the home equity loan market has softened. The mortgage market continues to be slow with only limited expectations for a rebound in the second half of the year. Several bankers reported commercial lending to small and mid-sized businesses has increased. Almost all contacts told us that credit quality remains generally stable. Energy Most coal producers reported production declines since mid-April and on a year-over-year basis. All our contacts reported cutbacks in capital spending and increases in material and equipment costs, especially diesel fuel. Workforce reductions are continuing. Wages are rising at a slower rate while benefit costs are accelerating. Reports by oil and gas producers contrasted with those of their coal counterparts. Resource development and demand were characterized as high. Production levels are flat to slightly up since mid-April and on a year-over-year basis. Capital expenditures for business expansion remain on target for the year. Funding for investment is easily available coming from internal sources and private investors. Material and equipment costs were flat to up slightly. All our contacts told us they are currently hiring and anticipate continued workforce expansion. Transportation On balance, demand for trucking and shipping services has softened a bit. We had a report that shipping rates for the less than truckload business softened due to a slower pace of economic activity and some overcapacity. Expectations for revenue growth during the second half of 2007 varied. Productivity in the trucking industry continues to be constrained by hours-of-service changes, congestion, and driver turnover among other factors. According to industry executives, productivity levels have fallen over the past couple years with little change expected during the next 12 months. Return to top Philadelphia Richmond