March 12, 1997 Federal Reserve Districts Fourth District - Cleveland

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Business conditions remain good overall, although little net growth has occurred since the last District report. Unemployment is holding steady at a low level in most areas, and reports of labor shortages persist, especially in central and southwestern Ohio and northern Kentucky. Indeed, unemployment in central Ohio fell to a 27-year low at the end of 1996. In the Dayton area, labor shortages have reportedly pushed the pay for unskilled workers one dollar or more above the new federally mandated minimum. In southwestern Pennsylvania, an area that has lagged the District over much of the current business expansion, the unemployment rate has recently dipped about 1/2 percentage point below the national average. A spurt in new business incorporations last year is reportedly a contributing factor in the area�s recent economic rebound. A small rise in joblessness among construction workers earlier this year appears to have improved substantially with the relatively warm temperatures of the past month. According to District employment agencies, hiring of temporary workers increased in the beginning of 1997 at a greater pace than a year ago. Some occupation mismatch was noted. For example, while workers with office computer skills were plentiful, low-skilled workers for data entry, accounting, and receptionist positions were scarce. One contact indicated difficulties finding machinists and welders, perhaps due to a reduction in training programs. Most agencies report that persistent labor shortfalls have made corporate clients more agreeable to higher pay scales. Indeed, the rate of wage growth has been steadily increasing over the past year. District real estate markets remain strong after a very good performance in 1996. One real estate professional characterized the housing market in southwestern Ohio and northern Kentucky as �extraordinary.� In the commercial real estate area, the availability of office space in central Ohio is well below the national average, and vacant industrial space in Cincinnati is virtually nonexistent. Manufacturing Industrial activity is holding steady, and most respondents describe it as strong. Employment, production, and orders are all similar to those noted in the last District report. Steel orders and production have been good, although imports have increased. Capital goods producers indicate continued strength in new orders from domestic and foreign sources. Even heavy truck manufacturing, which retreated in 1996, has begun the year with a solid rise from the fourth quarter of last year. The dollar�s recent runup in foreign exchange markets has had a negligible impact on foreign orders. Price reports from industry continue to show little overall increase, with improved productivity accounting for any profit gains. Two sources noted that manufacturing wage growth had stepped above the 3 percent level, although these expenditures have also been matched by higher productivity. Retailing District retailers report mixed results for January and February, but give no indications that retail conditions have changed significantly since the previous District report. Spending activity during the two February holidays was thought to be about average. However, expectations for the first quarter as a whole are positive, and retailers are expecting sales to exceed last year�s. Household supplies and better apparel items are considered to be selling particularly well, while electronics, furniture, sporting goods, and general apparel are not. Retailers indicate that prices are stable and that inventories are in good to excellent condition. Auto Dealers District auto sales slowed in February after a strong performance in January. Nonetheless, dealers remain optimistic about spring sales prospects and report that showroom traffic and general consumer interest have been strong. A few dealers stated that instances of insufficient equity and bad credit have increased. Leasing growth appears to have leveled off. While most dealers reported inventories slightly above desired levels, others noted limited supplies of specific models that were selling unusually well. It is too early to gauge the full impact of a work stoppage at a major automobile supplier which temporarily idled 3,000 workers at a District auto assembly plant. However, area auto dealers expressed some concern about the shortage of a popular model that was caused by the strike. Banking and Finance Lending activity in the District was mixed by category and region during the first two months of the year. Commercial loan demand across the District ranged from good to disappointing. Of the banks reporting lower-than-expected commercial lending, one noted that a strong economy has allowed some firms to finance borrowing needs internally. Consumer borrowing trends have been flat throughout the District, with any growth attributed to seasonal demand. Competition for borrowers is still sharp, although most respondents indicated that the spread between borrowing and lending rates has stabilized. Credit unions are emerging as a competitor for many community banks, particularly with regard to auto loans. Credit standards this year are holding steady in most areas and have tightened for credit cards. Commercial loan quality is seen as very good, but consumer credit quality has deteriorated slightly due to heavier debt loads. Most District bankers feel that they have seen the worst of the recent rise in loan delinquencies. However, several respondents indicated that bankruptcies continue to increase. Despite competitive pressures and a rise in delinquencies, major District banks reported strong profits in 1996. Return to top Philadelphia Richmond