December 3, 1997 Federal Reserve Districts Fourth District - Cleveland

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General Business Conditions The Fourth District economy continues to grow at a moderate to good pace. Labor markets are strong, and price pressures remain light. Residential and commercial construction is very active in the District, with sales and prices rising in both markets (particularly in central Ohio). District retailers indicate difficulty finding seasonal workers, although no more so than in recent years. One notable exception appears to be in central Ohio, where reports of more extreme labor shortfalls are heard. Temporary employment agencies note a further rise in the already heavy demand for workers, especially clerical help and general laborers. Only a few sources report increased wage growth, although a number of firms are offering increased benefits and more flexible work rules. Manufacturing Industrial activity has strengthened considerably since summer. Orders growth has been good, production and employment levels are increasing, and inventories are shrinking. Moreover, order backlogs are rising again, and some shortage of skilled workers is seen. Steel producers indicate good orders growth from a variety of sources, although additions to capacity and an increase in steel imports have helped to hold price increases down. A similar report is heard in heavy truck manufacturing, where production and order levels have reached or surpassed the historic peaks of 1995. The order books in this industry look solid through early 1998, and little, if any, price pressure is noted. Firms with significant sales in Asia have seen a falloff in orders recently. In particular, orders for semiconductor manufacturing equipment declined substantially between August and October. Consumer Spending Retailers in the District report that unseasonably warm weather during the first two weeks of October restrained spending a bit. However, sales have recovered and are currently at, or slightly above, retailers' expectations. The recent sales growth has been broadly based, but is particularly strong in domestics (linens and towels), certain apparel lines, and electronics, including personal computers. Retailers surveyed indicate that year-over-year sales are currently running about 3% to 5% above last year's level, with a few reporting substantially higher growth rates. Inventory levels are thought to be adequate for the season, although a strong holiday sales period is generally anticipated. Retailers continue to report steady prices. In some cases, wholesale costs actually seem to be falling. Auto sales in early November continued a string of generally soft reports that began in September, and many dealers expressed concern over their growing inventories. Price incentives are reported to be on the rise. Sales activity in the used car market is seen as especially slow, and deep price discounts are being offered. Agriculture Overall, crop conditions have been favorable this year. Combined corn production for Ohio, Pennsylvania, and Kentucky is expected to exceed last year's level by 18%, with yields much stronger in Ohio than elsewhere in the District. The region's soybean crop is projected to be 22% above 1996's harvest. Again, yields are slightly higher in Ohio than elsewhere. Soybean prices fell between September and October, while corn and hay prices firmed a bit. Kentucky tobacco production is expected to be 8% higher that last year, down slightly from preliminary projections. The quality and condition of the crop are variable, and there is some concern about poor color and weight. Major auctions during the first two weeks of November suggest a strong demand in the District's horse farm industry. At one auction, more than 2,000 horses were sold over the period and gross sales topped $200 million, a record high. Dealers and breeders report that the improved numbers are due to high stock quality and a healthy domestic economy. Selling prices, while strong, were not judged to be unusually high. Banking and Finance Lending activity in the District is strong overall, with commercial loan demand continuing to grow, while a few banks are reporting a slight softening in consumer loans. A recent drop in mortgage interest rates has spurred a sharp rise in mortgage refinancing. Consumer delinquencies have recently leveled off, and a few banks indicate that they may be seeing some improvement. The spread between borrowing and lending rates remains narrow, and competitive pressures are still reported to be fierce. A few banks note that competitive pressures have prompted an easing of commercial credit standards. Return to top Philadelphia Richmond