March 18, 1998 Federal Reserve Districts Fourth District - Cleveland

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The Fourth District economy continues to grow, but at a moderating pace. Labor markets are strong and price pressures remain light. Both residential and commercial construction are flourishing, particularly in the central Ohio and Pittsburgh areas. Temporary employment agencies report increased demand since the beginning of the year, especially for data entry employees and administrative assistants. Historically, the first quarter is a slack season, so the robust activity thus far in 1998 suggests that temporary employment demand for the rest of 1998 will exceed even the high levels seen in 1997. Many companies report that they are increasingly willing to train unskilled employees, especially those who are willing to learn some computer skills. Some also mention a shift in the composition of those seeking work, resulting in relatively greater numbers of younger (19-21 years), older (65 and over), and less educated (those with only a high school diploma) applicants. Organized labor reports a small increase in annual wage growth to slightly over 3% per year. Those unions that have not yet seen wage gains expect to see them in the near future. The main focus of current contract negotiations is wages, which the unions are targeting in preference to job security issues. Benefits growth is said to be stagnant, while the trend toward longer contracts has continued into the first part of 1998. Manufacturing Industrial activity remains strong. Most manufacturers report an increase in production levels, but the number of those reporting production declines has risen a bit. New orders have increased, but not at the rate experienced in January. Steel producers report strong growth in orders, but stable raw materials prices have held the product price down. The demand from the auto industry is so strong that some producers report shipping their steel while it is still hot. Asian developments have not had a strong effect on final sales due to healthy domestic demand and long contract lead times associated with exports of higher-performance steel. Consumer Spending Most retailers expect 1998 to be a stronger year than 1997. Retail sales in the District have met or slightly exceeded expectations for the first part of the year, with January sales significantly above target but February sales only marginally so. Gains appear to have been led by strong demand for apparel and wireless communication. There is a wide disparity in reported inventory levels, but the average seems to be slightly above the desired levels. January and February auto sales showed strength in the minivan, sport utility vehicle, and truck categories, but were flat for passenger cars. As a result of heavy inventory buildup in the slow months leading to the holidays, dealers have an ample supply of cars. There is some downward price pressure in the used vehicle market because large numbers of 1996 models are being returned from lease agreements. However, leasing prices are marginally higher as a result of lower residual values. Transportation Trucking has benefited from the strong market in structural steel. Generally, however, business in trucking remains only somewhat better than at this time last year. The air cargo business has seen steady, if unspectacular, growth since the beginning of the year, particularly for machine parts and international shipments. Coal Eastern Kentucky coal mines expanded output in 1997 by 2.3%, only slightly less than the U.S. average increase of 2.9%. Coal production is expected to remain high this year, despite increased foreign competition for the lucrative export markets in steam coal. Serious concern was expressed about the potential regulatory impact of the Global Warming Treaty. Producers are particularly worried that provisions of the treaty might make Kentucky coal production more expensive and harm its competitive position. On the labor front, the collective bargaining agreement between the United Mine Workers and the Bituminous Coal Operators Association, which was set to expire this year, has already been renewed. Banking and Finance Lending activity in the District remains vigorous, with commercial loan demand continuing to strengthen. Consumer loan demand has weakened slightly, but mortgage refinancing remains very robust. Consumer loan delinquencies are edging up slightly, although commercial delinquencies remain low. The narrow spread between borrowing and lending rates is resulting in significant interbank competition and small profit margins, and there is mild concern that banks may be easing consumer credit standards somewhat. Return to top Philadelphia Richmond