March 17, 1999 Federal Reserve Districts Fourth District - Cleveland

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The Fourth District's economy is still growing, although somewhat unevenly by industry. Labor markets remain tight and reports of wage increases are growing. Indeed, the rate of joblessness in some areas has descended to levels previously unseen (about 2% in the Cincinnati/Northern Kentucky region.) The District's temporary employment agencies were unable to keep pace with demand in February, and all of the agencies surveyed indicate having increased wages since the beginning of the year for a wide range of workers. Several agencies are preparing for another round of wage increases within the next few months. General laborers are in short supply in the southern parts of the District, even in the manufacturing sector where labor markets have been softer. Elsewhere, firms continue to report a shortage of administrative support, including experienced secretaries. District transporters report a leveling off in shipping activity this year, and business is modestly below levels of a year ago. International traffic has improved, as both imports and exports have grown since the last report. Imports remain especially strong, however, and the imbalance between imports and exports persists. Shippers are expected to hike rates on Asian routes to compensate for capacity excesses on return trips. Agricultural commodity prices, which have stabilized recently, are substantially below levels of a year ago, although dairy prices remain elevated. In Pennsylvania reduced soil moisture has become a source of concern, and Kentucky tobacco farmers report reduced crop quotas for 1999. Construction Residential building has picked up from the brisk pace of 1998. Residential building activity in central Ohio is especially strong. The volume of commercial construction does not appear as universally strong as residential construction, though none of the sources we contacted indicate any drop in activity from earlier in the year. Shortages in particular trades continue and are adding to wage pressures in those areas. Lumber and drywall are in short supply and costs are rising. Still, some builders report that profit margins have improved from last year. Reports of speculative building remain spotty by region and category. Land speculation in northeast Ohio is noted by a few sources, and a few commercial contacts also indicate that speculative building and development has increased. Industrial Activity District manufacturing is holding steady or showing modest gains. Export markets have stabilized and show modest improvement in some cases. In the steel industry, strong domestic orders have eased competitive pressures created by foreign imports. Capital goods makers note renewed broad-based growth in orders and production after a mixed fourth-quarter performance. Semiconductors, agricultural machinery, and construction equipment have all picked up following relatively soft year-end numbers. Transportation equipment makers are posting gains from an already high level of production. Heavy truck orders rebounded in February, and the orders backlog in this industry extends almost through the end of the year. One industry source expects production in 1999 to top last year's record level. Industrial commodity prices are either flat or falling across a range of goods. Although employment is rising again and wage growth has picked up for some workers, industrial producers see productivity gains neutralizing employment cost pressures. Consumer Spending The majority of retailers report strong, better-than-expected sales in the first two months of the year. Seasonal discounts are reported less than usual due to a strong consumer appetite. Inventory levels are good and spring merchandise is already in stock. Furniture stores report very strong sales, with inventories and prices adequate. Retailers maintain that the labor market is still tight, but less so than in December. Auto sales in February were good or better. Manufacturer incentives, combined with a strong economy have kept the industry active in a typically slow season. New vehicle inventories are in line with sales expectations, with fewer-than-normal shortages reported. Even the previously soft used-car market has seen good sales recently. Banking and Finance Lending activity in the District is good for both commercial and consumer loans, although the growth rate of commercial loans has slowed. Small business borrowing is mixed by institution, and some businesses are finding credit more difficult to obtain. The spread between borrowing and lending rates is still shrinking. An increase in the loan delinquency rate is reported by many, if not most, banks. District auto dealers expressed concern about an apparent deterioration in the creditworthiness of some new car buyers. One source noted a rise in auto repossessions in the past year. Return to top Philadelphia Richmond