May 5, 1999 Federal Reserve Districts Fourth District - Cleveland

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The Fourth District economy continues to perform at a high level. Some pickup in manufacturing production has been experienced while retail and construction activity remain quite strong. District temporary employment agencies indicate that a lack of workers continues to hamper their ability to meet demand resulting in some added upward wage pressures. Likewise, wage growth appears to have accelerated slightly for workers under collective bargaining agreements; the average increase has inched up from 3% to 3�%, reaching 4% in some cases. Inflation protection is not a major concern in current contract negotiations. Some cost of living adjustment clauses have been replaced with performance bonuses, while others are activated only when inflation exceeds 3% per year. The length of contracts is mixed, with some moving back toward the more standard 3-year duration, while others average between 4 and 5 years. Weather has been favorable for District farmers, with plenty of moisture for young crops. Most crops are reported to be ahead of schedule for the season. Construction Commercial construction activity in the first quarter of 1999 varies by region. Contractors in the Cleveland market report markedly less activity than in the previous year, and some skilled tradespeople, such as bricklayers, have been laid off. Sources in this region indicate that weather fluctuations may be to blame for the slower pace of construction in recent weeks. Commercial builders elsewhere in the District report that activity is outpacing levels of a year ago; commercial construction in Pittsburgh, for example, is characterized as "booming." Residential construction continues at a brisk pace, improving a little from its already high level of activity. Worker shortages are being reported in the Pittsburgh and Cincinnati regions, with masons, roofers, and framers in especially short supply. Some raw materials shortages, including drywall, lumber, and concrete have been noted, and prices have edged up in these markets. Industrial Activity Capital goods producers report a pickup in demand for heavy vehicles, with both sales and orders on the rise. Some industries that showed softness earlier in the year, such as industrial machinery components, appear to have improved. Steel production also seems to have rebounded in the past month, but production levels remain substantially below this time last year. Overall demand for steel is strong, but the industry continues to struggle with high inventories stemming from a surge in imported steel. Strength in the housing market has helped to boost sales of equipment for residential construction. A notable weakness in the District's manufacturing sector is aerospace-related production, which has softened following a very strong fourth quarter. Prices of industrial materials have shown mixed patterns in the past few months. A larger percentage of purchasing managers indicate some upturn in raw commodity prices recently, although some products, namely aluminum and certain steel products, continue to experience downward price pressures. Manufacturers report no significant labor market or wage developments in the past two months. Consumer Spending Retailers report very strong sales in March, boosted in part by an earlier-than-usual Easter holiday. Retail contacts are optimistic that this sales strength will continue through the remainder of the spring. A large percentage of the District's retailers report expansion plans for 1999. These plans may be hindered, however, by a labor market that many see as very tight. District auto sales in the first quarter were widely regarded as strong, generally exceeding sales volume for this period last year. Some dealers note a slowdown in April sales numbers following a "feverish" March pace. Some dealers are struggling to keep pace with the strong sales volume, noting a less-than-average inventory position. Shortages have been centered in sport utility vehicles and light trucks. Banking and Finance Lending activity in the District is mixed for both commercial and consumer loans. Demand for consumer loans has leveled off, as is typical for the season. Demand for commercial loans has softened for some institutions. There is no change in credit quality. Consumer and commercial loan delinquencies remain low and generally unchanged over the past few months. No changes in credit standards have been reported. Still, the spread between borrowing and lending rates remains narrow, and competition for borrowers is considered fierce by industry sources. Return to top Philadelphia Richmond