September 22, 1999 Federal Reserve Districts Fourth District - Cleveland

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General Business Conditions and Labor Markets The Fourth District economy shows sustained strength in spending and production, labor markets remain tight, and wage growth has increased. While greater price pressures are noted at the manufacturing level, retailers continue to see stable prices. District temporary employment agencies indicate steady demand, overall, and report continued difficulty finding and retaining qualified workers. While there appears to have been a decline in the demand for general labor, such as entry level clerical and assembly line production workers, agencies note a sharp increase in orders for legal and executive secretaries, account executives, bookkeepers, engineers, and information technology specialists. Tight labor markets have prompted temporary help agencies to raise wages. For some, wage growth has been substantial, as in the case of administrative assistants, who have seen hourly wages rise by about 20% since this time last year. Union sources also note a shortage of skilled workers, and higher training and development costs are reported for steel workers. Wage growth has risen for virtually every industry, with growth rates ranging from about 3-5%. Construction District builders are seeing strong third quarter sales, although some home builders note a modest slowdown from the exceptionally high sales levels reported earlier this year. Home builders are still reporting material shortages, and cost pressures are growing in a few key areas, like drywall, lumber, and insulation. Overall, residential building material prices are estimated to have increased on the order of 3-4% during the year. Similar increases are reported for the wages of residential construction workers. Nevertheless, the profits of residential builders are thought to be good, and rising, as new home price increases outpace the rise in building costs. Reports from commercial contractors are more mixed than for their residential counterparts, although most respondents report that conditions are holding steady at a relatively high level. Materials shortages and rising cost pressures have been seen, and some commercial builders report rationing by drywall distributors. Other commercial builders report a higher backlog among subcontractors. Agriculture The drought has seriously affected agriculture in the southern reaches of the Fourth District. Yields from the District's corn and soybean harvest are expected to vary widely across the District. Some areas of northern Ohio are reporting yields that are slightly above average, while in southern Ohio and Kentucky, the corn crop is less than one half its 1998 harvest. There are reports that some farmers in eastern Kentucky are cutting corn and soybean crops for cattle feed because of poor crop conditions, lack of adequate cattle forage, and low crop prices. Recent rains in some regions of the District have improved pasture lands, but grazing conditions are still poor. Farmers in southern Ohio and eastern Kentucky are feeding hay to their livestock, and some farmers are paring down their herds. Tobacco is also suffering from the drought, and some areas of eastern Kentucky are expected to show yields 30-40% below normal. Industrial Activity Manufacturing activity appears to have improved somewhat since July. New orders growth is generally reported to have picked up in August and production continues to rise. Commodity prices are rising after having shown no significant change over much of the year; higher prices are seen for a variety of metals, plastics, and paper products. Foreign steel imports remain high. Still, the demand for steel is high due to strong orders in the auto and construction industries. Several steel companies in the District have announced 5-7% price increases on stainless steel products and many have reduced their price discounting, although prices are still low relative to their peaks of a few years ago. Industry sources report no inventory stockpiling in anticipation of a Y2K disruption. Consumer Spending Retail sales continue to show exceptional strength. Sales of apparel goods are particularly strong. District retailers expect strong sales to continue into the fourth quarter holiday shopping season. Retail inventories are low. Moreover, some retailers plan to accelerate their year-end inventory stocks as a Y2K precaution. The demand for retail sales space in the Fourth District is reported to be very high. Almost all retail contacts reported that they have recently expanded their outlets or anticipate opening new stores soon. Sales of new vehicles remain brisk. Most contacts report light or insufficient inventory due to the strength of this summer's sales, although inventory positions appear to have improved with the arrival of the new model year. Dealers anticipate strong sales for the remainder of 1999. Banking and Finance Lending activity in the District is steady for both commercial and consumer loans, with commercial loans holding at a high level. Mortgage refinancing is down considerably; one large bank reported that refinancing is now down to 15% of its mortgage business after accounting for about half of its business in 1998. The rate for loan delinquencies is holding at very low levels. Credit quality is good and no change in credit standards is reported. The spread between borrowing and lending rates is narrowing in accordance with the observed long-term trend. Competition for borrowers is still fierce, but some sources report an easing from a year ago. No identifiable Y2K-related change in customer deposit behavior has been observed. Return to top Philadelphia Richmond