December 8, 1999 Federal Reserve Districts Fourth District - Cleveland

Skip to content Summary Districts Boston New York Philadelphia Cleveland Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco Full report

No major changes in District business conditions have been observed since the last report. Spending and production remain strong, and labor markets are tight. Wages are still rising a bit faster than they did during the first half of the year, but retail prices are holding steady. No significant Y2K concerns were identified. District employment agencies reported continued high demand for temporary workers, and increasingly, firms are retaining these workers on a permanent basis. Contacts also reported strong seasonal demands for workers in customer service, production, warehousing, and distribution. Demand for seasonal help is expected to surpass last year's record levels. Although our contacts continue to express difficulty finding and retaining qualified workers, none reported an acceleration in wages from the last District report. Union sources indicated that wage growth is edging higher in many industries (averaging just slightly above 3 � percent relative to a year ago). Similarly, contacts reported significant improvements in pension benefits, which they linked to the strong performance of U.S. equity markets. Modest gains have also been made in the provision of job security for a variety of industries. These have typically taken the form of no-layoff clauses, retraining for displaced workers, and outsourcing restrictions. Construction Building activity in the District is still strong overall, as a rise in commercial building has largely offset a moderation in residential construction activity. Residential sales continue to slow, a trend that began in September. One residential builder reported that sales volume for the third quarter was down as much as 15 percent from the same period last year. That pattern is thought to have continued this quarter, and projections for the fourth quarter are 20 percent to 30 percent below a year ago. Still, relative to longer-term trends, the current pace of new home sales is thought to be somewhat high. Commercial builders reported improving conditions. The construction and renovation of office space remains strong, while demand for warehouse and manufacturing space has improved markedly. Commercial builders also reported an easing in materials' cost pressures. This development has helped to improve profit margins, which had been under pressure earlier because of softening sales volume and rising material and labor costs. Framers and carpenters remain difficult to find in the District. Lumber and drywall also remain scarce, though less so than during the summer. Despite the exceptionally tight markets for labor and materials, contractors estimate 1999 cost increases of only 3 percent to 5 percent. Agriculture The combination of below-average harvests resulting from the summer drought and low crop prices has resulted in substantial losses for many Fourth District farmers. More farmers than usual are rolling over this year's operating loans until next year. In southern Ohio, where the drought was worst, many farmers will enter the 2000 season in financial distress. In northwestern Ohio, dry soil continues to be a problem for wheat farmers, and there is concern about the condition of pasturelands. Many contacts in southern Ohio and Pennsylvania are growing uneasy about low water tables, as the planting season approaches. Kentucky's tobacco crop is predicted to be about 10 percent below last year's levels, with the same number of acres harvested. Also, recent warm weather has been detrimental to the curing of tobacco. Kentucky tobacco farmers, however, will see some relief this year as they receive settlement checks from the tobacco companies in the latter part of December. Crop prices remain depressed, and in the last few weeks, milk prices have dropped precipitously (by about 25 percent to 30 percent). Previously, dairy farmers had been among the few farmers not under pressure from low prices. Industrial Activity Industrial activity in the District is good and still improving, following a mid-summer slowdown. Heavy-truck orders have come down somewhat in the past month or so, a development that one industry analyst has tied to a glut in the used-truck market. October orders were at the lowest level in three years. A major auto supplier indicated continued good orders and production numbers in October. Construction equipment manufacturing is holding steady at a somewhat low level, although a rise in export orders has been seen. Agricultural equipment orders have also seen an uptick recently. The demand for steel in the Fourth District remains strong. As a result, steel production has picked up, and steel inventories have fallen to levels that are now considered about normal. Prices are on the rise across all products although most product prices are still well below the levels of last year. While conditions appear to be improving in this industry, District steelmakers generally reported poor third quarter earnings. Consumer Spending The fast-paced growth of retail sales slowed somewhat in October, but most retailers still reported that sales remained quite high and that growth had come down from phenomenal increases to merely very strong increases. The modest slowing in October might be associated with unusually mild weather in the Fourth District that damped demand for seasonal items such as apparel. Retailers hold optimistic expectations for the Christmas season. Sales projections for the season call for gains of between 5 percent and 6 percent over last year's strong numbers. Although information at this point is still very preliminary, retailers contacted in the days following the Thanksgiving holiday reported better-than-expected sales numbers. Inventories are low for most retailers, and that has increased profits. However, retail prices remain flat. Sales of new vehicles appear to have returned to a record pace after a slight October slowdown. Most dealers report sales were up 5 percent to 15 percent over this time last year, and year-to-date sales of new vehicles are running 5 percent to 45 percent above a year ago. Consumer demand for light trucks is especially strong, and some District dealers are worried that their inventory positions for new trucks are insufficient to meet continued strong demand. Banking and Finance Lending activity in the District is generally down. On the supply side, some banks are reporting that it is very difficult to attract deposits as customers increasingly rely on equity markets as a place to put savings. The result has been a rise in the loan-to-deposit ratio at District banks. Moreover, credit standards are thought to have tightened a bit in response to somewhat elevated consumer-debt loads. Loan demand has softened in response to rate increases. One exception is automobile finance, where discount-loans have generated extremely strong demand for credit. The rate of loan delinquencies is holding at a low level for all borrowing categories, and credit quality is thought to be relatively high. Still, the spread between borrowing and lending rates is narrowing (in accordance with the observed long-term trend), and competition for borrowers is stiff. Return to top Philadelphia Richmond