September 20, 2000 Federal Reserve Districts Fourth District - Cleveland

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Growth in economic activity in the Fourth District has experienced little change since our last report, remaining moderate. Prices are stable for most goods except for the rising price of fuel. Wages continue to grow at a moderate pace. The fall in the rate of residential construction appears to have moderated. The market for temporary workers is described as tight, particularly for administrative secretaries. The tightness is expected to be exacerbated as college students return to school. All contacts indicated that demand for temporary workers is expected to increase over the next two months. Retailers and trucking firms reported that filling positions has been very difficult. Union contacts reported that recently negotiated contracts granted average wage increases of about 4 percent. The public sector experienced wage increases that were somewhat above the private sector, reversing recent patterns when this sector has tended to lag. The union contacts also reported success in negotiating stronger employment security provisions. Construction In contrast to the declining activity of the spring, District residential construction reportedly held to a steady pace during the past six weeks, albeit at low levels. Prices for new homes have fallen, while total costs have been flat, leading to a decrease in profit margins for homebuilders. The distribution of builders' costs has changed: Fuel costs have risen, while lumber and drywall prices have fallen. Conditions in the commercial building sector appear to have held mostly steady since the last report, although a small decrease in industrial building and warehouse construction was noted. No significant changes in labor and materials costs have been seen in this sector. Industrial Activity The demand for steel has softened a bit, causing a slight decline in its price. The lower demand is expected to continue until inventory in the steel service centers declines, which could take several months. Rising energy prices have significantly increased the costs of producing steel. Heavy truck manufacturers expect cuts in production as large as 20 percent year-over-year due to the low sales they have seen over the past six months. High fuel prices and low used truck prices are reportedly responsible for low sales of new trucks. These companies also reported a small decline in the demand for trucking services. Orders are flat for heavy construction equipment. Consumer Spending District retailers reported steady sales throughout the summer, although receipts did not match last year's season. Recent markdowns in summer apparel (in anticipation of the change to winter inventory) have done as well as expected. Retailers anticipate no change in spending in the next six weeks. Auto sales were quite strong in August when compared with previous months, particularly among those dealers whose manufacturers offered price reductions (often through rebates.) Despite the strong August sales, year-to-date performance is slightly below last year's strong pace. There is little evidence that total unit sales were affected by the increase in petroleum prices, although more consumers are choosing smaller cars with better gas mileage. The market for used cars is also strong, and some contacts reported that this was caused by the high price of leased vehicles. Agriculture Most District farmers expect high yields in corn and soybeans this year, with the exception of the northernmost counties, where yields are depressed by late planting, disease, and cloudy August weather. Dairy and livestock farmers also reported excellent production, with some areas predicting their best year on record. In spite of this, low commodity prices are ensuring that profit rates remain low in most farming sectors, and farmers in the north of the District are expected to show a net loss for the year. Banking and Finance Commercial lending has remained steady over the last six weeks, although the number of new loans is lower than it was one year ago. Mortgage lending is slowing and many contacts reported a year-over-year decline. Bankers attributed the decline to higher interest rates. However, auto loans, are still quite strong, fueled by the increase in summer auto sales. Most banks reported, however, that this acceleration has disappeared in recent weeks, and they do not expect auto loan growth to continue into the fall. Although the rate of loan delinquencies is generally reported to be unchanged, some contacts reported a rise due to increased debt burdens. Many of our contacts reported that people who formerly would have made large deposits are now investing directly in mutual funds and stocks, creating increased competition for deposits. Return to top Philadelphia Richmond