March 7, 2001 Federal Reserve Districts Fourth District - Cleveland

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Economic activity in the Fourth District remains weak overall, but the landscape is mixed, with some sectors weathering the slowdown better than others. Roughly speaking, sectors tied directly to households, such as retail sales and residential construction, appear to be holding up better than heavy industry, such as steel and capital equipment. While there have been some layoffs, mainly in manufacturing, most households have yet to feel directly the effects of the slowdown; the unemployment rate remains relatively low, and wage growth has generally continued along last year's trends. Industrial Activity The District's industrial producers continued to experience flat to declining demand for their products in the first two months of this year. Although heavy truck producers--one of the hardest hit groups last year--saw orders improve in January from the level averaged over the last half of 2000, contacts still expect a 30 percent decline in the industry's production for 2001. A survey of metal forming manufacturers revealed that most (61 percent ) expect their business to decline over the next three months. About a third have laid off workers or have put their plants on short time. They also reported that the number of customers who pay less promptly has increased, from 15-20 percent in the first half of 2000 to 39 percent currently. The steel industry continues to suffer from both weak orders and over supply. Contacts do not expect steel prices to rebound this year given weak demand, high inventories, and strong competition from foreign imports. While steel producers are getting more orders than at the end of 2000, orders currently remain well below levels reached this time last year. Consumer Spending Some contacts reported that sales were weak through January, while others experienced modest improvement. All contacts reported that sales have picked up during the first couple weeks of February, though sales were well below those of last year at this point. Sales of women's apparel and electronics are doing well, but men's clothing and housewares are still down. All contacts expected the situation to remain unchanged through the first half of 2001 with perhaps some sales growth at the end of the year. Over the first seven weeks of 2001, District sales of new vehicles were steady, but a little below expectations. Moreover, all area auto dealers reported that sales were up from the end of last year when sales were weak. The dealers offering aggressive incentives programs reported the strongest sales. Improved weather also was credited for boosting sales over December's level. Dealers still reported that fewer customers are coming into the showrooms than in the first nine months of last year. Most dealers reported inventory positions at or in excess of 75-days of sales; levels around 60-days are typically preferred. Used vehicles sales have been surprisingly strong recently. Labor Markets Demand is still strong for some occupations, for example, skilled administrative assistants, low skilled clerical workers, and experienced receptionists, but not for manufacturing workers or manual labor. In response to slower sales, some stores have instituted hiring freezes and cut back store clerks' hours. The demand for temporary workers softened. All contacts reported that they received virtually no new requests for temporary workers in January, although hiring improved during the first two weeks of February. Nonetheless, demand remains well below that seen throughout most of 2000. Organized labor contacts reported virtually no change in the rate of wage growth in current contracts, with the notable exception of the public sector. So far in the first quarter--a particularly heavy renegotiation period for public sector workers--wage growth averaged 3.8 percent compared to 3.5 percent in the last quarter of 2000. Construction Commercial builders throughout the District reported a decline in the demand for new construction. However, not all segments of commercial construction appear to be out of favor. Municipal governments are said to have amassed relatively large surpluses, and are still in the market for construction services. As a result, many firms that have focused on private building in the past are attempting to reorient themselves to take advantage of the public work that remains available. For similar reasons, some commercial construction firms are now said to be turning to the still robust residential market. Residential builders are cautiously optimistic about their prospects in 2001. For the year so far, most reported steady sales. Buyers seem to see the current circumstance as a buying opportunity, in part because of lower interest rates. Homebuilders, nevertheless, remain guarded, concerned that the current economic uncertainty could soon spill over into the sector. Cost pressures remain muted for both commercial and residential builders. In particular, drywall costs are down, and lumber prices are at an 18-month low. Labor also appears to be more plentiful, with the labor shortages of last summer reportedly a thing of the past. Banking and Finance In the past six-week period, commercial loan activity was at about the same level as that experienced in the fourth quarter of 2000. The decreasing cost of funds eased the liquidity problems that were reported in our last round of calls and have also generated an increased rate of mortgage refinancing activity. Delinquency rates did not change significantly, but banks are watching more closely their customers' ability to make payments. Trucking and Shipping Most companies reported decreases in tonnage shipped and revenue earned since the end of 2000, anywhere in the range of 2 percent to 8 percent , but a few contacts indicated that they are even or slightly above the same period last year. Note that the year-over-year drop-off is misleadingly small--the beginning of last year was slow because Y2K worries led to overstocked inventories. Compared to the end of last year, manufacturing shipments declined substantially, particularly for steel, automotive, heavy trucks, and capital goods. Shipments of electronics and retail goods declined to a lesser extent. Return to top Philadelphia Richmond