September 19, 2001 Federal Reserve Districts Fourth District - Cleveland

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The manufacturing sector in the Fourth District is weak. Poor sales during the first two quarters have caused some plant closings, hiring freezes, and layoffs. On the other hand, consumer spending appears to have increased slightly in August and September from the low levels of July. Prices for producer goods and retail products remain flat, as do wages. Demand for temporary workers has increased slightly from the very low levels of early summer. While demand decreased for highly skilled positions, it remains somewhat strong for warehouse workers, light manufacturing, and office support, especially in legal offices. Our contacts reported that many positions previously filled by temporary agencies have disappeared because of layoffs and plant closings. Agencies reported no trouble in finding qualified applicants (and in the last month, they experienced a large increase in the supply of applicants) and generally no pressure to increase wages. The agencies expect some increase in the demand for workers by the new fiscal year in January. Our union contacts reported negotiated wage increases of three to four percent for new contracts. In the steel industry, previously negotiated wage increases were reduced in exchange for new job-security provisions. All of our union contacts reported that employers are reluctant to hire new workers, and some have negotiated agreements that allow the employer to reduce the number of employees through attrition. Construction Commercial builders reported that construction throughout the District is stagnant, at levels of activity considerably lower than those of a year ago. This is true across all categories of commercial building. In order to keep skilled employees on their payrolls, many builders have accepted less profitable or less traditional types of projects more than they have in the past. District homebuilders noted a stable residential market. Although sales of new homes remain flat, home prices have been reduced. There are fewer backlogs of work, and most of our contacts reported that all of their subcontractors are producing their products on time. Prices for materials remain generally flat. Employers have been able to hire most trades people far more quickly than last year at this time. The only trades reported to be in short supply in some regions are masons, framers, and roofers. Industrial Activity Orders for steel stabilized at low levels in July and August. Demand for stainless steel remains weak. Prices for steel also stopped falling during the same months. Capacity at steel mills remains at about 75 percent; optimal capacity utilization is 92 percent to 95 percent. Most mills and furnaces reported operating for only five days a week, and layoffs of 5 percent to 10 percent were reported at many plants in the District. Demand for fabricated metal products remains very low. Sales have decreased 20 percent since last year, and bankruptcy auctions are up 25 percent. Many of the firms in this industry are experiencing large layoffs. On the other hand, some of our contacts reported a recent small increase in orders and anticipate that the difficult conditions may improve over the next year. Rubber and plastics manufacturers are experiencing much smaller demand, especially in the automobile sector, which is seeing declines of up to 30 percent in sales from last year. Inventories in rubber and plastics are down; some manufacturers would like to achieve even lower inventory levels. Sales of chemicals are sharply lower than in the spring. Transportation and shipping companies across the District reported the same level of activity in July and August as in the latter half of the second quarter. Some items, notably steel, dropped further from the already depressed levels of early summer. Other items, such as electronics and construction goods, are shipping at the weak levels of the beginning of the summer, while retail goods are being shipped at higher levels. A recent spike in fuel charges during the last few weeks, due to a refinery fire in Chicago, has not resulted in increased shipping prices. As in other sectors of the economy, firms involved in transportation and shipping indicated that it is much easier than last year to secure qualified workers. Consumer Spending Retail sales are generally reported to be flat, with several area stores reporting a small increase. Large shopping centers seem to be doing better than other stores, and items that are selling well include summer clothes and home decorations. All contacts expect sales to remain stable over September and October and do not expect substantial increases throughout the rest of the year. Automobile dealers reported that sales of new cars in August were slower than in a fairly strong July. Sales remain considerably lower than at the same time last year. The decrease is concentrated among domestic brands and luxury cars. Dealers attributed the softer sales to consumer fears of a declining economy. They also reported strong used car sales as consumers shift from the new car market. Inventories of new autos are being held at lower levels than last year because many dealers do not expect sales to increase until the spring of 2002. The demand for boats has declined to about four-fifths of last year's level. Sales have softened over the last 6-8 weeks, particularly for the large luxury fiberglass craft. Agriculture Dry weather in the northern part of the District has left farmers expecting to harvest only 50 percent to 75 percent of their average annual corn yield and 70 percent to 90 percent of their average annual soybean yield. Farmers in the southern part of the District reported far better conditions and anticipate an above-average harvest. Livestock farmers reported that business is excellent, and prices for beef are significantly higher than last year. Banking and Finance Lending activity in the District is mixed for commercial loans, with some banks reporting small increases and some small decreases. On the other hand, our contacts reported slight increases in consumer loans in August. There is a large increase in refinancing, which our sources attributed to the recent rate cuts and, to a lesser extent, to a consolidation of credit card debt. Our contacts also reported an increase in loan delinquencies and a slight decline in credit quality. On the other hand, the spread between lending and deposit rates has risen slightly. This has been attributed to lower short-term and deposit interest rates. Return to top Philadelphia Richmond