October 23, 2002 Federal Reserve Districts Fourth District - Cleveland

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Contacts characterized economic activity in the Fourth District during September and the first two weeks of October as "slowing," "stagnating," or "declining." Industries that had reported positive conditions in the previous report (residential construction, trucking and shipping, and automobile and home goods manufacturers) noted either slowing growth or no change in conditions compared with August. Industries that reported mixed or declining conditions in the last report (retail, commercial construction, banking, and manufacturers not related to automobiles or home goods) noted further deterioration in conditions. Agriculture contacts reported conditions worse than have been seen in the area for more than 30 years. Most contacts mentioned that uncertainty regarding both domestic and international events was having an adverse effect on their businesses. Optimism about the balance of 2002 appears to have dissipated. Most contacts expect business to remain flat through the end of the year. The exceptions are auto dealers and commercial builders, who expect activity to fall in the fourth quarter. Labor is in plentiful supply, as headhunters and temporary agencies reported an increase in people looking for work. Contacts reported no plans to hire additional staff, but no new layoffs either. Manufacturing Contacts in the manufacturing sector reported stagnant conditions through September and the first two weeks of October. Most reported that conditions in September were flat compared with August but that production and sales were still showing year-over-year growth. Some contacts reported slowing sales due to the West Coast ports' lockout. Manufacturers are cautious in their outlook for the remainder of the year--most believe conditions will remain flat. Some automobile manufacturers in the District continued to report overtime being worked at their plants, but the amount appears to have decreased since the start of September. Two major plants in the District reported temporary shutdowns--one halted production because of the West Coast ports' lockout, while the other did so to adjust inventories in response to weaker-than-expected demand. Steelmakers reported weak demand for their products in September and during the first two weeks in October. Production has slowed at most plants throughout the District. Some contacts noted that declining demand has resulted in price competitions as companies cut their prices. Most expect spot prices for steel will fall significantly before the end of the year. In the stainless steel industry, contacts noted that prices are 2 percent lower than at the start of the year. Retail Sales For the second consecutive report, Fourth District retail sales have faltered. Retailers believe that the uncertain international environment, shaky consumer confidence, and the declining stock market all contributed to the poor conditions. Most contacts reported that year-over-year, September 2002 sales were down as much as 10 percent compared with September 2001. With the exception of discount retailers, who reported year-over-year sales increases around 3 percent, contacts were surprised that sales this year were poorer than in 2001, given the lost sales due to the terrorist attacks last year. Mall traffic the last week of September was down roughly 10 percent year-over-year. Apparel sales continue to be very weak. As has been the case for several months, however, furniture, electronics, and other big-ticket home items continued to sell well. District retailers' outlook has become increasingly pessimistic. Contacts noted that they expect some fall-out from the West Coast ports' lockout. While a few retailers increased their inventories in anticipation of the lockout, others resorted to shipping their goods by air when the lockout began, resulting in increased costs. One firm made no changes with the onset of the lockout, and, as a result, reported that its inventories will be delayed 3-4 weeks. In general, contacts do not expect much improvement in retail conditions during the holiday season. Automobile retailers also noted slowing conditions in September and slowing October sales as well. Contacts reported that sales have become extremely dependent on dealer incentives. Most believe the slowing will persist--dealers are pessimistic about future prospects. They believe demand over the last year was high because of incentives and that sales will be depressed in the near future. Construction Little has changed since the start of September for District homebuilders. Customer traffic and sales are reportedly steady and at the high monthly levels recorded last quarter. Although some contacts reported a slight decline in customer traffic at the beginning of September, the change was not persistent. Homebuilders continue to offer incentives. Commercial builders reported unfavorable conditions for the fourth consecutive report. Competition remains fierce for the few commercial projects that are up for bid. Although there is some demand for medical and institutional structures, demand for office and industrial construction is especially weak. The outlook in the industry has become increasingly dark: Contacts reported that the architects with whom they typically work (whose projects are an indicator of future work for builders) are unable to find work. Trucking and Shipping Shipping activity showed no increase from the last report, but contacts continued to characterize demand as strong. Most companies imposed a price increase in late summer that has held through the second week of October, and contacts believe the higher prices will remain intact. The increase in prices did result in higher profit margins for most companies in September, but some contacts fear this may be only temporary, as diesel prices and insurance costs continue to rise. Less-than-truckload carriers, who had reported slower year-to-date growth in their niche than the industry as a whole, noted stronger activity in September and the first two weeks of October. The uptick is attributed to the bankruptcy and exit of a major competitor from the market. The West Coast ports' lockout resulted in more business for airfreight carriers. The industry is operating at full capacity, as retailers have begun shipping lighter, high-profit items (such as upper-end apparel and electronics) by air to keep their shelves stocked. Contacts expect this boost to be temporary, lasting only until normal shipping activity through the ports resumes. Banking The number of mortgage-related (first, second, and refinancing) applications for consumer loans remained extraordinarily high in the favorable interest rate environment, but the volume of applications for other consumer and commercial loans remains depressed. Competition for commercial loans to small and midsized companies is increasing as demand continues to fall. Lending activity to large corporate firms held steady, but remains soft. Contacts noted a disinclination among most customers to open new lines of credit or use existing ones, given current uncertainties in both the domestic and international environments. Among both commercial and consumer loan applicants, credit quality is deteriorating. Regarding existing loans, some contacts reported an increase in mortgage loan delinquencies and foreclosures. Others reported that commercial customers were current on their payments but that payments to their customers were being stretched out to 60-90 days delinquent. Agriculture Problems for District farmers persist. Some contacts reported that economic conditions are worse than they have seen in the last 30 years. Local prices for grain commodities are currently above the government assistance price floors, but yields are of poor quality and considerably lower than historical averages (some farmers reported yields that are as much as 75 percent below average). Livestock farmers are also facing tough conditions, as they are forced to purchase winter feed at higher prices and in larger quantities than usual. The prices of cows and hogs are well below the cost of production in some areas. For the most part, farmers are remaining current on their loan payments, but most are only making the minimum payment and, as a result, their loan principals are ballooning. Agricultural lenders noted that most farmers will rely on government, insurance, and disaster relief payments to avoid bankruptcy. Return to top Philadelphia Richmond