November 27, 2002 Federal Reserve Districts Fourth District - Cleveland

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The Fourth District's economic activity showed mixed signals during October and the first two weeks of November. In the manufacturing and banking industries, reports varied widely from firm to firm, with little consensus regarding industry conditions. Other industries offered signs of growth: Conditions in retail showed modest improvement after two consecutive reports of declining conditions, the slowing in homebuilding activity in the last report appears to have been temporary, and trucking and shipping activity remained steady. Signs of weakness were also present, however, as commercial construction continued to report dismal conditions; steel manufacturers reported falling demand, production, and prices; automobile dealers noted a drop-off in sales; and agriculture continued to report poor conditions. Despite varied reports of current conditions, most contacts shared a similar outlook: November and December conditions are widely expected to remain much as they were this October. While opinions on exactly when conditions will improve in 2003 varied, most expect the economy to begin improving no later than the close of the second quarter. Labor conditions were mixed. Some contacts reported slightly expanding their workforces, while others reported imminent layoffs. Firms that are looking for help (including retailers hiring seasonal help) reported no difficulty in finding employees. Manufacturing Reports from the manufacturing sector varied widely, with little consensus regarding current conditions in the industry. Compared with September, October production at local facilities either remained the same or decreased slightly for most producers, while sales remained steady or increased slightly. In general, durable goods manufacturers reported increased year-over-year production and sales but expect conditions to slow in the near term. Nondurable manufacturers reported year-over-year decreases in production but sales figures that were comparable with one year ago. Nondurable manufacturers expect conditions to improve in 2003. In general, manufacturers have been able to significantly reduce their inventories. On the nondurables side, some contacts reported increasing their workforce by either recalling laid off workers or hiring a few new workers. On the durables side, however, some contacts noted cuts and possible layoffs. Several contacts noted significant increases in the prices of some of their inputs. Most have passed on these increases to their customers, although a few noted they could not pass on all of the increases or that their increases did not stick. Automobile manufacturers in the District reported stable conditions. One plant in the District, which had shut down temporarily in mid-September to adjust inventories in response to weaker-than-expected demand, resumed overtime at the plant in October. Steelmakers continued to report weak demand for their products during the survey period. Production continued to slow at most plants throughout the District. As expected, spot prices have fallen roughly 10 percent since September 2002. Contract prices, most of which were negotiated earlier in the year, are considerably higher. Contacts expect demand to remain soft through the first quarter of 2003, primarily due to increased domestic inventories and continued competition from imports. Retail Sales Nondiscount retailers reported a slight improvement in conditions in October. Although some contacts still reported negative year-over-year figures, these reports were an improvement over the survey period. Other retailers reported flat conditions or slight growth in sales. Some also noted a slight pickup in mall traffic. Discount retailers reported that their October sales were between 3 percent and 13 percent higher than last October (and last October's sales were strong for them as well). While some contacts noted pressure to run promotions and engage in price markdowns and discounting, most noted that promotions were at about the same level as in years past. Promotions are expected to pick up after Thanksgiving. Most retailers anticipate modest improvement in sales this holiday season compared with last year (estimates ranged from 1.5 percent to 4 percent). Automobile retailers noted that sales had weakened in October and continued to show weakness the first two weeks of November. Contacts reported that year-over-year figures show significant decline, but this is partly due to exceptionally strong sales in October 2001. Most contacts reported decreased showroom activity, and inventories are climbing, ranging between 70 days and 90 days (in general, dealers target 60 days). Dealers expect conditions to remain soft through the balance of the year. Construction Most area homebuilders reported that they are ahead of their sales plans for the year. Although some contacts reported a slight decline in customer traffic in the last report, the change was not persistent--sales rebounded in October and the first two weeks of November. Smaller firms, in particular, noted sizable increases in sales in the last six weeks. Despite a favorable interest rate environment, conditions in commercial construction continued to worsen. Business clients are reluctant to make significant capital expenditures, given current uncertainties in both the domestic and international environments. Contacts reported that smaller construction firms are beginning to cease operations because they cannot compete with larger firms for bids, and layoffs continue at firms of all sizes. Trucking and Shipping Trucking and shipping activity was steady over the six weeks covered by this report, and contacts continued to characterize business conditions as positive. Most carriers expect activity to remain steady or increase slightly through the balance of the year. Price increases from the summer have stuck, and fourth-quarter profits are expected to be higher than originally forecast. The tightening of emissions standards in October resulted in a de facto reduction in capacity in the industry (companies have been slow to replace old equipment with new and unproven engines designed to meet the standards), and as a result, trucking and shipping firms are not attempting to undercut their competition. Banking Loan demand was mixed in the District in October and the first two weeks of November. Growth in commercial loan demand was flat (although a few contacts reported modest gains). Contacts noted that growth in consumer loan demand, which had been characterized as strong in previous reports, slowed considerably over the last sixty days. Consumer loan activity was largely driven by refinancing activity. Most banks reported steady growth in core deposits and attributed this to aggressive marketing features such as free checking and free on-line bill payment. Regarding existing loans, contacts reported that loan delinquencies were up slightly compared with last year. Agriculture The severe weather that moved through the area did not affect most farmers in the area because their harvests were already completed, but a few dairy farms reported damage to their facilities. While some grain farmers reported yields near their historical average, most reported yields 50 percent to 75 percent below average. Prices for dairy and livestock farmers' commodities remain low, but input prices, especially feed, are on the rise. Return to top Philadelphia Richmond