March 5, 2003 Federal Reserve Districts Fourth District--Cleveland

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Economic conditions in the Fourth District remained mixed in January and through the first three weeks of February. On balance, conditions in this report were very similar to the last: Conditions in residential construction were positive. Although trucking and shipping contacts reported a slight seasonal decline, conditions remained generally stable. Manufacturing, banking, and retail reports were mixed. Commercial construction conditions remained poor. Winter weather did have an adverse impact on several businesses in the region. Businesses in retail and construction saw less customer traffic than usual, and many firms across several industries temporarily closed operations because of severe winter weather during the survey period. While hints of future improvement can be found in this report (for example, new orders in manufacturing increased slightly), little suggested conditions would change in the near future. In the current environment, contacts remained reluctant to forecast future economic conditions--most are basing future decisions on the expectation that conditions will remain flat over the next few months. A few firms reported reducing their capital expenditure plans since the first of the year, but most appear to have adopted a wait-and-see attitude before changing their budgets. Labor market conditions have deteriorated since the last report--several manufacturers reported having reduced their labor forces or planning to do so. The few firms that were looking for employees reported no trouble in hiring--one contact reported 8,600 applications for 200 jobs at a new facility that would be opening in the near future. Manufacturing In manufacturing, most nondurable goods producers reported flat or slightly increasing conditions compared with the end of 2002 and reported year-over-year increases in production and sales for January 2003. Durable goods manufacturers were not so uniform--some reported year-over-year declines in production and sales while others reported flat or improving conditions compared with a year ago. While reports on production and sales varied, reports on other business indicators were more similar. Most contacts reported idle capacity (some as much as 40 percent or 50 percent), curtailed capital expenditures, and labor force reductions. Those that increased production did so using overtime rather than by expanding their labor force. Reports regarding input prices were mixed, with roughly half our contacts noting significant increases, while the other half reported flat or declining prices. Looking forward, most contacts reported flat or slightly increasing new orders, suggesting a slight pickup in production in the coming months, but most firms were making no plans to increase their labor force or capital expenditures in the near future. Most contacts reported that they would be able to respond to a sudden pickup in demand by bringing their idle capacity on line. Severe weather curtailed District auto production during the third week of February, closing several plants in the area for at least one day. Despite these closings, roughly half the District auto plants reported year-to-date production above 2002 levels, and others reported year-to-date figures very near 2002 levels. Demand for steel continued to soften in January and during the first three weeks of February. Production and sales were slightly down from December 2002 levels but significantly below January 2002 levels. Steel prices remained under downward pressure even as the cost of production increased significantly throughout the winter. Many contacts expect significant reductions in the steel industry's labor force as companies renegotiate labor contracts. Labor reports were mixed among companies that did not have negotiated labor contracts: Some reported that they were planning to hire back some of the many workers they laid off in 2002, while others reported that they would lay off more workers if conditions in the industry did not improve in the next month. Retail Sales District retail reports remained mixed in January, ranging from slight declines (-1.2 percent) to strong gains (4.0 percent) in year-over-year comparable store sales. Although sales for Valentine's Day were characterized as robust, retailers reported that sales for the month of February were trending downward. Apparel retailers noted that seasonal promotions and clearance events had allowed them to move merchandise and reduce inventories. Most retailers are very carefully managing their inventories, as they expect sales to be flat in the coming months. Automobile dealers in the District characterized sales in January as "lethargic" (one contact noted that year-over-year sales were down 10 percent), but February reports were mixed. Most contacts noted a rebound in sales, but a few continued to report declines. Although dealers reported significant cuts in their advertising budgets (some as high as 20 percent), they were optimistic about sales in the coming months as manufacturers continue to offer incentives. As was the case in the last report, inventories remain high (seventy-five- to one hundred-day supplies--a sixty-day supply is preferable), but contacts were not as concerned about climbing inventories as they were in the last report. Construction District homebuilders reported that sales were steady, at levels slightly higher than at the start of 2002. Despite some slowing in consumer traffic (partially attributed to poor weather), demand remained reasonably strong in a favorable interest rate environment. Commercial builders, on the other hand, continued to report weak conditions. Worsening state and local budget crises have had an impact on the availability of public construction projects (a major source of business for some firms in 2002). Competition for available projects in all areas of commercial construction has increased. Some contacts noted, however, that architects have been seeing an increase in business, suggesting a pickup will occur in commercial construction in about a year. Trucking and Shipping Trucking and shipping activity slowed again in January, although most of this slowing was seasonal. Compared with one year ago, shipping volume in January was nearly flat--most contacts saw a year-over-year increase of about 0.5 percent. Contacts are expecting February shipping volume to remain flat, but note that the industry will see a seasonal pickup in March with an increase in volumes from auto manufacturers and their affiliated companies. For the first time in many reports, the industry experienced downward price pressure as companies respond to slowing demand (in the last report, contacts reported price increases). Profit margins have been shrinking as input prices, especially labor and energy, continue to rise. Companies are attempting to contain capital spending to replace worn-out equipment--several contacts noted recycling trucks or buying them off the secondary market. Banking In the banking sector, both commercial and consumer loan demand remained weak. Compared with one year ago, most contacts reported demand was flat or slightly down, but, for the first time in many months, some contacts reported that demand growth for mortgages was "robust" (attributed to both new and refinancing activity). For most banks, however, home equity loans continue to be the only source of growth in lending. The number of loan applications remained flat, and the credit quality of consumer loan applicants remained very poor. Competition for creditworthy borrowers remains intense. Contacts offered conflicting reports regarding loan delinquency behavior. Reports regarding core deposit growth were also mixed, with a few contacts reporting declines, but most reporting no change or growth. Those that reported growth attributed it to heavy promotions, including free checking. Most contacts reported a continued squeeze on spreads as loan rates adjust downward and funding rates remain relatively constant. Return to top Philadelphia Richmond