April 23, 2003 Federal Reserve Districts Fourth District--Cleveland

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Economic growth remained subdued in the Fourth District during March and the first two weeks of April, and reports regarding economic conditions remained mixed. Although activity in commercial construction and steel manufacturing remained weak, the tone of reports from our contacts in other industries was generally more positive than it has been in the last three reports. For those contacts who reported increasing economic activity, most characterized improvements as "slight" or "small." Stories of deteriorating conditions were significantly fewer in number; many of the contacts who had noted weakening conditions in the last report saw moderating conditions in this one. Very few firms reported any noticeable change in their business due to the onset of military action in Iraq. Retailers noticed a slowdown in traffic only during the first few days of the conflict. The outlook of contacts in our District seems to be improving slowly. With the exception of steel manufacturers and a few durable goods manufacturers, none of our contacts expect conditions to deteriorate further. Most contacts expect conditions to improve somewhat in the next six months. The labor supply in the District is plentiful, and no firms reported difficulty in hiring for open positions. Significantly fewer firms noted plans to reduce their labor forces. Several contacts reported continued increases in labor costs due to health care and other benefits. Manufacturing Most manufacturers noted that production and sales in March were flat or slightly improving on both a monthly and year-over-year basis. Finished-goods inventories have fallen across the industry, and the level of idle capacity appears to have decreased from the last report. In general, growth was stronger in the nondurable goods sector than it was in the durable goods sector. Nondurable goods producers reported steady or increasing employment as well as significant overtime at their plants. Some contacts attempted price increases for their products that appear to have stuck. The outlook among our nondurable goods contacts was positive; most anticipate an increase in both sales and production in the near future. Durable goods manufacturers reported some layoffs and staff reductions, as well as shortened overtime schedules. Some durable goods producers attempted to raise the prices of their products over the last two months, while others reduced theirs. These price changes have remained intact. Most durable goods manufacturers expect conditions to remain flat in the near future, but some expect increased sales and production during the latter half of 2003. Monthly production at every automobile plant in the District increased in March, but the level of overall production in the District was down slightly compared with one year ago, even after adjusting for models that were discontinued. One plant closed for the first time in two years because of slower-than-anticipated demand for the model it produces. Demand for steel remained weak in March and early April, with production and sales equal to or slightly lower than February levels. While most firms anticipate conditions will remain flat in April, a few contacts voiced strong concerns about weak levels of new orders and feared further deterioration in conditions. Excess capacity ranges from 0 percent to 60 percent in the industry, and most firms reported inventories above desired levels. Prices have stabilized at low levels. Several firms tried to implement a 5 percent increase in their prices to cover rising production costs over the last few months, but the price increases failed to stick. Retail Sales Several retailers characterized the retail environment as soft in March but cautioned that several factors, including bad weather, the war with Iraq, and the "Easter shift" (in 2002, the Easter buying season fell entirely in March, but this year it falls mostly in April), make year-over-year comparisons difficult. Most said that they would be examining combined sales for the months of March and April to determine the health of their industry this spring. Most nondiscount firms reported comparable store sales roughly 3 percent to 7 percent below March 2002 levels, while discount retailers reported flat or slightly increasing sales. Still, discount retailers expect combined sales from March and April to be higher than one year ago. In general, some contacts noted an increase in current and anticipated sales promotions, and some noted inventory levels that were rising or higher than they had hoped. Contacts mentioned, however, that they expect to be able to manage inventories to lower levels in the coming months. Most contacts expect sales during the first half of 2003 to be very near the levels of the first half of 2002. Automobile dealers in the District suggested conditions had improved somewhat since January and February, when sales were poor. One contact characterized March sales as "almost robust." Inventories fell again in March, and contacts reported inventories ranging from 64 days to 85 days. Although a sixty-day supply is preferable, most dealers felt their inventory levels were manageable. Automakers offered additional incentives in March and April, which, dealers noted, play a big role in this market. Contacts are optimistic that summer weather and new models would bolster sales in the near term. Construction District homebuilders continued to report steady sales, at levels roughly 3 percent to 5 percent higher than a year ago. Although severe weather resulted in some slowing in sales and customer traffic in January and February, contacts reported that March sales and traffic were significantly higher, and quarterly sales were above most firms' projections. Commercial builders, in contrast, continued to report poor business conditions. Some contacts reported that conditions have remained depressed since the start of 2002, and others reported that business was down as much as 20 percent year-over-year in March. Some contacts in commercial construction, however, seem slightly optimistic about the prospect of improving conditions. One noted that architects are now busy, which suggests commercial construction will pick up before the close of 2003. Trucking and Shipping The trucking and shipping industry recovered from the seasonal slowing it experienced in January and February, and contacts reported that activity during March and the first two weeks of April increased slightly compared with the same period a year ago. Contacts reported fewer bankruptcies in the industry than one year ago. Some carriers have even begun to see some improvement in profits from the price increases they implemented at the end of 2002. Although some contacts had feared downward price pressures would emerge during late February and March, they did not materialize, and prices charged by shippers have remained fairly constant since the start of the year. Outside of seasonal factors, most contacts expect business conditions will remain favorable in the near future. Banking Banking contacts noted slightly improved conditions. Some contacts reported a year-over-year increase in the demand for commercial loans, a market that has been unequivocally characterized as weak in the District for more than a year. Consumer loan conditions remained relatively stable: Reports on consumer loan demand continued to range from slightly up to slightly down compared with one year ago. A few contacts noted some improvement in the creditworthiness of applicants. Most bankers reported that growth in core deposits was either flat or slightly up; credit standards and the number of loan applications had not changed; and mortgage, installment, and business loan delinquencies were down or flat compared with a year ago. Despite some signs of improvement in the industry, however, competition for borrowers was still intense and the squeeze on spreads continued as loan rates adjusted downward and funding rates remained relatively constant. Return to top Philadelphia Richmond