March 3, 2004 Federal Reserve Districts Fourth District--Cleveland

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Business conditions continued to improve slowly and steadily in the Fourth District in the first two months of 2004, as they have been since late last year. Manufacturers, for the most part, reported that their production levels have remained largely flat in recent months, but higher than at this time a year ago. Steel producers have seen demand surge recently. Retailers reported that business conditions have continued to improve in 2004, after ending 2003 with a somewhat disappointing holiday selling season. In the construction industry, residential builders continue to see strong sales, whereas conditions for commercial contractors remain less favorable. For banks in the District, loan demand in the first two months of 2004 was flat. Finally, shipping firms reported rising demand across an array of sectors. Few firms reported any plans to increase payrolls in the near term. In addition, reports of rising input prices were more common in this report than in the last, as commodity prices continued to increase in recent weeks and steel prices surged. Manufacturing Both durable and nondurable goods producers reported that production levels remained largely unchanged in the first two months of 2004. Relative to this time a year ago, however, production levels are higher for about half of the contacts surveyed. Manufacturers saw steady improvement in the economic environment in 2003. Most expect to see continued steady growth in sales and production for the remainder of 2004. In general, manufacturing contacts reported that their inventories were at acceptable levels. However, while the majority of nondurable goods producers reported holding less inventory now than at this time last year, most durable goods producers reported that their inventory levels were flat from year-ago levels. One notable exception: Some durable goods producers reported holding higher steel inventories because of current low levels of supply and long lead times for steel production. About half of all manufacturing contacts reported higher levels of unused capacity than desired. And more manufacturers reported using overtime in the last two months than previously, though few reported any plans to increase payrolls in the near term. In addition, several firms indicated that they expected to initiate more layoffs in the coming months. There were no reports of rising wages; however, firms reported continued concerns about rising health care costs. Input prices, for the most part, were flat in recent months, though there were reports of increases in commodity prices, especially steel prices. Rising freight prices--due to new regulations--were also reported. Most manufacturers noted that their prices had stayed flat or fallen in recent months. Domestic steel producers reported robust orders and increasing shipments in the last several months. Contacts reported steady demand from automobile and appliance manufacturers, improving demand in industrial markets, and an uptick in demand from construction companies. Aside from an increase in demand, some of the surge in recent activity is attributed to low levels of inventoried steel. Several steelmakers also reported that their order books are full for the rest of the first quarter, and many mills have seen their lead times increase significantly. A few firms reported that their production is being slowed by shortages of some raw materials, such as scrap steel. Prices for both flat-rolled and structural steel, as a result, have continued to rise in recent weeks, as much as 20 percent by some estimates. For most automakers in the District, automobile production accelerated sharply at the beginning of 2004; however, some of this surge in production is due to the normal seasonal patterns. For the five major automakers with facilities in the District, automobile production in the beginning of 2004 had fallen from year-ago levels. Retail Sales In general, retailers reported that sales activity since January had met or exceeded expectations, and they attributed this to improving consumer confidence, additional clearance activity, and the weather. Contacts at discount stores consistently reported that sales had increased from a year ago, whereas reports from specialty retailers and department stores were mixed in this regard. Retailers noted that consumer durables such as furniture, electronics, and appliances continued to sell well, as did novelty gifts and personal care products. In addition, sales of apparel items reportedly improved recently. Overall, inventories continue to be tightly managed and are reported to be flat or down on a year-over-year basis. Retailers reported that it is easy to find qualified workers. While there were no reports of rising wages, contacts did report increases in health care costs. In general, however, input costs remain unchanged. Automobile sales so far in 2004 have been soft, with many dealers attributing much of the sluggishness to bad weather. With the exception of trucks--sales of which have remained reasonably strong since the year began--sales are generally down from both the end of 2003 and this time a year ago. Numerous incentives remain in place for new cars, which have hurt used-car sales. Dealers that have reduced used-car prices have reported stronger sales recently. Construction Some homebuilders reported a slight slowing in activity early in the year because of bad weather, but in general, residential builders reported that business conditions remained strong in recent months and that they expect sales in 2004 to equal or eclipse sales in 2003. Materials costs have risen in recent weeks, notably for lumber, drywall, and steel. Many builders, however, have managed to offset rising materials costs by raising their own prices. Several contacts reported shortages of subcontractors in certain specialized trades. For commercial builders, conditions at the beginning of this year were little changed from those at the end of last year, as activity continues to be weak. Sales are especially sluggish in the Cleveland and Pittsburgh areas. But contacts continue to expect conditions to improve by mid-year, reporting several potential projects in the planning stages. Commercial builders reported less of a change in materials costs than residential builders, but noted increases in steel prices. Companies have also cut staffing levels. Banking Overall, loan demand in the first two months of 2004, among both commercial and consumer clients, was flat relative to the end of 2003 and a year ago. Competition for borrowers was characterized as strong. The number of mortgage refinancing applications remains much lower than at their zenith in 2003; however, originations have reportedly improved in recent weeks. Core deposit growth was mixed among institutions in the District. A few contacts suggested that current and potential customers may increasingly be moving money into capital-market instruments instead of deposits. Most banks indicated that there was little change in credit quality in recent weeks. Trucking and Shipping Trucking and shipping firms reported that demand has risen recently across an array of sectors, including manufacturing and retail. Most contacts indicated that they are operating at or near capacity. Several firms plan to expand their fleets in 2004--sales of heavy-duty trucks have reportedly risen sharply in recent weeks--but a limited supply of drivers could constrain any expansion. New so-called hours-of-service regulations also limit the amount of labor current drivers can provide. Freight rates have reportedly increased in recent weeks, in part from increasing demand and new regulations. And some companies are concerned about future fuel cost increases, after an announcement by the Organization of Petroleum Exporting Countries that it will cut current production levels. Return to top Philadelphia Richmond