March 9, 2005 Federal Reserve Districts Fourth District--Cleveland

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Through the first two months of 2005, the economic environment in the District improved across an array of industries. Reports from retailers signaled a slight strengthening in business conditions. And production among the District's durable goods manufacturers generally rose as well, while nondurable goods makers saw steady production levels in early 2005. Residential builders reported better sales in recent weeks, though sales levels were less than at this time last year, and nonresidential contractors continued to report modest improvements in their industry. At District banks, borrowing by businesses continued to strengthen. Finally, demand for shipping services remained robust. While concerns about increases in some materials prices were reported, most input costs rose less rapidly or even fell throughout the last several weeks. Plans to expand employment still seem isolated, though staffing services companies reported that the number of job openings increased in recent weeks, and is dramatically higher than at this time a year ago. While contacts indicated that workers were not hard to find, some jobs requiring specific skills were reportedly becoming more difficult to fill. Manufacturing Production at the District's durable goods producers appeared to trend up through the first two months of 2005. This differs from the final months of 2004, which were marked by flat or falling production levels on a month-over-month basis. Production also appeared to be up slightly on a year-over-year basis at most District durable goods facilities, and new orders have generally grown since the start of the year, leaving many contacts cautiously optimistic. Automobile production at District facilities was also above the levels of this time last year despite planned production cuts at some automakers. However, domestic steel shipments softened somewhat in the early part of 2005, though they remained at high levels. Most contacts continued to think that the demand for steel was solid, and attributed the declines to increases in inventories among steel distributors and a surge in imports. Nondurable goods makers generally reported that production levels were steady for the first two months of 2005, and about the same as a year ago. Refineries, in particular, reported strong sales. Most nondurable goods producers did not anticipate a significant change in the economic environment in the months ahead. For most manufacturers, input cost increases appeared to abate, especially for food and energy items. While steel spot prices have fallen in recent weeks, price increases for inputs into the steel production process--especially coking coal and iron ore--were widely reported. Additionally, many steel contracts are currently being renegotiated, and may result in increased effective steel prices for many firms. Few nondurable goods producers planned any capital additions or hiring; however, hiring plans were more widespread among durable goods manufacturers. While most durable goods producers planned to keep their capital spending at about the same levels, those producers that planned increases wanted to expand capacity to accommodate an anticipated increase in demand. Retail Reports from retailers suggested some improvement in the economic environment in early 2005, though contacts continued to note that sales activity was weaker throughout the Midwest. Discount retailers reported that their sales were generally as expected through the first two months of 2005 and modestly above the levels of a year ago. One contact suggested that the improvement in sales was due to declining gasoline prices, which may have left consumer with more money to spend on other items. Specialty retailers reported results that were similar to discounters', if more mixed, and contacts expect good sales growth in the months ahead. Department stores, by contrast, continued to struggle, reporting that sales throughout the early part of 2005 were down from this time a year ago and below expectations. Auto sales were mixed throughout the District, though trucks and SUVs continued to sell well. Widespread incentives continued to cut the effective prices of new automobiles. Outside of autos, prices in recent weeks were stable, with a few exceptions. Some apparel product prices were aggressively reduced according to contacts, while prices for products made with steel were said to be higher. Construction New home sales and customer inquiries improved in early 2005 for most residential builders relative to the last six weeks of 2004, even after accounting for seasonal factors. Nevertheless, sales for many District builders were down on a year-over-year basis. Isolated input cost increases--for items such as steel, concrete, and lumber--that most companies can only partially offset have put pressure on builders' profit margins. Additional increases in concrete and lumber prices are anticipated. Regarding the outlook, many builders expect slower sales in the first half of 2005 than they saw throughout the first half of 2004. Nonresidential construction activity in the District increased modestly in recent weeks, relative to the end of last year. Client inquiries also increased in early 2005. Among the nonresidential construction categories, several contacts cited particular improvements in building related to the retail sector. However, most nonresidential builders' backlogs remain light. In general, contractors expect construction activity to improve throughout this year, albeit at a measured pace. As with residential builders, increases in materials costs were cited by nonresidential builders, for items such as steel products and insulation. While builders have attempted to pass these price increases on to their clients, they have had mixed success. Banking Large banks in the District generally reported some increase in loan demand among both their commercial and consumer clients. Loan demand was described as broad-based across commercial lending categories. For consumers, some large institutions indicated that home equity lending was especially strong; however, demand for mortgages and automobile loans appeared to be down somewhat. Smaller banks generally reported less robust activity, with commercial loan demand increasing only modestly, though more than in the consumer categories. Many banks noted that their deposit growth was flat or falling, but some contacts suggested that seasonal patterns partly explain the weakness. Trucking and Shipping Activity among trucking and shipping services providers continued to be strong through the early part of 2005, and above year-ago levels. Moreover, contacts described demand as strong across an array of industries. Accordingly, despite the strong demand seen throughout the last year, many firms are forecasting an even stronger 2005. Limited capacity, however, concerns contacts. Companies continued their attempts to attract workers through better benefits and wages, but have been unable to draw enough employees to meet demand. Firms are also planning truck purchases, but there are long lead times for delivery. Finally, any increases in fuel costs continued to be offset through surcharges. Return to top Philadelphia Richmond