July 26, 2006 Federal Reserve Districts Fourth District--Cleveland

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The District's economy continued to expand in June and early July, but showed signs that growth was beginning to moderate. Most manufacturers reported steady production in the six weeks ending in early July. Retailers, however, reported a softening in sales, attributing this to high gasoline prices and rising interest rates. While commercial building continued to show modest growth, residential construction has weakened since May. Demand for trucking and shipping services continued to be strong and broad-based. And while commercial and consumer borrowing generally remained steady, there were reports of some deterioration in consumer credit demand. In general, hiring continued to be limited throughout the District. Staffing-services companies reported that job openings increased only modestly in June. However, demand is still high for healthcare and insurance industry workers. Only a few manufacturers were concerned about wage pressures and this was mainly due to expiring labor contracts. Almost all contacts reported some increase in input costs, especially for petroleum products and metals. Commercial builders, nondurable goods manufacturers, and trucking firms frequently reported that they could pass these costs along to their consumers relatively easily. Retailers, however, reported that they were generally holding prices steady. Manufacturing For the six weeks through early July, the District's durable good producers generally reported steady production, at levels above those of this time last year. Among important District industries, steel producers continued to see steady demand from an array of industry segments, including the energy, heavy truck, aerospace, and commercial construction sectors. Steel shipments to the automotive market, however, were generally weak. District auto production appeared to echo this, with production weakening recently, as well as on a year-over-year basis. Most durable goods producers expected current levels of activity to continue through the end of the year. Most also reported that they had little idle capacity, and accordingly planned to increase their investment spending. Hiring was widely reported, with many firms indicating an intention to continue to hire through the rest of this year. Production at the District's nondurable goods facilities also appeared to be steady in the six weeks through early July, but only above year-ago levels for half of the companies contacted. About half also expected activity to improve through the remainder of 2006. However, few firms planned to increase their investment spending in the coming months, and few planned any staff additions. Among all manufacturers, wage pressures were not widespread, though increases in materials costs were widely reported, in particular for some petroleum-based products and copper. Nondurable goods producers generally sought price increases more frequently than their durable-goods producing counterparts. Retail Sales at District retailers were soft through the six weeks ending in early July. Most contacts attributed weaker sales to high gasoline prices and rising interest rates. Among apparel retailers, sales were reported to be on-plan, but less than a year ago. Contacts were rather pessimistic or uncertain about activity in the near future. Sales at discount stores were soft and below-plan in June. These contacts reported that shopping traffic slowed and that lower-income customers were making fewer purchases. Finally, sales at drug stores were mixed. Almost all retailers noted that utilities, shipping, and construction costs were up dramatically on a year-over-year basis; nevertheless, product prices were holding steady. Most retailers noted no unusual activity in hiring, however, one contact cited a slow-down due to business uncertainty. Regarding sales of new vehicles, foreign nameplates continued to outsell their domestic counterparts. Used vehicle sales remained relatively steady. All dealers reported that showroom traffic was down and that, to a significant extent, sales continued to be dependent importantly on incentives. Construction New home sales since late May continued to weaken, with sales down on a year-over-year basis. Traffic was also less than at this time last year. In addition, some builders reported an increase in cancellations, with the inability of individuals to sell their own homes offered as a partial explanation. Under the circumstances, many contractors have radically reduced their speculative building. In general, builders' backlogs have also fallen from year-ago levels. Regarding materials costs, most builders thought that overall costs changed little in recent weeks, though several reported rising copper and petroleum-product costs. Several contacts also reported trimming their staffs, while subcontractors are reportedly readily available. About half of those contacted noted that they had increased incentives or discounts recently. The District's commercial contractors reported that the economic environment remained better than at this time last year, and that customer inquiries continued to be strong. However, some contractors reported a softening in sales since the end of May. Still, for most firms, backlogs remained relatively strong. Among the segments where sales remained robust were manufacturing, health care, and education. Input cost increases were widely reported, notably for petroleum-products and copper. Most builders reported that they can easily pass these price increases through to their new customers, but aren't generally able to adjust current contracts with existing customers. Few firms changed their staff sizes in recent weeks. Banking At District banks, both commercial and consumer borrowing remained relatively steady since the end of May. However, some smaller institutions noted a further deterioration in consumer credit demand. A contact at a large institution reported an increase in the demand for commercial credit lines; however, he indicated that this had yet to translate into additional borrowing. This was interpreted as a possible sign of underlying uncertainty. Credit quality continued to be strong, though there were some reports of rising delinquencies. Finally, in general, growth in core deposits was described as steady. Transportation Demand for trucking and shipping services remained strong through early July, although most contacts noted a small decrease in tonnage compared to a year ago. High fuel costs remain a concern. However, trucking companies continue to easily pass on these costs to end-users using surcharges. As previously reported, carriers are coping with high driver turnover and shortages. Nevertheless, most contacts reported little movement in wages. Return to top Philadelphia Richmond