July 31, 2002 Federal Reserve Districts Fourth District - Cleveland

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Economic conditions in the Fourth District during June and the first half of July showed some improvement from the last report. Shipping activity continued to increase, reports of expansion in manufacturing have spread, and improving sales figures were reported across the retail sector (as opposed to only among discount retailers, as had been the case since the start of the year). Since the last report, however, banking conditions remained mixed, and commercial construction continued to struggle. Most contacts believe that business activity during the second half of 2002 will be stronger than the first, although many qualified their outlook with the caveat that the stock market decline and news of accounting scandals could scare consumers into holding onto their money. Many contacts reported having increased or planning to increase their capital expenditures. Some manufacturers reported having completed capital expansion projects that were started before the recession. Retailers reported expanding their chains as planned, with no or few delays. Commercial builders reported that many projects that had been on hold were finally begun during the survey period. In the trucking and shipping industry, if companies could, they were purchasing new trucks before prices rise as a result of tighter EPA standards that will take effect in October. Labor markets showed little change since the last report. The supply of labor remains plentiful, and those few contacts looking to hire reported that skilled labor was not difficult to find. Demand for temporary labor was up slightly, but contacts reported that this was typical for this time of year. Very few contacts plan to hire new workers or recall temporarily laid-off workers, although contacts seemed to think this would likely change in the next couple of months. Health care benefits remain a point of contention between unionized labor and employers, as do pension plan benefits--unions are pushing for defined-benefit plans, as opposed to defined-contribution plans. Contacts noted mixed price trends. As has been the case for a while, most contacts reported that the costs of health care and insurance were on the rise. Manufacturing contacts, however, reported that the cost of most of their inputs have been falling, as have the prices of their finished goods. Construction and retail contacts reported little change in prices. Steel prices have stabilized over the last month. Manufacturing The manufacturing sector saw expansion across the District in June. Several nondurable goods manufacturers saw expanded capacity come on-line recently (some of these projects were planned as early as 1999). Contacts reported that inventories are steady and now at acceptable levels--they had been higher than preferred during the first quarter. Overall, contacts reported that new orders rose through June and the first half of July, suggesting continued expansion. Manufacturers are optimistic that the recovery in the industry will persist. Automakers in the District again reported significant amounts of overtime in June. Most plants in the District were closed the first two weeks of July to retool their plants for 2003 models, although some closed the third week of July. At the time of the survey, some plants already had scheduled overtime for the fourth week of July. Steelmakers reported that business conditions remained steady through June and the first two weeks of July. Contacts in rolled steel reported that most of their mills were operating at or near full capacity and they are expected to be at full capacity through the third quarter because order books for August and September are filled. Demand for stainless steel is weak, considerably lower than at the start of the year. Prices for steel have held steady, as most of the spot price increases have already been implemented and most contract prices are not negotiated until the fourth quarter. Retail Sales Retailers appeared more optimistic in this report, with most noting improved sales since the last report. Discount retailers noted continued steady growth, while specialty retailers reported improvement in conditions relative to the first five months of 2002. Apparel retailers saw improved sales with the summer season, with one contact reporting record sales in one of its clothing lines. While a few contacts continued to report year-over-year losses, they noted that their losses were smaller in June. Contacts reported that inventories remained low because they were still managing inventories conservatively. For the most part, area retailers expect sales to increase at an annual rate of 1 to 3-1/2 percent during the second half of 2002. In contrast to most retailers, automobile dealers reported that new car sales steadily declined through June and the first two weeks of July. Used-car sales, however, have remained relatively steady. Dealers are pessimistic about business through the rest of the year, with most expecting year-over-year declines. Construction District homebuilders continued to report that they remain guardedly optimistic amid fairly stable business conditions. Commercial builders, on the other hand, continued to report an unfavorable economic climate through the survey period. Some commercial building firms report that year-to-date revenues are half what they were a year ago. Although commercial builders reported that the rate of customer inquiries began to increase in July, the increase was modest. Commercial builders, by and large, however, hope that the uptick signals the beginning of a better economic environment. Trucking and Shipping Contacts reported that trucking and shipping activity in the District saw strong monthly growth during June. Year-to-date, the industry is showing an increase in activity, despite a slowdown due to the Fourth of July holiday falling in the middle of the week. Shipments of steel and nondurable manufacturing goods have seen the largest year-over-year increases, but growth has been strong across all industries. Contacts remain optimistic that industry's recovery will continue. Banking Half our contacts reported no change in their net interest margin, while the other half noted tightening in the margin. Competition for borrowers remained aggressive as demand for commercial loans remained weak. On the consumer side, roughly half of our contacts reported that demand for loans was lower than last year, while half reported demand was higher. Demand for refinancing has slowed considerably since the start of the year. Both the rate of loan delinquencies and the credit quality of applicants have remained unchanged from the start of 2002. Agriculture Crop farmers (primarily corn and soybeans) reported being off to their worst start in 10 years. Heavy rain during the spring delayed planting--while May 10 is the target date by which farmers try to have all their crops planted, farmers were planting as late as the last week of June. Because crops were planted late, farmers were already expecting a poor year. Dry conditions through June and July have further depressed their yield estimates. Most farmers expect year-over-year losses. While livestock producers are experiencing a good production year, they reported that current market prices were below the cost of production. Except for cases where price contracts were negotiated, livestock farmers expect to experience year-over-year losses for the first time in many years. Return to top Philadelphia Richmond