January 15, 2003
Federal Reserve Districts
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According to reports gathered from December 23 through January 3, the Fourth District's economy continued to show mixed signals during the last six weeks of 2002. Although some deterioration in conditions was noted among contacts in the nondiscount retail, automotive retail, steel, and banking industries, it appeared that more contacts saw flat conditions or slight improvement. Both homebuilders and trucking and shipping contacts reported continued favorable conditions in their industries. Commercial builders, for the first time in more than a year, reported signs that improvement may come with the new year, and most manufacturers appeared cautiously optimistic that new orders and conditions would pick up in the first quarter of 2003.
That said, uncertainty over the economic outlook remains in the Fourth District. Many contacts seemed to expect flat conditions for 2003 only because they were not sure how geopolitical risks and equity markets would affect consumer confidence and their customers' willingness to spend money. Other contacts, however, particularly in banking and commercial construction, seemed to note cues from their business customers that slight optimism was emerging regarding 2003 prospects.
Labor conditions were stable, although some firms reported difficulty in finding qualified managers. Other than seasonal adjustment of labor forces in retail, very few labor changes were expected among District companies.
District auto plants reported fairly mixed conditions--roughly half the models produced in the District showed an increase in production in the first three weeks of December compared with the first three weeks in November 2002, while the other half showed a decrease. This was also true when comparing production for the first three weeks of December 2002 with the same period in 2001. Overall, however, 2002 production in the District was higher than 2001 production for all but one company. None of the plants reported temporary closures in the last six weeks of 2002, but one reported that it ended production of one of its model lines in December.
Steelmakers reported that demand softened yet again in December and noted that while some of the decline in demand was seasonal, part of it was because their customers had built their raw-materials inventories when prices began rising. Demand is expected to remain soft during the first quarter, due to an oversupply of steel in the industry. Prices, which fell roughly 20 percent in Q4:2002, were expected to continue falling in Q1:2003.
Contacts noted some pickup in sales during the week of Christmas and the following week but did not expect the pickup to persist. Most contacts expected sales for Q1:2003 to be flat but did not have solid expectations beyond the first quarter, citing uncertainties in the geopolitical environment and wavering consumer confidence as reasons they could not make projections for sales in 2003.
Although auto dealers in the District saw a slight increase in sales during the last week of November and the last week of December due to manufacturers' incentives, most reported sluggish sales for the last two months of 2002. Inventories among auto retailers were climbing--most dealers try to keep a sixty-day supply on their lots, but contacts reported inventories ranging from seventy-day to more than one hundred-day supplies. Although sales slowed considerably in Q4:2002, overall sales for 2002 were expected to be above historical averages, though not as high as 2001, which was a record year. Looking forward, contacts expected the level of sales in 2003 to be flat or slightly lower than 2002 levels.
Trucking and Shipping
Despite slowing demand, excess capacity in the industry remained at very low levels, and price increases continued to be reported across the industry. These price increases have not resulted in larger profits: most of the reported increases were spurred by increased costs of inputs, especially health and collision insurance costs.
On the consumer side, loan demand was steady and continued to be fueled by home equity loan activity (most of which was refinancing). The number of loan applications remained steady, but contacts noted that the credit quality of applicants was very poor. Competition for creditworthy borrowers remains intense.