June 11, 2003 Federal Reserve Districts Fourth District--Cleveland

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Economic activity remained mixed in the Fourth District during April and May, with some industries reporting improvements and others reporting deterioration over this period. On the positive side, most manufacturing contacts noted steady or improving production and sales, with the expectation that conditions would continue to improve in the near future. Residential homebuilders reported strong year-over-year gains in April and May (2002 was a record-sales year). Banking, for the second consecutive report, noted some improvement in commercial loan demand. Still, some signs of weakness persisted in the economy. Retailers continued to characterize the retail environment as soft. Auto dealers reported slowing sales. Commercial builders continued to report depressed economic activity. Trucking and shipping contacts noted a downturn in activity. Most contacts in manufacturing and residential construction expect conditions to continue improving within the next six months, although contacts in retail, trucking and shipping, and commercial construction all seemed pessimistic about prospects for the last half of the year. The labor supply remains plentiful, and those firms that are hiring reported no difficulty in finding qualified labor. Although most firms indicated plans to maintain or augment their current workforces, a few firms did report that they planned layoffs. Overall, prices remained stable in this reporting period. The exception appeared to be both rolled and specialty steel--prices continued to fall for these commodities in April and May. Manufacturing As was the case in the last report, most manufacturers noted that production and sales in May were steady or improving on both a monthly and year-over-year basis. Finished goods inventories are still lower than year-ago levels for most producers, and the level of idle capacity appears to have decreased from the last report. Roughly one-third of our contacts noted that they were hiring, one-third noted keeping their workforce steady, and the remaining one-third reported staff reductions. Roughly half our contacts noted overtime in recent weeks. Regarding the outlook, more than half our contacts expect production and sales to increase in the near future. Auto production fell at most plants in the District in April and May, with Districtwide production roughly 10 percent below 2002 levels, adjusting for models that moved production or were discontinued. Four of the five major auto producers in the District reported a decline in production from April to May--the declines ranged from 15 percent to 25 percent. Demand for rolled steel softened in May, with contacts reporting production roughly 5 percent to 10 percent below April levels. Prices continued to fall, and are roughly 10 percent to 15 percent below their level at the close of 2002. Many contacts noted that they would lay-off workers if they were not constrained by labor contracts--others noted either a planned workforce reduction negotiated into next year's labor contract or temporary two-week layoffs. Contacts do not expect conditions to improve. Specialty steel producers, however, have seen an increase in demand, and sales have increased roughly 5 percent to 10 percent from one month ago, but they are still below 2002 levels. Unlike firms in the rolled-steel industry, specialty steel producers reported either calling back laid-off employees or expanding their workforces. Retail Sales Retailers continued to characterize the retail environment as soft in April and May, with many contacts reporting below-plan sales and either flat or year-over-year decreases in comparable store sales. Mall traffic continues to be down, and apparel sales have been poor, in part due to the cool weather. Some contacts noted that they had hoped for a pickup in sales with the resolution of the military campaign in Iraq, but this pickup did not materialize. Prices remained stable in May, and contacts continued to manage inventories very conservatively. Although labor is plentiful, very few contacts are hiring. Most of our contacts expected flat sales in the coming months. Automobile dealers also noted sluggish activity. Despite some improvement in sales in early March, sales for March and April were below expectations--one contact noted sales had dropped off as much as 25 percent from the previous year. In terms of the aggressive incentives being offered, consumers do not appear to be as responsive to the current offers as automakers and dealers had hoped. Inventories at dealerships have been rising: Contacts reported inventories from near seventy-day to ninety-day supplies, well over the sixty-day supply that most dealers try to maintain. Contacts did not expect conditions to improve--most expect sales growth to remain flat through the end of the year. Construction Homebuilders reported strong sales in April and May, with many builders reporting sales increases of more than 10 percent over the high level of sales one year ago (2002 was a record-sales year for most of our builders)--one contact reported that April was his best month on record. The strength in homebuilding does not appear to be attributable to one or two specific housing markets; rather, it appears to be spread across the District. Commercial builders, on the other hand, continued to report poor conditions. One contact noted that the work his firm currently has is not new business, but, rather, projects that were postponed last year. Another contact noted that lending activity appears to be constraining demand: Although some clients are interested in pursuing new building projects, the narrowing spread for lenders appears to leave them reluctant to lend money for projects. Although activity from health-care projects has slowed some in recent months (most contacts believe it is due to consolidation in the industry), the health-care industry continues to be one of the few sources of new activity among commercial builders. School construction, which has been steady over the past two months, remains the other source of new activity in commercial construction. Trucking and Shipping Demand for trucking and shipping was flat in May compared with April, and slightly lower than one year ago. Prices in the industry have remained stable over the least year, but some contacts speculate a price increase may be attempted by carriers sometime during the summer if excess capacity in the industry continues to fall at the pace it has fallen the last couple of months. The drop in excess capacity is due in part to a decision by firms to delay purchasing new engines. Many firms remain reluctant to invest large sums of money in new, unproven engines that meet the EPA regulations that took effect last October. Rather than invest in new engines, firms are making expenditures on technology to improve efficiency. Banking For the second consecutive report, a growing number of bankers reported slight improvement in commercial loan demand--for this report, more than half our contacts reported commercial loan demand had increased both year-over-year and year-to-date. Consumer loan conditions remained mixed: Half our contacts reported demand was slightly up, while the rest reported demand was flat or slightly down compared with one year ago. Most bankers continued to report that growth in core deposits was either flat or slightly up. Credit standards had not changed, and the number of loan applications remained roughly the same compared with one month ago, but a few contacts did note deteriorating credit quality among applicants. Most bankers reported mortgage, installment, and business loan delinquencies were flat or very slightly increased compared with a year ago. Return to top Philadelphia Richmond