November 26, 2003
Federal Reserve Districts
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Business conditions for firms in the Fourth District appeared to improve from late September to early November. While most durable goods manufacturers saw production levels stay steady in recent weeks, automobile and steel producers reported increases in production of late. Nondurable goods producers continue to report increases in production, and most indicated lower levels of idle capacity than durable goods producers did.
District retailers typically reported monthly increases in sales in September and October. However, growth rates were uneven, and despite optimism about the outlook, many retailers reported that sales levels in recent weeks were lower than at this time last year. Residential building remains strong, and while commercial construction is still weak, there are signs of improvement in the sector. Finally, activity for trucking and shipping firms is said to have increased significantly in the last six weeks.
For the most part, price pressures continue to be muted; however, there were some reports of rising commodity prices, as well as reports of rising steel and energy prices. A variety of businesses also reported rising labor costs due to increases in health insurance premiums. Despite an apparent pick-up in economic activity, few contacts indicated any intention to increase staffing levels outside of seasonal additions.
Manufacturing. Most durable goods producers reported that production levels remained flat in October relative to September. Compared to a year ago, about half of those contacted reported a slight increase in production, while an equal number saw little change. Nondurable goods producers, on the other hand, experienced more consistent growth, with most again reporting modest production increases in the October. Most contacts in nondurable goods production reported an increase in year-over-year production levels.
Both nondurable and durable goods producers reported lower inventory levels than at this time a year ago. A small majority of durable goods producers reported that more than a quarter of their capacity remained idle, but nondurable goods producers mostly reported little if any spare capacity. The use of overtime was more widespread among nondurable goods producers than among durable goods producers, but permanent staffing levels remained little changed for both types of manufacturers. Most producers reported that their input prices were flat or had fallen somewhat in the last month, though some noted increases in steel prices. There were also isolated reports of other increases in commodity prices. Over the last year, input prices are reported to have risen for nearly all contacts involved in nondurable goods production.
Production for the auto manufacturing facilities that we follow in the District rose significantly from September to October. Relative to a year ago, total automobile production in the District appears to have risen about 10 percent. By contrast, national automobile production is reportedly flat from a year ago.
Domestic steel producers reported flat to increasing shipments in recent weeks. Demand for steel was mixed across various market segments: Shipments to auto producers reportedly remained steady, while demand from commercial builders was sluggish, and demand from defense-related contractors continued to be strong. A few firms indicated that their rate of capacity utilization rose slightly to accommodate increases in shipment volumes. Nevertheless, most firms have maintained normal work schedules in recent weeks and do not have plans to increase the size of their workforce. There were reports of some cost pressures for steel producers, particularly with respect to rising natural gas prices. Steel prices have reportedly risen in recent weeks, and several producers indicated that they intend to increase prices again in early 2004.
Retail Sales. Several specialty retailers indicated that sales seemed to be improving in recent weeks, though they are still below the levels of a year ago. Discount stores in the District also reported strong recent sales gains, but department stores continued to fare worse than other types of retailers. Some contacts noted that department stores on the coasts seem to be seeing stronger sales than those in the Midwest. While apparel sales, in general, remain soft, contacts noted that furniture and other consumer durables were selling well, as were novelty gifts, jewelry, and personal care items. Many contacts expressed optimism about the coming holiday selling season, but others remain cautious.
Prices at the vendor and retail levels are reportedly mostly unchanged in recent weeks, while inventories are reported to be flat or down relative to a year ago and continue to be tightly managed. Contacts noted that it remains easy to find qualified job applicants.
On balance, new car sales in the District were flat; about as many contacts said that sales worsened in October relative to September as said that they improved. Much of the month-to-month fluctuations appear to be incentive-driven. Ford and Chrysler recently reduced the rebates they offer, and sales of these makes, according to contacts, have fallen as a result. Sales of other makes were reported to have been stronger. Used car sales were said to be steady or slightly improving.
Construction. The pace of residential building remained strong across the District. However, several contacts suggested that some sales activity that might otherwise have occurred within the last several weeks occurred in the summer instead, as buyers attempted to lock in lower mortgage rates. As a result, some builders reported that their sales were flat or slightly above those for this time last year. Materials prices were largely unchanged in recent weeks, with the exception of plywood prices, which have been rising. Employment levels were little changed in recent weeks.
There are indications that commercial construction is improving in some parts of the District, but overall conditions continue to be weak. Demand for new office space seems particularly weak in downtown Pittsburgh; by contrast, with vacancy rates beginning to decline, office construction activity appears to be increasing slightly in Columbus, Ohio. Reports from builders whose clients are primarily manufacturers were mixed. There was little or no change, overall, in input costs. Staffing levels also remained steady.
Trucking and Shipping. Activity among trucking and shipping firms increased significantly in September and October, after modest increases in August. All firms also reported that activity in the last six weeks is above that for this period last year. The acceleration in trucking and shipping activity appears to be partly the product of increasing demand from both retailers and manufacturers. Fuel costs have reportedly stabilized since the summer. Recent increases in demand are prompting some firms to consider increasing compensation levels to attract workers.
Banking. Breaking with the recent pattern, growth in core deposits at District banks slowed. Some banks actually reported a slight decline in deposits in the last six weeks. Loan demand remained mixed in recent weeks. As many contacts reported an increase in their commercial lending levels as reported no increase. All but one contact reported that their consumer lending levels fell or were unchanged. Mortgage refinancing is down from recent record levels.