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Federal Reserve Districts


Fourth District--Cleveland

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Full report

From late February through the first full week in April, District business conditions continued to show signs of improvement, although somewhat less evenly than earlier this year. Among manufacturers, activity at the District's durable goods facilities continued to trend up, and contacts characterized production as steady among nondurable goods manufacturers. Reports from retailers, which had indicated an improving environment earlier in the year, suggested some deterioration in recent weeks. Residential builders saw seasonal improvements in sales, but sales were slower than at this time last year; commercial builders continued to report modest improvements in conditions. At the District's banks, commercial borrowing continued to strengthen. But demand for shipping services, while still strong, showed some signs of slowing.

Input cost increases seemed slightly less pronounced in recent weeks, with isolated increases reported for fuel and other petroleum-based products. Steel-related product prices also remain high; however, steel spot prices are expected to fall. Interestingly, effective steel prices for many firms may actually rise as contracts--many of which were negotiated when steel spot prices were much lower--are adjusted to reflect more recent spot prices. Several steel industry contracts are currently being renegotiated.

Hiring still seemed limited throughout the District, though staffing-services companies reported an increase in openings and a shrinking supply of prospective candidates. Recruiters reported that it took longer than at this time a year ago to find matches for available openings.

Manufacturing
Through the six-week period ending in early April, production levels continued to trend up at the District's durable goods producers and were also above year-ago levels. Despite the steady increases in production through the last several months, however, many firms noted flattening new orders growth. Among specific sectors, steel shipments continued to soften, but remained roughly even with the levels of this time a year ago. Contacts attributed slowing shipments to an accumulation of inventories, sluggish demand from automakers, and attempts by some customers to delay purchases until prices fall further. At District automobile plants, production has risen throughout the early part of 2005 but remains below the levels of this time last year.

Nondurable goods manufacturers reported that production was steady through the last six weeks and up slightly for several producers on a year-over-year basis. The level of new orders remained roughly flat. Though production levels have been steady for some time, many producers expect an acceleration in sales in the months ahead.

Among all manufacturers, hiring remained somewhat sluggish. Durable goods producers added to their staffs more frequently than their counterparts in nondurable goods manufacturing, though the former plan fewer increases in the months ahead. And while most nondurable goods producers plan few additions to their capital stock, many durable goods manufacturers intend to increase their investment spending through the course of the next six to twelve months, with several noting a need to increase capacity.

Input costs increased only slightly in recent weeks, though they are still up substantially from a year ago. Many manufacturers noted increases in fuel costs, though steel product prices were expected to fall. Several contacts noted that they had begun to raise prices in an attempt to restore their margins and undo the impact of a steady string of increases in input costs. However, firms have generally been unable to completely offset these cost changes, and they continued to report reduced margins.

Retail
Retailers' reports suggested a more mixed economic environment from late February through the early part of April. Recent increases in gasoline prices were thought to be the cause of slightly weaker sales at discounters; discount retailers previously reported an improvement in the pace of sales, which some thought was tied to declining gasoline prices. Sales at District department stores were also worse than expected and below the levels of this time last year; contacts had anticipated better sales because of the Easter holiday. Unseasonably cold weather was also cited as a cause of more sluggish sales activity.

Specialty stores and grocers, however, generally reported gains in their businesses. And automobile dealers saw March sales rebound slightly. Nevertheless, apart from auto dealerships, most contacts were somewhat less sanguine about their sales prospects in the foreseeable future. While incentives reportedly remained generous at District dealerships, prices at other retail outlets were characterized as stable.

Construction
Residential builders reported an increase in sales through the six weeks ending in early April; however, most contacts attributed these gains to the typical seasonal pattern. Despite the improvement in sales, most builders reported that their sales levels were less than at this time last year, and several noted that their backlogs were weaker than desired. Several builders also indicated that the lower-price segment of the market had fared more poorly than other price points. Input costs continued to increase for builders for an array of items including concrete, steel, and petroleum; however, lumber prices stabilized, albeit at a high level. Regarding hiring, most homebuilders did not add to their payrolls in recent weeks.

Nonresidential builders continued to report rising activity, with sales for many firms exceeding those of this time last year. Firms also reported increases in inquiries from prospective clients, leaving many contacts optimistic in their assessment of the outlook. While business conditions improved across a range of nonresidential construction categories, growth in public building projects seemed particularly pronounced. Interestingly, input costs increases seemed less severe recently for many firms, though many contacts anticipate an increase in concrete and steel prices. Builders reported that their prices were stable, and most had merely maintained their current staff sizes.

Banking
At banking institutions in the District, contacts characterized commercial loan demand as steady, though it slowed somewhat in March. Nevertheless, lending connected to commercial real estate, especially for manufacturing firms, was described as faring well within recent weeks. Contacts also characterized consumer borrowing as steady, despite weak demand for automobile loans. Banks reported extending home equity loans at an increasing pace in March. Larger banks in the District generally reported rising core deposits, while changes in core deposit levels were more mixed among smaller banks. Hiring remains modest at most institutions.

Trucking and Shipping
Business conditions continued to be strong for shipping firms in the District. However, for the first time in at least a year, some contacts suggested that activity may be starting to soften. Contacts reported that rising fuel costs continue to be a concern for shipping firms. While surcharges allow shippers to almost entirely eliminate the impact of increases in fuel costs, companies are worried that these increases in shipping costs will eventually dampen demand. Outside of surcharges, regular shipping rates have remained steady. Contacts reported that their firms continue to attempt to attract drivers, though wage rates remain stable. Firms also continue to add trucks to their fleets.

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Last update: April 20, 2005