July 27, 2005 Federal Reserve Districts Fourth District--Cleveland

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District business conditions generally improved across a broad base of industries in the six-week period through the middle of July, after a period of uneven growth throughout the spring. Outside of a few categories, most manufacturers reported that production remained steady or rose in recent weeks. And reports from retailers suggested notable improvements in the sector, paced by strong gains at automobile dealerships. As in recent reports, commercial builders continued to see steady improvements in business conditions, while residential builders reported a more mixed economic environment. At the District's banks, loan demand was steady to slightly increasing. And demand for trucking and shipping services continued to be strong, after slowing slightly through the early spring. Growth in most materials prices moderated through the middle of July, though prices of petroleum-based products and concrete increased more sharply since May. Despite steady improvements in the economic environment in recent months, hiring continued to be modest in most industries. Nevertheless, staffing-services companies reported an increase in the number of job openings, especially for workers with specific skills, such as accountancy and information technology. Contacts at staffing-services firms also noted that these workers were in shorter supply than in the recent past. Manufacturing Through the six-week period ending in mid-July, production at most District durable goods facilities remained steady, and above the levels of this time a year ago. While inventories were generally reported to be at acceptable levels, more firms cited excessive inventories than was true at this time last year. Nevertheless, most contacts reported that their new orders had risen in recent weeks, and accordingly, they expected production levels to rise throughout the remainder of 2005. Activity at the District's steel facilities, however, has not been as strong. Contacts cited weaker demand from firms in commercial construction and in automobile and appliance production as part of the explanation for recent declines. These developments have led to larger-than-desired inventories and, along with an increase in imported steel, have pushed prices down for some steel products on the order of 40% from fourth-quarter 2004 levels. Regarding another important District industry, production at automobile assembly plants continued to be above year-ago levels in June, despite some domestic auto producers' recent production cuts. Among nondurable good producers, production was generally characterized as steady or rising, both relative to earlier in the year and to this time last year. According to most contacts, the current pace of new orders suggests steady gains in production through the rest of 2005. While most manufacturers reported that their input costs were flat or falling for the six weeks through the middle of July, costs generally continued to be above year-ago levels, and firms with petroleum-based products as important inputs reported that their input costs rose in recent weeks. Several contacts from durable goods firms reported that their companies were able to successfully increase prices in June and early July. Hiring continued to be limited among most manufacturers, and while durable goods producers generally did not anticipate any significant changes to their capital spending through the end of 2005, several nondurable goods contacts noted that they planned to upgrade equipment, in some cases to improve the energy efficiency of their capital stock. Retail After a lull in the spring, which coincided with an increase in gasoline prices, sales for District retailers improved in June and through the first half of July. Typically, retailers reported that their sales were consistent with expectations, though warmer weather may have helped to improve traffic. By segment, several specialty apparel stores, particularly those catering to teens, saw strong year-over-year sales gains. Department stores also saw solid year-over-year increases in sales, despite reporting declines throughout much of 2005. In general, attitudes among retailers were characterized as cautiously optimistic, especially regarding the upcoming back-to-school selling season. Few firms reported using an abnormal amount of discounts or other incentives to attract shoppers. Automobile sales were strong across the District in June and through the early part of July. Contacts reported that the recent employee-discount pricing policy introduced by General Motors (GM) led to dramatic year-over-year sales gains. Interestingly, respondents reported that the promotion not only benefited GM, but also other automakers by drawing would-be buyers to dealerships. Other automakers have since moved to mimic GM's employee-discount pricing policy, which has been extended through the end of July. Construction The slightly weaker business conditions that homebuilders have reported since early spring continued to prevail throughout the District. In the six-week period through the middle of July, most homebuilders reported that their sales were slightly weaker than anticipated, although activity levels varied from market to market. Most homebuilders do not expect conditions to change markedly through the remainder of 2005. Regarding costs, outside of isolated increases in specific materials, such as cement and concrete, materials costs remained relatively flat. Labor costs have also stayed steady, though some subcontractors in specific trades have been less available because of increases in nonresidential construction. New home prices have tended to be flat for the most part across the District. Nonresidential builders continued to report more growth than their counterparts in residential construction, with contractors typically seeing increases in year-over-year sales. As with residential builders, materials costs were generally seen as stable, though isolated increases were reported for concrete and petroleum products. Builders noted that these cost increases were difficult to pass through to prices, which have remained relatively stable. With respect to specific sectors, contacts reported an increase in demand from firms in the manufacturing sector. Finally, builders generally noted that their orders backlogs had increased, which was typically taken as a positive sign for the future. Trucking and Shipping Demand for trucking and shipping services in the District remained steady at a high level in June and July, after a period of weaker demand that ended in early spring. While rising fuel costs continued to be offset through surcharges, contacts noted that these increases were still affecting their margins as a result of truck operations that cannot be billed to clients. Prices, nevertheless, remained relatively stable in recent weeks, as did wages, despite continuing complaints of a driver shortage. Banking Conditions at commercial banks in the District were little changed for the six-week period ending in mid-July. Loan demand was steady to slightly increasing at institutions in the District among both commercial and consumer clients. In addition, demand from commercial clients was broad-based, with no specific industry identified as driving demand. For consumer clients, though mortgage demand was down slightly, the demand for home-equity loans remained robust. Most contacts reported an increase in core deposits, and credit quality continued to be strong, with some contacts indicating that their charge-offs and delinquency rates were at unusually low levels. Return to top Philadelphia Richmond