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Fourth District--Cleveland

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In general, District business conditions continued to show steady improvement in the eight weeks ending August, despite modest declines in some sectors. Most manufacturers continued to see increases in production through this period. District retailers typically reported sales above year-ago levels with strong sales continuing for automobile dealerships. However, outside of autos, there was some softening more recently in retailers' sales. Commercial builders continued to report increases in activity, and while District homebuilders have seen demand weaken, sales remained strong by historical standards. After slowing slightly in late July, demand for trucking and shipping services returned to its previously brisk pace. And at the District's banks, loan demand from commercial and consumer clients generally remained steady to slightly increasing.

While most materials costs remained relatively stable in July and August, increases in the prices for petroleum-based products were widely cited by contacts. As in recent reports, hiring remained modest in most industries. However, staffing-services companies continued to report steady increases in the number of job openings available throughout the District. Some staffing-services contacts also indicated that their job seekers have been finding employment more quickly.

Business conditions continued to be largely positive at the District's durable goods facilities. Through the eight weeks ending August, production at most District durable goods plants remained steady, and above the levels of this time a year ago. Nevertheless, a significant share of firms reported having higher levels of inventories than desired. Inventories in the steel supply chain, though, are reported to have fallen through the last several weeks, prompting increases in production at District steel mills as of August. Activity is expected to increase through the remainder of the year, at a time when market demand would usually diminish due to seasonality. Steel spot prices are also expected to rise after having fallen for about a year. Automakers are also reducing inventories through their aggressive employee-discount pricing promotions; although, production at automobile assembly plants in the District remained notably below last year's levels in July.

Nondurable goods producers also reported production below last years' level, though there were some signs of improvement in recent weeks. For the two-month period through the end of August, production improved relative to the late spring, with contacts sounding a somewhat more optimistic tone.

Most manufacturers reported slight increases in their total input costs in recent weeks, driven primarily by increases in the prices of petroleum-based products. There were also slight increases in some metals prices. Several contacts indicated that they could partially pass through these increases in costs to their consumers. Hiring continued to be limited throughout the manufacturing sector. Planned increased in capital spending were also limited, though several manufacturers that anticipated adding to their capital stock cited expectations of stronger demand through the remainder of 2005.

After reporting an improvement in the economic environment in June and through the first half of July, District retailers reported somewhat weaker business condition through the end of August. Discount retailers generally reported that their sales in July were at anticipated levels and up from the levels of a year ago; however, sales seemed to weaken in August. Contacts cited increases in gasoline prices and unseasonably warm weather (which was thought to discourage sales of items for fall) as among the reasons for the declines. Discount retailers also reported that their higher-priced items seemed to sell better in recent weeks. In other segments, sales at specialty retailers were generally flat or above year-ago levels, while sales at District department stores were typically down from a year ago and continued to be below expectations. Finally, several contacts expressed disappointment with the back-to-school selling season.

Automobile sales continued to be strong throughout the District in July and August, spurred by several automakers' employee-discount pricing promotions. Some dealerships, however, worried that these promotions have simply shifted activity from future months to the present. Dealers' inventories were typically characterized as at or below target levels.

Business conditions continued to weaken slightly for homebuilders, although activity remained relatively high by historical standards in July and August. Nevertheless, relative to this time a year ago, most residential builders reported that their sales had fallen. Most contacts also characterized their backlogs as average while some said that they were light. In general, homebuilders do not anticipate any significant improvement in the economic environment through the remainder of 2005. Cost pressures also appeared to intensify somewhat in the third quarter. In particular, contacts indicated that inputs related to oil, such as shingles and siding, were commanding higher prices. And several contacts noted that concrete costs had risen. By contrast, labor costs were characterized as stable, with subcontractors seen as readily available. Finally, new home prices have, in general, remained relatively stable throughout the District.

Unlike their counterparts in residential building, nonresidential contractors continued to characterize business conditions as improving. Nonresidential builders reported increases in activity relative to a year ago, and indicated that their backlogs were rising. One contact noted that his firm's backlog was big enough to keep it occupied through the end of 2006. Still, most contacts considered profit margins to be tight, due to both reasonably intense competition and increases in materials costs. Prices for petroleum-based products, and especially for fuel, have been particularly difficult to estimate and include in bids. Hiring among general contractors continued to be fairly limited, though demand for work from subcontractors increased in July and August, with several contacts citing rising subcontractor rates. Regarding demand from specific sectors, contacts indicated that the number of institutional and educational projects available rose in recent weeks, while inquiries from manufacturing firms were also higher.

Trucking and Shipping
After slowing slightly toward the end of July, demand for trucking and shipping services in the District rebounded in August, with activity remaining at relatively high levels. This followed a period of weaker demand that ended in early spring. While rising fuel costs continued to be largely offset through surcharges, cost changes affected firms' margins through truck operations that could not be billed to clients. Outside of increases in fuel surcharges, it was reported that shipping rates remained stable. Despite the increases in energy prices, most contacts continued to foresee favorable business conditions.

The economic environment for commercial banks in the District remained relatively strong through the eight weeks ending August. For larger institutions, loan demand from commercial clients was steady throughout this period, while smaller banks saw increases in demand. And while demand from commercial clients was broad-based, there appeared to be notable increases in demand from manufacturing firms. Loan demand from consumer clients also rose in recent weeks, with contacts citing a significant increase in automobile loans. This was attributed to automobile dealerships' move away from incentive financing toward price-discount promotions. Most District institutions saw an increase in core deposits, and credit quality continued to be notably strong.

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Last update: September 7, 2005