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Federal Reserve Districts

Fourth District--Cleveland

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Fourth District business conditions continued to show gradual improvement across a broad array of industries in the six weeks through the middle of November. Production activity among durable goods producers saw gradual gains through the last several weeks, while nondurable goods producers reported production remained steady. Most District retailers reported a generally positive economic environment since the beginning of October, despite concerns about consumer confidence. While sales at automobile dealerships declined sharply in October, automobile assembly plants in the District actually saw activity increase slightly. In nonresidential construction, contractors continued to report increases in activity. However, District homebuilders saw sales continue to trend down. Finally, demand for trucking and shipping services remained robust throughout the District.

Firms continued to report increases in their input costs through the middle of November, especially for petroleum-based products, but these increases were generally more modest than in the recent past. Aside from petroleum products, contacts also cited increases in the prices for steel, drywall, lumber, concrete, and natural gas. Companies continued to add to their payrolls sparingly, although some staffing services contacts reported that their placements improved in October and early November, at a time when there is typically a seasonal slowing in demand.

Through the six weeks ending in mid-November, the District's durable goods producers generally reported moderate increases in production, and anticipated that conditions would continue to improve in the near term, based on increases in their orders for future delivery. Relative to a year ago, contacts also typically indicated that their production levels had risen. Within specific sectors, steel producers reported that shipments were steady or rising in recent weeks, with steady demand from an array of industries, and increases in demand from the appliance and automobile industries. Steel-industry sources expect these favorable conditions to continue, possibly attenuating the seasonal slowing in production that typically occurs at year-end. Consistent with increasing steel shipments to the auto sector, District automakers saw a slight increase in production in the six weeks through the middle of November. Some contacts speculated that automakers may be trying to increase their inventories ahead of a potential strike at a large auto parts supplier. Nondurable goods producers generally reported that their production levels were flat for the last several weeks, as well as relative to this time a year ago. Among nondurable goods producers, the pace of new orders also remained relatively unchanged for most firms.

Most manufacturers saw slight increases in their input costs from October through the middle of November. Costs also continued to be notably higher for most firms relative to this time last year. In general, increases in costs were tied to petroleum and petroleum-based products, like plastics and resins, though contacts noted that natural gas and steel prices had also risen. Hiring continued to be modest among manufacturers, while durable goods producers reported plans to increase their capital spending, as a response to stronger demand.

Through the six-week period ending in mid-November, the District's discounters reported steady sales that were above year-ago levels, which met or exceeded expectations. Specialty stores also generally reported that their sales met or exceeded expectations. Among discount and specialty-store contacts, business conditions are anticipated to remain favorable throughout the holiday selling season, though some discounters are concerned that high home heating bills will weaken sales in early 2006. However, sales at the District's department stores continued to trend down, as contacts again reported year-over-year sales declines. District automobile sales also fell further in October, after falling sharply in September. In mid-November, the "Big Three" again announced new incentive plans.

Outside of autos, many contacts reported that their product prices had, on average, risen in recent months, while few contacts reported any major changes to their input costs, aside from some increases in transportation costs. Hiring has been modest for most retailers, and some noted that they will hire fewer workers this holiday selling season than in the past.

In the six weeks through the middle of November, District home sales weakened relative to the end of the third quarter and a year ago. Contacts reported that customer traffic was light, while builders' backlogs were generally down from their levels of this time last year. Higher-priced homes sold somewhat better than their lower-priced counterparts. Increases in input costs were widely reported by builders. Among the materials most often mentioned were concrete and various petroleum-based products, such as polyvinylchloride pipe and vinyl siding. Hiring among homebuilders continued to be largely to replace workers, with some organizations planning to reduce staff sizes.

Most nonresidential builders noted that their sales had risen in recent months, and were also higher than at this time last year. Moreover, builders' backlogs were regarded as relatively strong. Increases in materials costs were also widely reported among nonresidential builders, though these increases were much more modest than in the previous report. Contacts reported that their attempts to recover these increases in costs met with differing degrees of success, though several contacts mentioned that their clients seemed to expect higher prices now.

Trucking and Shipping
Demand for trucking and shipping services in the District remained robust through the middle of November. As previously reported, attracting and retaining drivers continued to be a challenge in the industry. Trucking companies continued to offset elevated fuel prices through the use of surcharges. Nevertheless, the increases in fuel costs still adversely affected profits through truck operations that could not be billed to clients. Accordingly, several companies are reportedly considering raising their base rates beginning in 2006.

Among larger banking institutions in the District, commercial borrowing increased in the six weeks ending in mid-November. The demand for loans related to health care and commercial real estate saw especially strong gains. Consumer loan demand was generally flat for banks of all sizes throughout the District, though some respondents again reported an increase in the demand for home-equity loans. Core deposits were down slightly at most banks in the District, while credit quality reportedly remained strong.

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Last update: November 30, 2005