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District business conditions remained reasonably strong through the last six weeks of 2005; however, business spending was somewhat stronger than that for households. In particular, holiday spending appears to have been weaker than the District's retailers had hoped for, while home and auto sales were down, and the provision of consumer credit was flat. By contrast, commercial construction and credit issuance rose at the end of 2005. In the manufacturing sector, durable goods producers saw shipment volumes rise, while shipments were steady for producers of nondurable goods. Finally, trucking and shipping services providers continued to report robust demand.
Reports suggested that input cost increases were more modest as the year ended, however more firms mentioned attempting to increase their own prices to try to offset previous increases in input costs. Overall, hiring still appeared somewhat limited throughout the District, though staffing services companies reported an increase in client orders, which was attributed to expectations of ongoing economic expansion in 2006.
At the District's durable goods facilities, production levels continued to trend up through the last six weeks of 2005. Production activity was also generally reported to be above the levels of a year ago. Shipments from steel facilities in the District were stronger than typical at year-end, the consequence of a smaller stock of inventories and healthy demand from firms in other industries, notably the heavy truck, construction, and aerospace industries. And despite the consolidation of two Ford automobile assembly plants in the Cleveland area, District auto production increased on a year-over-year basis in the last two months of 2005. Among nondurable goods producers, production remained steady toward the end of 2005, but was generally less than at this time a year ago. While new orders growth continued to be tepid, most nondurable goods producers were still sanguine about their prospects in 2006.
Manufacturers generally reported that their overall input costs increased little through the last six weeks of 2005. Nevertheless, most producers reported raising their own prices, in an effort to mitigate earlier increases in input costs. Hiring appeared to strengthen somewhat among durable goods producers, but remains much more limited among nondurable goods producers.
The District's discount and department stores generally reported that their sales this holiday selling season were flat or less than at this time last year. Several contacts characterized their companies' results as disappointing. Contacts attributed lackluster in-store sales totals to an array of factors, including strong internet sales, increases in gift card sales, milder weather, and high home heating bills. By contrast, sales at specialty retailers were generally higher than at this time a year ago. The items that sold well among all retailers included personal care products, electronics, and some apparel goods.
Many retailers reported more markdowns and promotional activity throughout this holiday selling season than was true a year ago. Several contacts suggested that some retailers' desire to move merchandise may have come at the expense of profits. In addition, a few contacts noted that some sales were lost due to inventories that were managed "too" tightly. Regarding hiring, one contact noted that there will be staffing reductions during the spring season as a result of this firm's poor sales performance over the holidays.
Sales at District auto dealerships were down during the last six weeks of 2005, despite aggressive promotions among the "Big Three". As a result, dealers' inventories were generally characterized as above desirable levels.
In general, homebuilders saw their sales trend down as 2005 ended. Most builders reported that their sales in November and December were down from the same time a year ago. Overall, sales in 2005 for most firms were the same as or below the totals achieved in 2004. Builders' backlogs are also generally down from a year ago. And some respondents reported that the inventory of speculative homes seems somewhat bloated. Accordingly, discounts from a few builders have been unusually heavy. Overall, input cost increases were modest toward the end of 2005, with some contacts noting that their total costs increased less rapidly than they would have anticipated a few months ago. Contacts reported increases in the prices for petroleum-related products, such as plastics and transportation, and steel. By contrast, contacts reported that lumber costs have recently been flat or falling. Several contacts noted that they have been able to hold off some suppliers' requests for further price increases because of diminishing demand.
Unlike homebuilders, commercial contractors ended 2005 with an increase in activity, relative to this period a year ago. Additionally, business was better throughout 2005 for most firms than was true in 2004. Commercial builders' backlogs were also characterized as good. Most contacts reported that their firms had increased prices as the year ended, with some part of these increases intended to recoup earlier escalations in costs. Through the last six weeks of 2005, commercial contractors reported modest increases in materials costs, often citing increases in the prices for fuel and drywall. Only slight increases in some firms' workforces were reported.
Demand for trucking and shipping services remained strong throughout the last six weeks of 2005, and stronger than at this time a year ago. Higher fuel costs continued to concern contacts, even though trucking companies have been able to maintain their surcharges. Many contacts also reported that their firms intend to increase base rates beginning in 2006. Carriers continued to report difficulty attracting and retaining drivers, however few firms planned to increase wages. Some acquisitions are reportedly being undertaken to add additional drivers to firms. Capital spending in the industry is expected to stay strong given changes in emissions regulations that will take effect in 2007.
Through the last six weeks of 2005, District banks saw an increase in the loans to their commercial clients, with lending related to real estate remaining especially strong. By contrast, consumer borrowing, across an array of categories, was flat for most banks in the District. Deposit growth also remained modest for most banks, though some contacts saw an improvement in the demand for certificates of deposit. Credit quality continued to be characterized as strong among both consumer and commercial borrowers. Contacts also reported that their commercial clients were confident about the upcoming year.