July 25, 2007 Federal Reserve Districts Fourth District--Cleveland

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The economy in the Fourth District continued to grow at a modest pace during the past six weeks. In general, manufacturing output was stable to increasing with District auto plants reporting higher production during May. Activity in commercial construction is steady to improving with backlogs at acceptable levels. New home sales improved slightly, but sales remain down on a year-over-year basis. Most home builders said that inventories have returned to acceptable levels. Retail sales in the District were flat to increasing slightly. Commercial loan demand increased while consumer lending was stable to declining. The mortgage market continues to be slow. Oil and natural gas production showed little change. And the demand for trucking and shipping services was mixed. On net, reports point to a slight increase in employment levels across the District with wage pressures limited to the energy sector and some highly technical and professional occupations. Accounts given by staffing firms reveal positive trends in job openings with an increase in the number of permanent openings. Our contacts also stated the number of job seekers was steady to increasing since late May and on a year-over-year basis. About half of our staffing representatives told us that wages are rising or they anticipate increases in the near future. A slight majority of manufacturers and builders said that input and energy prices are rising or remain at high levels. Manufacturing Most District manufacturers reported stable to increasing production levels during the past six weeks. On a year-over-year basis, a majority said they had increased their output. Top performers are found in the aerospace, power generation, machined products, food processing, and construction supply industries. Looking forward, almost all our contacts anticipate production remaining at current levels or increasing. Auto assembly plants reported higher production on a month-over-month and year-over-year basis. Domestic brands and their foreign counterparts shared in the increases. Although domestic makers expanded production at a higher rate, the total number of vehicles produced by foreign makers was larger. Shipments by steel producers and service centers varied widely. Contacts tell us they expect to maintain current shipment levels or experience some slowing in the 3rd quarter. Strong end markets for steel include aerospace, defense, non-residential construction, transportation, and appliances. Plant utilization rates were at normal levels to 100 percent capacity. Almost all manufacturers reported that capital expenditures were on plan since late May with half of the respondents saying they expect to increase spending in the next 12 months due primarily to increased demand. Industries planning increased expenditures include aerospace, food processing, autos, petrochemicals, and construction supply. Manufacturers were evenly split when asked about the direction of input prices. The most often cited increases were for metals, fuel, and agricultural products. Only a few of our contacts increased their own prices and few anticipate raising prices in the near future. The manufacturing workforce rose slightly during the past six weeks. Hiring in the near future is expected to be very slow with little wage pressure reported. Construction We received a few reports that new home sales improved slightly over the past six weeks as builders entered the peak building season; however, sales remain down on a year-over-year basis. Looking forward, builders are uncertain when the housing market will turn around--speculation is in 12 to 24 months. Several builders experienced a decline in cancellations which they attributed to a tightening in credit standards. Most of our contacts said inventories have now returned to acceptable levels. In general, new home prices fell slightly since late May. Material costs are stable--rising copper prices being offset by a decline in lumber prices. Most commercial contractors told us that business is steady to improving since late May; however, on a year-over-year basis, more than half reported that business has slowed slightly. Segments showing strong activity include healthcare, public works, and manufacturing. Nearly all respondents are satisfied with their current backlog. Contractors were mixed in their assessment of material costs with half stating that steel, concrete, and fuel increased; however, most held their own prices steady over the past six weeks. Retail District retailers reported flat to slightly increasing sales. The one bright spot was grocery stores where sales have been consistently strong since late May and on a year-over-year basis. Looking forward, retailers anticipate little change in sales trends. With the exception of food stocks and shipping, supplier prices held steady over the past six weeks. Hiring is limited to new store openings and little wage pressure was reported. Sales of new and used cars increased slightly on a month-over-month basis while SUV sales were sluggish except for luxury models. Showroom traffic has softened; however, customers who entered usually bought. Most dealers expect little variation in sales over the next few months. Banking Commercial loan demand generally increased since late May. Industries driving this growth were broad based. In contrast, consumer lending was flat to declining. Overall, auto loans held steady while home equity loans weakened. The mortgage market continues to be slow. Looking forward, several bankers told us they believe weakness in the mortgage market will continue throughout 2007 and into 2008. Core deposits were flat to slightly down. Almost all contacts reported little change in the number of delinquencies and credit quality for consumer and business applicants. Energy Oil and gas producers reported production levels were flat to increasing since late May and on a year-over-year basis. On balance, prices received for oil were flat to rising year-over-year while natural gas prices were flat to declining. Material and equipment costs were stable during the past six weeks but increased since last year. Limited hiring was reported with little workforce expansion anticipated in the near future. More than half our contacts said they have difficulty finding skilled field personnel. Almost all producers told us that wages are continuing to rise. Plans for four coal liquification plants to be located in the Ohio Valley have been announced. Two of the plants would produce jet and diesel fuel while the other two would produce liquid coal for power generation. Estimated value of the four plants is $10 billion. Each would employ 200 to 300 full-time workers. Transportation Demand for trucking and shipping services was mixed during the past six weeks with reports ranging from strong growth to softening. Industry representatives tell us that it is becoming very difficult to pass on non fuel-related price increases. However, about half reported that they were able to pass on rising fuel costs using surcharges. In general, capital expenditures have been flat to declining. Pre-buying engines in 2006 due to new EPA regulations was the most often cited reason for the decline. Wages have remained stable since late May. Return to top Philadelphia Richmond