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Federal Reserve Districts

Fourth District--Cleveland

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Economic activity in the Fourth District weakened further during late November and December. The downward trend in factory output and steel shipments that began in the middle of the third quarter continued. Residential construction remains very weak, with no improvement expected during 2009. Commercial builders are experiencing declining backlogs and a fall-off in inquiries. Sales by District retailers were characterized as flat to down, while purchases of new and used cars continued to fall. Business and consumer loan activity has weakened, while core deposits were stable to increasing. Little change in energy production was noted. And freight transport volume declined across all industry sectors.

Reports show a drop in employment levels, primarily in manufacturing, construction, and freight transport services. Staffing firms reported an overall decline in job openings as well. However, healthcare and defense-related businesses are still hiring. Wage pressures remain contained across all industry sectors. There has been a significant pullback in capital spending by manufacturers, retailers, and freight transport providers, with further cutbacks anticipated during 2009. The downward trend in raw materials prices has started to level off.

Output at District factories was flat to down during the past six weeks, with several reports indicating double-digit reductions in orders. On a year-over-year basis, production levels declined. Respondents expect demand will remain very soft through 2009. For the most part, capacity utilization is below normal levels. Almost all steel producers and service centers reported a worse-than-expected slump in shipping volume, with several contacts noting that end markets are weak across the board. Our contacts believe that the demand for steel will weaken further during the first quarter of 2009. We also heard several reports that foreign steel producers are beginning to price more aggressively. District auto production declined sharply during November on a month-over-month and year-over-year basis. The declines were felt by both domestic makers and foreign nameplates.

Almost half of our contacts said that their companies have trimmed back or halted capital expenditures during the past couple of months. Further, many of them expect additional cutbacks or a freeze on capital spending during 2009. Several manufacturers told us that they have successfully renewed their credit lines since our last report. However, the agreements contained additional covenants, and the price of credit was higher. Contacts indicated that the downward trend in raw materials prices has started to level off. Product pricing remains relatively stable, with some reductions noted. Looking forward, manufacturers expect little inflationary pressure during 2009. A majority of our respondents said that they have laid-off contractors and permanent employees. In addition, several companies eliminated overtime and initiated hiring freezes. Wage pressures are contained.

Real Estate
Residential contractors reported extremely weak home sales during the past six weeks; nonetheless, several noted an uptick in Internet and foot traffic. Looking forward, most builders are not expecting an industry turnaround through 2009. Although residential mortgage rates have dropped, banks continued to tighten credit standards and are demanding higher down payments from home buyers. We heard a few reports that banks are very reluctant to finance contractors. Prices for building materials and labor continued to moderate. There has been little change in the list prices of new homes, though builders are discounting. Some contractors reported increased inventories due to take-backs from home sales that fell through, and several builders are now renting out unsold spec houses and condominiums. General contractors and subcontractors reported widespread staff reductions and no wage pressures.

Most commercial builders told us there has been some slowing in construction activity during the past couple of months, and they expect this trend will continue during 2009. Several firms attributed the slowdown to difficulties in financing projects and uncertainty on the part of clients. Backlogs have declined for some contractors, while inquiries have fallen off. Construction material prices remain stable. Builders told us that they are becoming more competitive in their pricing, and some expect margin contraction in 2009. A few general contractors laid off employees, and wage pressures are not an issue.

Consumer Spending
District retailers reported that November sales were flat to down on a month-over-month basis across all industry segments. The sole exception was a national discount chain that experienced increased sales. Two respondents noted a slight pick-up in sales at the beginning of December, reflecting normal seasonal patterns. Retailers had mixed expectations regarding sales during the first quarter of 2009. On balance, vendor prices remained stable since our last report. Accounts from auto dealers show that purchases of new and used vehicles continue to decline. Dealers do not anticipate any improvement until the second half of 2009 at the earliest. A majority of our retail contacts said they plan to cut-back or freeze capital spending during 2009. Other than some seasonal hiring, staffing levels at retail stores were stable. In contrast, several auto dealers said they have cut additional sales and support personnel since our last report. Little wage pressure was reported.

In general, commercial and industrial lending has been stable to declining. Although banks' benchmark funding rates have been falling, nearly all bankers said that lending spreads are holding constant or widening. This is due in part to several bankers having put in place a floor under lending interest rates. On the consumer side, demand for installment loans fell, while the use of home equity lines of credit remained solid. There has also been a significant increase in refinancing applications for residential mortgages. Pricing for consumer loans showed little change. Loan standards remained stringent or have tightened further during the past six weeks. A majority of bankers reported that credit quality for consumer and business loan applicants has deteriorated, while the number of loan delinquencies has increased. Overall, core deposits were steady to increasing, with most of the increase attributed to a flight to safety. Staffing levels remain relatively stable; however, several banks are considering staff reductions in 2009 via layoffs or attrition. No wage pressure was reported.

On the whole, energy production has been stable during the past six weeks. Expectations call for oil and natural gas production to increase during the upcoming months, with some of the increase attributable to typical seasonal fluctuations. Nonetheless, a moderate decline in drilling activity is expected during the first half of 2009. The outlook for coal production is mixed. Reports indicate that the prices received for oil and natural gas continue to fall from their July peaks; however, the downward trend for natural gas has moderated. Energy producers saw little change in materials and equipment costs with the exception of diesel fuel, which has declined. Further, capital spending remains on plan, with little change expected during the next few months. We heard a few reports that coal mine operators are experiencing difficulty obtaining credit. Coal producers reported modest staff expansions, with some additional hiring expected in the upcoming months. Wage pressures that existed during the second half of 2008 have diminished.

Freight transport service companies experienced a greater-than-expected decline in shipping volume and revenues. Company officials told us that although weakness exists across all market segments, much of the drop-off is attributed to consumer products, autos, and construction materials. Expectations call for activity to remain very weak through at least the first quarter of 2009. Most transport companies reported pulling back on capital spending during the past few months, with further cutbacks anticipated. Many respondents told us that they are no longer hiring any drivers due to industrywide capacity reductions. As a result, there has been a lessening in driver turnover. Further, office staffing positions are being eliminated, and there were no reports of wage pressures.

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Last update: January 14, 2009