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Federal Reserve Districts

Fourth District--Cleveland

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Economic activity in the Fourth District showed modest growth since early January with restraint from the auto and housing sectors tempering growth in others.  Production by manufacturers was stable to increasing.  Activity in commercial construction has increased while residential contractors report sales remain stable--at low levels.  Post holiday sales by retailers were disappointing, weather being cited as a primary reason.  Loan demand at banks was flat while core deposits and credit quality were characterized as stable.  Overall, energy-related activity was flat to slightly down.  And demand for trucking and shipping services continues to soften.

On net, employment across the District was reported to be holding steady.  However, staffing firms remain upbeat about the number of job openings.  Three-fourths of our contacts said that openings have increased over the past six weeks and on a year-over-year basis with the greatest demand seen in health care.  With the exception of some energy-related businesses and retailers, wage pressures are largely contained.  Several manufacturers and building contractors reported that material prices, especially metals, are rising.  In response, some District manufacturers increased their prices; results were positive except in the auto and housing markets.  Almost all retailers said that they continue to hold their prices steady.        

District manufacturers reported production levels were stable to increasing since early January, with the most notable increases at capital goods producers.  On a year-over-year basis, several manufacturers reported lower production--mainly related to weakness in the auto and construction markets.  For example, most steel producers reported lower shipments on year-over-year basis with several citing weakness in the auto and residential construction markets.  Nonetheless, District auto plants, which mainly assemble small to mid-sized vehicles, reported increased production on a month-over-month and year-over-year basis.  Several contacts noted that increased production is attributable to competition for market share versus real market growth.  

The outlook expressed by most manufacturers is best described as steady to increasing.  Steel producers are expecting a pickup in demand during the second quarter.  Capital expenditures were on-plan for almost all manufacturers as few were concerned about their capacity utilization rates.  About one-third of our contacts indicated they are planning to increase capital spending during 2007 with four producers planning major expansions.  A majority of producers reported a rise in input prices--particularly for metals--since early January.  In response, about half of our contacts said they increased their prices.  Most were successful except in the auto and housing markets.  Hiring was limited during the past six weeks; however almost half of our contacts said they plan to add jobs during the remainder of 2007.  Wage pressures are largely contained; although, several manufacturers reported that benefit costs continue to rise.

New home sales over the past six weeks have been stable--but at low levels--and down on a year-over-year basis.  Looking forward, almost all residential contractors expect activity in 2007 will be similar to the second half of 2006.  Builders were encouraged by an uptick in traffic and inquiries.  Home prices are reported as stable to slightly down since early January.  Discounting continues to be used as a way of moving existing inventory.  Material costs have stabilized for the most part with a majority of contacts reporting a decline in lumber prices.  Most builders have no plans at this time to lay off additional workers. Activity among the District's commercial contractors has increased for the most part since early January and on a year-over-year basis.  A majority of builders are optimistic in their outlook for 2007 based on the level of inquiries and backlogs.  Segments showing strong activity include health care, public works, and recreation.  Reports on material costs were mixed with most builders saying that prices for concrete and steel are high and continue to rise.  In contrast copper prices continue to fall.  Almost all contractors are holding their prices steady with little change in profit margins.  On net, there was little change in labor force size.  

Post holiday sales by District retailers were disappointing with several citing the prolonged cold weather as the primary reason. Expectations for Q2 of 2007 are mixed; however, more than half our contacts anticipate stronger sales.  In general, supplier prices and other input costs have remained steady over the past six weeks.  Hiring continues to be limited to new store openings and turnover.  Several contacts reported wage pressures related to pending minimum wage increases.  New car and truck sales during January and February were characterized as slow with better results for foreign makes and used vehicles.  Looking forward, expectations were less than positive for vehicle sales, especially SUVs.

Since early January loan demand was generally flat; however, a few bankers reported a slight uptick in commercial loans and a small decline in consumer lending.  The market for auto loans and mortgage products can best be characterized as soft.  District bankers reported stability in core deposits and credit quality with a slight increase in delinquencies.  Business and consumer confidence was mixed at the beginning of the year with most sentiments ranging from cautious to improving.     

On net, energy-related activity was flat to slightly down across the District.  Coal producers reported decreases in spot prices ranging 10 to 20 percent since early January and 20 to 40 percent on a year over year basis.  Production was mixed with half our contacts showing increased levels year-over-year and half reporting declines.  Exporting District coal is not viable at this time due to the combination of high sulfur content and low prices.  Minimal wage pressure was reported and there are no plans to hire additional workers.  Oil and gas producers reported production levels were flat to slightly down.  In addition, several contacts reported continuing wage pressures.  

Demand for trucking and shipping services continues to soften with most contacts reporting a decline in shipments of auto-related products.  One contact also noted a drop in carpeting and latex deliveries.  Although fuel costs remain relatively stable, trucking companies continue to pass on fuel costs using surcharges and anticipate doing so into the foreseeable future.  Wages remained steady since the beginning of the year.

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Last update: March 7, 2007