November 3, 1999 Federal Reserve Districts Fourth District - Cleveland

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General Business Conditions and Labor Markets Business activity in the Fourth District remains strong, and some upward pressure in wages continues to be seen. Larger price increases are noted for certain commodities in the industrial sector, but retail prices remain steady. District temporary employment agencies reported continued high demand. All contacts face ongoing difficulty finding and retaining qualified workers. Agencies noted that, increasingly, firms are retaining temporary employees on a permanent basis, and in an effort to attract new workers, the agencies have had to raise wages. Rising wages have helped entice some workers back into the job market; a technical training center in Columbus reported that retirees make up a large share of its computer education classes. Due to the upcoming holidays, there has been a large increase in demand for workers in customer service, warehousing, and distribution. Sources anticipate that the demand for temporary retail workers during the holiday season will be even greater than last year's record-high level. Wage growth is inching up in almost all industries covered by collective bargaining agreements, averaging around 3 �%. Job security and benefits remain top priorities, and several contacts reported "dramatic" increases in pension benefits; minimum pension contributions have more than doubled in the past year for some employers. Construction Persistent labor and materials shortages continue to plague commercial builders, with contacts noting backlogs of 30 to 45 days for some materials--a significant increase from earlier in the year. Nevertheless, labor and materials costs remain relatively flat. Most commercial builders noted improved sales activity within the past six weeks, compared with earlier in the year. Particular strength was noted in the Cleveland and Columbus metropolitan areas; some weakness was reported in Cincinnati. For the first time in recent memory, residential builders are beginning to report a softening in sales volume, with sales in the third quarter of 1999 reportedly down about 10% from the previous quarter. The recent slowdown in the pace of residential construction is generally being blamed on higher mortgage interest rates. Unlike commercial builders, residential contractors reported that materials and labor costs are still increasing--each is estimated to have risen 3% to 5% year-to-date. Materials and labor shortages have also resulted in longer orders backlogs. Agriculture Crop yields were extremely varied across the District in 1999. In the northern reaches of the District, corn and soybean harvests were average, or slightly less than average. However, reports from southern Ohio and Kentucky indicate crop harvests were 50% to 85% below average. Recent rainfall in the District has helped the winter wheat and tobacco crops. Most tobacco is reportedly in good or fair condition, although yields are below average. The dairy industry is generally doing well throughout the District. Milk prices remain high, and feed prices have come down from earlier in the year. In some areas, recent rainfall has renewed pasturelands that had been diminished by earlier drought conditions. Industrial Activity Industrial activity is holding steady or growing moderately in the District. Production and orders data are generally favorable, and inventories have come down somewhat from the summer. Basic commodity prices are rising, a trend that appears to have begun this summer. Prices were noticeably higher for steel and paper goods and some chemicals. Shortages are seen for a variety of skilled trades, but wage growth is said to be modest. Capital goods producers continue to see high production levels and a strong orders pace. Auto-related manufacturing remains exceptionally strong. Some slowing in the heavy truck market has been seen, and the orders backlog-which had extended to about a year this summer-has been reduced by about one-third. Still, orders and production in this industry remain somewhat high by historical standards. Agricultural equipment production remains flat. Most steel companies in the District report poor third quarter earnings, primarily attributable to low prices. Mergers and acquisitions are believed to have deflated the earnings reports a bit. Strong demand and firming prices are expected to improve conditions in the industry slightly this quarter. Consumer Spending Retail sales are still showing strong gains overall, although a few retailers have seen some softening in the first few weeks of October. Sales in August and September ranged from good to better, with exceptional sales reported for apparel stores. General merchandise inventories are low, but most retailers reported plans to steadily increase stocks in preparation for the holiday season. Some also indicate a desire to stockpile larger-than-usual inventories as a precaution against possible Y2K-related tie-ups in the supply chain. Despite the continued strong sales pace, retailers report steady prices and a very competitive sales environment. Retailers also indicate having difficulty finding workers and are anticipating labor shortages as the holiday shopping season approaches. Sales of new vehicles slowed in October, after record sales over the summer. All dealer contacts reported missing their October sales projections, although year-over-year sales are still up sharply--between 5% to 15% from last October. The 2000 model year is selling well, and most of the 1999-model-year stocks have been liquidated. A few shortages of some 2000 year models were noted. Banking and Finance Lending activity in the District is generally down from the last District report. Most banks are reporting difficulty attracting deposits as people move available funds into equity markets. The loan-to-deposit ratio has risen, reducing banks' ability to lend, and some sources indicate having tightened credit standards. Higher interest rates have dampened credit applications somewhat. Loan delinquencies are holding at a low level and credit quality is high. The spread between borrowing and lending rates is narrowing in accordance with the observed long-term trend. Return to top Philadelphia Richmond