March 8, 2000 Federal Reserve Districts Fourth District - Cleveland

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Growth in the District economy remains strong, with continued low rates of joblessness and steady wage growth. Materials prices for manufacturers are rising. However, the prices for consumer goods and the materials prices for construction are stable. Labor Markets District temporary employment agencies reported a broad based increase in the demand for workers, following a seasonal holiday decline. Strong demand for administrative assistants, clerical workers, and legal secretaries continues unabated. Demand for workers with computer skills seems to have shifted away from hardware and systems workers to software and Web-based workers. Although most contacts mentioned difficulty in finding qualified personnel, none reported an inability to fill customer orders or significant wage increases. All contacts expect a steady growth in demand to continue for the next few months. Union sources reported continued wage growth, averaging 3 per cent. They affirmed that gains are "across-the-board" instead of being skewed by a few large settlements. Pension funds have done well recently due to high stock market returns. This has been balanced by a concern over the possibility that higher health care costs will be borne increasingly by workers and less by the firms. Job security remains a high-priority issue in union negotiations. Reports on the demand for information technology were mixed, depending on the type of services provided. Contacts who experienced an upsurge last quarter due to Y2K-related consulting expect a slowdown. Others anticipate a rise, as clients turn to development projects that were postponed until Y2K. Construction Although January sales are off from the high pace of a year ago, the level of home sales remains high. Some builders reported that existing homeowners have begun to account for a smaller share of their sales. These builders say that this could indicate a weakness in demand, because potential buyers may not be able to sell their existing homes. Cost pressures for both materials and labor continue to be subdued. Commercial builders reported a large increase in publicly funded construction. They also reported an increase in the construction of industrial facilities and office buildings. This is driven, in part, by increased demand from the manufacturing sector. Warehouse space for Web-based businesses is in high demand,. but retail space is characterized by some as being overbuilt. One contact suggested that the labor market was so tight that it could cause a wage increase on the order of 5 to 10 percent. Finding subcontractors has also become very difficult due to the high demand for construction. In general, materials prices for construction are flat. Industrial Activity Industrial equipment demand is very strong, and there are indications that much of the growth that has been concentrated in the high-tech sectors is also being seen in machinery, steel, and autos. One contact reported growth rates of 6 percent for industrial machinery in orders. Weak farm prices have decreased the demand for agricultural equipment, but this trend has flattened out in recent months. Industry analysts agree that rising gasoline prices have hurt this industry, although predictions for the decline in demand for heavy trucks range from 5% to 25% for the year 2000. The demand for light trucks continues to be very strong. In recent months the combination of strong demand and declining imports has caused steel prices to rise. Some companies announced spot market steel price increases of $20-$25 per ton for hot rolled, cold rolled, and coated products, effective for January shipments, and an additional $30 per ton effective for April shipments. Demand continues to be strong. However, last year's steel-price decreases and raw-material-price increases have caused most companies to report losses for 1999. Some companies expect to see improvements this quarter, but others do not expect major improvements until the end of the second quarter of 2000. Several companies have announced small job cuts recently. Purchasing managers in the District reported an increase in the growth rate of commodity prices in January. Higher prices were reported in primary metals, engineered polymers, memory chips, PVC resin, and steel. After several months of reductions, inventories of raw materials are starting to be rebuilt. Inventories of finished goods continue to drop. Both production levels and new order levels were mixed, but more companies reported higher levels in January than lower. Consumer Spending Several contacts reported slower sales, which they attributed to the severe weather conditions during most of the month rather than to a more fundamental decrease in demand. Overall, however, most of our contacts reported that their inventories are consistent with their plans. None of the retailers reported price increases. Expectations for spring are quite positive, with most retailers expecting moderate-to-strong sales increases overall. Internet sales by regular retailers continue to grow but remain a small portion of their overall sales. Sales of new vehicles have generally slowed for the month of February. However, sales in January were good, despite the bad weather. The February slowdown was anticipated, and inventories, which had been reduced by the brisk holiday sales, are now at more normal levels. Dealers did not believe that high gasoline prices would significantly affect sales, and they foresaw continued strong sales for the next few months. Banking and Finance Sources in banking report that lending activity in the District is down for both commercial and consumer loans due to recent rate increases. The rate for loan delinquencies is slightly up. This is said to be a seasonal variation caused by heavy Christmas spending. Credit quality is thought to be high, as banks report being very selective in accepting loan applications. Most banks already have a very high loan-to-deposit ratio both because of strong credit demand and because depositors are finding alternative instruments to bank liabilities. Willingness-to-lend levels remain high, but all banks reported that it is very difficult to attract deposits at rates that will provide a healthy margin for them. The spread between borrowing and lending rates is shrinking due to competition. Small banks reported that bigger banks toughen the competition by offering lower rates. Return to top Philadelphia Richmond