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Federal Reserve Districts

Fourth District - Cleveland

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Full report

Growth in economic activity in the Fourth District has moderated from the high rates experienced during the first quarter of the year. Labor markets are less tight than in April, although joblessness remains low. Business contacts reported that although skilled employees remain difficult to find, the general quality of potential employees has improved. The prices for consumer goods are said to be increasing more than in the previous report.

There has been a recent softening in the demand for temporary workers, particularly for administrative positions. Demand for unskilled workers remains strong. Although most contacts reported persistent wage growth, one found that increased student availability has led to a lessening of wage pressures.

Union contacts reported a rapid increase in health care costs for their members. The rising cost of pharmaceuticals appears to be an important component of the increase. Unions are less concerned about rising inflation, as the current contract negotiations are only rarely emphasizing cost-of-living adjustments.

District homebuilders reported a slowing of residential sales in the last few months, which some attribute to higher mortgage rates. Year-over-year sales declines for April and May varied among builders from between 5 percent and 10 percent. Builders have had to offer incentives in the form of easier financing or lower prices than last quarter in order to sell their houses. Homebuilders, while noting healthy profit margins, also noted that the cost of such incentives has eroded their margins somewhat.

Conditions in the commercial building sector appear to have improved somewhat since the last report, due to increased construction of warehouses and industrial buildings. Construction of office and retail structures is reported to be steady and strong. Some contacts reported the improved demand is due to a robust manufacturing sector. No significant changes in labor and materials costs have occurred since the last report, though lead times (from order to delivery) for steel and brick have lengthened.

Industrial Activity
Demand for steel is reported to be strong for all products. Back orders are larger than this time last year. All contacts expect the third quarter to be very busy. The major steel companies attempted to increase prices in the first and second quarters of this year, but these attempts were reportedly beaten back by competitive pressures.

Heavy truck manufacturers expect large cuts in production of 10 to 15 percent year-over-year due to continued low sales from the first quarter of 2000. The low sales are reportedly due to high fuel prices, a large stock of used trucks, and higher interest rates. Some manufacturers are predicting layoffs to occur with the decline in production. Orders have increased for heavy construction equipment, reportedly due to increased highway construction. Durable goods production is described as good, with strong export markets. Purchases of farm equipment have also risen from their low levels of a year ago. Purchasing managers in the District reported moderately higher commodity prices in May, especially for brass, petroleum products, and paper products.

Consumer Spending
Though District retailers reported that sales remain at high levels, the pace of sales growth in April and May slowed relative to earlier in the year. General merchandisers continue to see good sales growth across all product lines although the rate of growth is lower than the unusually high rates experienced in 1999. Smaller, specialty retailers have seen somewhat more weakness in sales. Sales in the furniture and home furnishings category, for example, appeared flat in April and May, relative to the first three months of the year. A luggage retailer reported declining sales.

The retail sector reported mixed signals about the next quarter. On the one hand, inventories are said to remain at desired levels. On the other hand, some retailers reported increases in the prices charged by their suppliers. As a result, many have indicated that they have had to increase their retail prices. However, in spite of a sense among many retailers that things had slowed and may continue to slow, many organizations continue to expand and add staff. As has been true for some time now, however, it remains difficult to recruit and retain employees. Wage growth in retail firms appears to have been on the order of 3 percent to 5 percent.

Sales growth slowed in the most recent period for most car dealerships, with most reporting no increase in sales over the May to April period. Due to recent increases in fuel prices, buyers are reportedly more interested in fuel-efficient automobiles, which are not yet available in enough quantity to meet the increased demand. Dealers are offering more attractive financing plans, as well as discounts and rebates in the pricing of new autos. Automobile dealers indicated revenue and sales volume for used cars have remained nearly the same this May as in May of 1999. Dealers of both new and used cars expect sales for 2000 to be flat or lower than last year, due to the recent increases in both interest rates and gas prices.

Greater-than-average precipitation in the month of May has brought mixed blessings to agriculture in the District. The corn crop has benefited, with predictions of good-to-excellent yields being reported throughout the region. However, continued high rainfall in June may result in lower yields. Wheat yields may also decline from disease if rainfall is high during June. Soybean production has been adversely affected by the rain, in part because of pests. However, most predictions about these three main crops of the District remain favorable.

Banking and Finance
Lending activity in the District is strong for commercial loans. Contacts attributed this to increased merger and acquisition activity and to inventory building. On the other hand, the demand for consumer loans is down, which was attributed to interest rate increases. The rate for loan delinquencies remains around 1 percent. There were mixed reports on the availability of funds for lending. Some banks reported very high loan-to-deposits ratios, whereas other banks reported having more available funds.

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Last update: June 14, 2000