January 17, 2001 Federal Reserve Districts Fourth District - Cleveland

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Growth in economic activity in the Fourth District remained at the same slow rate described in our last report. The steel industry in particular continues to show a great deal of strain as a result of strong foreign competition and weaker domestic demand. Retail stores experienced a slower-than-expected holiday season, as consumer spending remained soft. However, labor markets have remained fairly buoyant, although less so than they had been earlier in the year. Industrial Activity The steel industry is facing some tough times. Mills are operating 10 to 30 percent below capacity, domestic demand has slowed, and there is intense competition from foreign producers, in part due to the strong dollar. Several firms have filed for chapter 11, and more filings are expected. January orders are a little stronger than December's, but first-quarter orders are expected to be weak. Producers of specialty steel are in a better position. While prices on specialty steel products decreased along with carbon steel, orders for specialty steel remain stronger. Consumer Spending Retail stores reported disappointing sales during the entire holiday season, with the lackluster performance extending across all categories. Retailers were forced to mark down many items to boost sales. Some did so as early as the first week of December. A discount retailer reported that at stores open at least a year, sales were down 1 percent from last year and over 3 percent below expectations. A more upscale apparel store reported sales were off over 7 percent from expectations. Although sales of new vehicles through the first three quarters of 2000 were better than or just slightly below the record pace of 1999 for District dealers, sales slowed in this year's last quarter compared to 1999's. Moreover, it was reported that sales worsened as the quarter progressed. Finally, results for each dealer varied widely depending upon incentives offered by manufacturers. A current concern for area dealers is the bloated state of their inventories. Most reported having a 75-day or greater inventory, yet a 60-day inventory is preferred. Weak sales are anticipated to continue for the next couple of months. Labor Markets The slowdown in retail spending has not translated into an easing in the labor market. Firms continue to struggle to find and keep qualified employees. Demand for temporary workers remained unchanged from the tight levels reported November and October. According to several union contacts, wage growth in current contracts has increased, most in the range of 3.5% to 4%--a rate still below the 4.7% that total private hourly earnings rose in the fourth quarter. While benefits growth appears to be concentrated mostly in pensions, health care remains an area of concern. Cost shifting, co-payments, and stop-loss arrangements have increased the costs borne by union members. Banking and Finance Commercial loan activity slowed in December as manufacturing firms received fewer orders and delayed investment because of slower anticipated economic activity and lower interest rates. Demand for consumer loans also declined, but less than commercial loans. Credit standards and delinquency rates have not changed significantly, but banks are watching their customers' ability to make payments more closely. Also, banks are paying more attention to the value of the collateral for loans. Construction Commercial builders throughout the District reported mixed conditions. While some contractors reported dramatic declines in economic activity, others reported largely stable economic conditions. There have been no substantial layoffs, but firms do not anticipate hiring additional workers. With the exception of prices for petroleum-based products, most materials prices have stayed relatively flat. District homebuilders continued to report little change in business conditions. Some are concerned, however, about how much work they will have in 2001. At this time last year, many homebuilders had nearly twice as many projects scheduled for the upcoming 12 months as they do now; of course, last year was exceptionally strong. Trucking and Shipping Most shippers reported a slowdown in business in December from November, and nearly all reported a decrease in shipping activity compared to December 1999. In November and December, revenue decreased slightly less than shipping activity, or not at all, due to price increases and fuel surcharges. Shipping volume declined, confirming the slowdown in steel-, manufacturing-, and automotive-industry-related products. Over the last month, fuel costs have stabilized and even gone down slightly for some companies. But even with lower fuel prices, unusually bad winter weather has resulted in rising costs anyway. Most contacts expect the decline in shipping activity to continue into the first quarter of 2001. Return to top Philadelphia Richmond