June 13, 2001 Federal Reserve Districts Fourth District - Cleveland

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Economic activity in the Fourth District changed little in April and May as conditions remained weak. Commercial construction was, if anything, weaker than in the first quarter. Residential construction remains strong, although it has cooled slightly, possibly because of seasonal factors. Demand for steel and other manufactured goods has yet to recover. Layoffs continued, and wage growth slowed further. The persistence of the slowdown in manufacturing caused some contacts to alter their outlook; they now believe that their orders are unlikely to rebound as early or as quickly as they had forecast in March. Nonetheless, retailers reported moderate sales growth. Industrial Activity In general, manufacturers continued to see weak orders. Managers are eagerly looking for convincing signs of an upturn, and the downturn has made them extremely keen to trim costs to the bone and become ever more cost efficient. Manufacturers still believe that orders will rebound later in the year, but some now feel that the recovery will be later and slower than they had expected. Despite this, they remained reluctant to lay off skilled workers. A supplier of investment goods reported that year-to-date orders are about 10 percent below the same period last year. The primary reason cited was that customers were waiting for their orders to rebound. The steel industry continued to see little improvement. Inventory levels remained high at steel service centers, and some mills are being closed temporarily. Demand for flat-rolled steel products was soft in May, with both prices and production levels low. While some observers believe that steel prices have hit bottom because they stabilized in April, others expect prices and demand to decline further in the third quarter. As in the first quarter, specialty steel makers reported a healthy demand for their products. Consumer Spending Retail contacts reported moderate sales growth in April and May. Apparel retailers had an unexpectedly strong April, which they attributed to good weather. In contrast, apparel sales in the first three weeks of May were weaker than expected because cool and rainy weather appears to have postponed summer purchases. Computer, stereo, and appliance sales are still slow. One contact reported that the demand for computers, stereos, home appliances, and televisions was extremely low. Another reported seeing virtually no replacement of large-ticket items. The bright spots for these retailers have been new technical gadgets like digital cameras and personal digital assistants (PDAs), which are selling very well. Auto sales in April and May were reportedly up significantly from earlier in the year, but they remained roughly the same as they were last year at this time. However, sales have been quite spotty, with some dealers performing much better than others. Sales of trucks and SUVs have been slightly weaker than autos but have followed approximately the same trends as car sales. Some of this difference could be seasonal, as sales of trucks and SUVs generally pick up in the summer, but higher gas prices are thought to be playing a role. Contacts related that sales continued to be dependent on dealer incentives. Sales expectations for the summer are cautiously optimistic. Labor Markets Union contracts negotiated in April and May contained annual wage increases of about 3.2 percent as opposed to the 3.5 percent averaged in first quarter contracts. However, health care costs are rising rapidly for many employers, and some union leaders have tried to educate members on the nature and magnitude of health care cost increases. One contact indicated health care costs increased 12 to 18 percent over the last year. Demand for temporary labor continues to be soft. An exception is still skilled administrative workers, although most contacts believed this is due to a small pool of available labor rather than increasing demand for these workers. For most other occupations, contacts reported an increase in people looking for work. In particular, one contact observed an increase in the supply of skilled, high-tech and engineering workers. Some have been laid off from a previous job, while others are graduating from college and have yet to find full-time work. Construction Conditions in the commercial building sector are still characterized as stagnant. The level of new inquiries, according to one builder, remained distressingly low. Moreover, vacancies for all categories of commercial building have continued to climb since the end of last year. In contrast, Fourth District homebuilders continued to be in a much better position as their sales have been solid. However, although customer traffic has been good, it has been trending down over the course of the last couple of months. While this decline has been roughly consistent with normal seasonal patterns, builders are nevertheless concerned about their prospects for the months ahead. Lumber prices have risen about 20 percent since the middle of April because of a trade dispute between Canada and the United States that may result in retroactive American tariffs on Canadian lumber. Most other materials prices, however, remain flat. Banking and Finance Banks in the Fourth District indicated that loan activity picked up slightly from March to May. More consumers refinanced their debt obligations to take advantage of lower rates. Many converted uncollateralized loans to home equity lines of credit to obtain a lower rate and a tax deduction. Although refinancing activity has slowed since the peak in February and March, the level was still described as high. In contrast, there has been very little refinancing in commercial loans because commercial loan contracts frequently do not allow companies to pay off these loans early. Contacts noted that new commercial loans have been used to upgrade or repair equipment -- few loans were thought to be for new investment. All contacts agreed that the credit quality of loan applicants declined in April and May, particularly for consumer loans. Consequently, contacts reported that they plan to tighten standards or at least not loosen them. Trucking and Shipping Overall trucking and shipping performance was still off last year's pace, and most companies have reduced their capital expenditures. Shipping of automotive, heavy capital goods, and truck parts remained significantly down. Electronics, high-tech, and retail goods have been off somewhat as well. Shipments of refrigerated goods and food products remained strong. Shipping costs have been going up, led by fuel prices that have recently risen to nearly last year's peak levels. Even more worrisome than fuel costs have been insurance costs, which are up about 20 percent from last year, with further increases expected later in the year. The consensus outlook among shippers was that the summer will remain slow but that there would be a rebound later in the year. Agriculture The good news from farmers is that nitrogen prices appear to have peaked and output prices are generally acceptable. In particular, milk prices in May were up 5 percent from March and up almost 20 percent from April 2000. Although the spring planting went very well, Fourth District fields may be receiving too much rain. Farmers are beginning to worry that they may have to replant some crops. Return to top Philadelphia Richmond