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Federal Reserve Districts

Fourth District - Cleveland

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The Fourth District economy continues to move laterally, with large gains in a few areas offsetting modest declines in many sectors. Weakness in the region remains centered in manufacturing, although industrial softness has begun to exert downward pressure on other industries, such as shipping and construction.

Unemployment remains low, although District labor markets have loosened considerably this year and wage growth is reported to have moderated. Demand for temporary workers is off 10 percent to 15 percent from the levels seen in May and June. This falloff, combined with a seasonal increase in students seeking summer work, has created an excess supply of temporary workers.

Conditions in the manufacturing sector continue to deteriorate. Steel orders remain soft and inventory levels are still high. Moreover, a recent slowdown in the construction and appliance-manufacturing industries is expected to exacerbate the already weak demand for steel. Steel prices have fallen at least 25 percent since a year ago, and recent attempts by some steel makers to boost prices 5 percent per ton have not stuck. Computer and telecommunications firms have also been hard hit.

Elsewhere in manufacturing, orders, production, and employment have shown little overall growth and overtime at many firms has been cut. Sources are not optimistic that industrial activity will improve soon; accordingly, capital outlays in manufacturing are well below levels seen a year ago.

Retail Sales
Retail activity in the District is mixed, although signs of weakness appear to outweigh signs of strength. While a few chain stores report extremely strong sales, most others appear to be faring poorly. Home decorative merchandise, floral and nursery goods, and some apparel items are selling well, but sales in most other categories remain soft. Heavy price discounting is under way to help boost sales and thus slow rapidly rising inventories. Most retail contacts are pessimistic about conditions in the immediate future and see the possibility of sales declines through the back-to-school season.

Aggressive manufacturer incentives helped to bolster sales at District auto dealers in June -- the highest month on record for many dealers. Year-to-date sales (through June) appear reasonably strong, and dealer profits are on the rise. Still, sales activity appears to have peaked in June as the effectiveness of pricing programs waned. In general, auto sales were down between June and July, and additional price discounts are expected in August as manufacturers prepare inventories for the new model year.

The sustained strength of home sales this year continues to surprise District home builders. Recent new home construction levels compare favorably with the historic peaks achieved in the first half of 2000. However, some firms report less customer traffic than this time last year.

Most commercial construction categories report weakness. Demand for office space, for example, seems to have dropped dramatically, particularly in central Ohio. Demand for retail and industrial space has fallen across the District, and vacancy rates for commercial building segments continue to rise. According to one source, the low level of new construction inquiries suggests that improvement in this sector is not imminent.

Overall, materials prices are said to be stable, although lumber prices have fluctuated widely and drywall prices have fallen further. Labor availability is mixed by trade: Unskilled workers are in ample supply, but shortages of framers, roofers, and masons have been reported.

Trucking and Shipping
Trucking and shipping tonnage in June and July was well off its level of this time last year. Shipping activity has felt the slowdown in manufacturing. Shippers note a larger-than-usual number of auto-related plant shutdowns and reduced production at machine tool, steel, and heavy equipment manufacturers. Shipments of retail goods are reported to have improved somewhat. Planned capital expenditures are down for the year, and sources point to significant excess capacity in the industry. Bankruptcies among shippers have increased in the past year.

Fuel costs have dropped substantially since the last District report, leading to a reduction in energy-associated surcharges by shipping companies.

Recent dry weather has had an adverse effect on corn crops in the northern part of the District, and farmers expect yields to drop 5 percent to 10 percent as a result. Lower-than-average rainfall has led to poor growth in grazing pastures, forcing some farmers to dip into their winter feed supplies to maintain livestock. Dairy prices remain high, although production has fallen recently with the dry, hot weather -- daily milk production is down as much as 10 percent for the season in some parts of the District.

Still, farmers appear to be faring better financially than last year at this time: Some have been able to make capital improvements to their farms this year, and very few banks report delinquencies on loans to farmers.

Fourth District banks report mixed developments in the aftermath of the recent interest rate reductions. Commercial loan activity is up for half of our sample, down in the other half; however, commercial loan applications have picked up in the past month or so. Consumer borrowing has been steady over the past six months, though some banks report growth in home equity lines of credit and new car lending.

There has been no significant change in the rate of loan delinquencies at District banks. Some bankers are concerned that recent increases in layoffs will pinch household liquidity. The spread between lending and deposit rates has widened slightly.

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Last update: August 8, 2001