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Federal Reserve Districts

Fourth District - Cleveland

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Full report

The general downward drift of the Fourth District economy continued in late August and September. Most industries experienced a temporary negative shock following the terrorist attacks of September 11, but production cuts in several industries will likely be more persistent, namely, manufacturing, retail, and travel and tourism. Most contacts in these industries revised their profit expectations downward for the year, and there seems to be little optimism that business activity in these areas will recover in the near future.

Conditions in the District's labor market were mixed. A number of labor unions reported some improvement in compensation, but job security is a serious concern for most union members. In general, wage growth remains subdued, but several contacts noted accelerating benefits, especially for health care. Temporary workers are in high demand in the southern part of the District, while conditions in the northern part are reportedly less favorable. Since September 11, large layoffs have been announced in the airline, aerospace, hotel, and restaurant industries. Some manufacturing contacts warned that more substantial layoffs may be necessary if unfavorable economic conditions persist past the end of the year.

Contraction in the manufacturing sector continues, but conditions vary widely by type of manufacturer. Suppliers to automakers reported significant drop-offs in new orders and production, as did steel makers, aerospace equipment producers, and printing and publishing firms. Manufacturers of niche products related to safety and security noted that business has increased substantially since September 11. Some producers of luxury goods, such as boats, reported that business remains surprisingly strong in the wake the attacks. Most manufacturing contacts have sharply revised their fourth quarter sales estimates downward since September 11, and some are marking down 2002 sales projections as well.

Retail Sales
Contacts reported that retail sales for the first ten days of September were sluggish. Retailers do not expect to recover the losses associated with the drastic drop-off in sales that occurred after September 11, but most contacts indicated that sales returned to pre-attack levels very quickly--some as soon as the following weekend, and most within two weeks. High-end and apparel retailers appear to be an exception; sellers of these goods reported depressed sales. Discount retailers reported steadily increasing sales since September 11 and expect September sales to be stronger than August sales. Few retailers are optimistic about prospects for the holiday season and many expect fourth-quarter sales to be well below last year. Most contacts have revised their annual sales estimates downward an additional 2 percent since September 11.

Auto sales in the District declined considerably the week after September 11, but September's auto sales were still close to pre-attack expectations because sales rebounded during the last half of the month. Dealers reported that showroom traffic is now higher than it was in August. Aggressive incentive packages by manufacturers, including zero-percent financing and cash-back bonuses, have contributed significantly to the recent pickup in sales.

Residential building activity declined significantly the week after September 11, but since the third week of September it has returned to levels described by District homebuilders as normal. Builders are cautiously optimistic about their prospects for the remainder of the year.

Commercial construction activity has declined a bit since the last report, although perhaps more so in the weeks following September 11 as conditions in both the office and retail segments of commercial construction have worsened, but the industrial and warehouse segments have held steady. Some contacts reported that their customers appear to be more cautious since the attacks, but others noted that the favorable interest rate environment has spurred some interest among potential customers.

Trucking and Shipping
Air freight volumes have steadily picked up since September 11 and are now near the levels seen prior to the attacks. Trucking and shipping tonnage changed little after September 11, compared to August and the first week of September. Year-over-year shipments are down significantly, and contacts reported that they have not seen the seasonal September increase in retail and consumer goods shipping.

Input cost pressures are mixed: diesel prices have continued to drop over the past several weeks, and some carriers have eased their energy-associated surcharges. Insurance costs, on the other hand, have seen a substantial increase in the District, with some contacts reporting that premiums for umbrella coverage have tripled since they last renewed their contract. Security costs for air freight have also increased considerably, and most carriers are passing these increased costs on to their customers through surcharges.

Fourth District banks reported mixed developments stemming from the recent rate cuts. The net interest margin improved for most banks, but a couple reported tightening in the margin. Half of our contacts reported a drop in demand for commercial loans, while the other half reported no change in commercial loan activity. Consumer loan activity has been mixed: mortgage lending for both purchasing and refinancing has been strong, while consumer credit has weakened. Most banks reported a slight increase in the rate of loan delinquencies, and almost all contacts reported some decrease in credit quality. Loan applications have remained steady since the last report.

Travel and Tourism
Contacts noted that since the attacks, meeting planners have changed their criteria when selecting locations for large events: they now favor cities that are easily accessible by ground travel over cities with large airports. Cities with larger airports reported a higher percentage of cancellations of planned conventions and conferences than those without. For the most part, events are being postponed rather than cancelled, but attendance at these rescheduled events has been and is expected to remain significantly lower than originally planned. Local government administrators are warning that decreased tourism may cause shortfalls in their budgets.

As expected, farmers in the northern part of the District have been able to harvest only 80-90 percent of their annual average yields in both corn and soybeans. Farmers in the southern part of the District reported that their corn and soybean harvests should be above five-year annual average yields. Livestock farmers across the District reported that business is strong, and prices for beef remain significantly higher than last year.

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Last update: October 24, 2001