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Federal Reserve Districts

Fourth District - Cleveland

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Full report

Reports gathered in early November suggest the Fourth District economy has bottomed out. None of the contacts surveyed expects economic conditions to worsen, and signs of recovery are beginning to emerge: Manufacturers reported some improvement in the level of new orders, steelmakers reported that prices have stabilized, retailers reported strong sales among discount chains and improved forecasts for holiday sales, bankers reported improvement in their net interest margins, residential builders reported business is near the same levels as last year, and commercial builders expect prospects to brighten with the new year. While business in December may remain sluggish, most industries expect conditions to improve markedly during the first half of 2002.

In the labor market, however, job security continues to be a serious concern. Some industries have suffered major losses in employment as a result of the economic downturn and the September 11 attacks. Other industries that were not able to shed jobs through layoffs and restructuring have stopped filling open positions to reduce labor costs. The demand for temporary workers has slowed considerably over the past few weeks. Wage pressures have eased, reportedly because workers are more uncertain about their jobs. Benefits costs are rising, with most contacts specifically identifying increasing health care costs. Skilled labor is easily available, and open positions are being filled with minimal recruiting efforts.

Although several manufacturing indicators in the District continued to decline in October and early November, some improvement in new orders in the northern part of the District and a slowdown in the decline in new orders in the southern part of the District suggest that industry conditions may improve during the first quarter of 2002. Most manufacturing contacts reported that employees were working shorter weeks with no overtime.

Contacts in the steel industry noted that prices stabilized in October and November, but did so at very low levels. Most companies reported selling steel at or below cost, and contacts noted that companies operating under bankruptcy protection are pricing their products artificially low to keep their contracts, contributing to the downward price pressures in the industry. Steelmakers that produce niche products reported for the first time that business was sluggish, but noted that they do not expect this weakness to persist.

Retail Sales
Reports from area retailers were mixed: discount retailers reported that October sales figures were much stronger than last year's, while higher-end retailers, apparel retailers, and retailers located in malls reported very weak sales. Some contacts reported that year-over-year sales were down as much as 15 percent. Several contacts noted a continued shift in consumer preferences from more expensive, high-end products to lower-priced products.

Retailer forecasts for the holiday season have improved since the last report, reportedly due to positive consumer response to aggressive advertising, increased discounts, and special promotions. In our last report, retailers were generally pessimistic about the holiday season, but now most retailers are characterizing their outlook as "cautiously" or "guardedly" optimistic. Discount retailers have a more optimistic outlook, and expect above average-sales this year. Apparel retailers appear to be an exception to the increasing optimism in the District, with most still forecasting year-over-year sales to be down around 5 percent.

Automobile dealers reported that manufacturers' offers of zero-percent financing led to record sales in October, and initial reports for November suggest that, although sales have begun to slow, this month's sales figures will also be higher year-over-year. Strong sales during the last quarter of 2001 are expected to result in a significant drop in sales for first quarter 2002, but dealers expect sales to return to "normal" levels during second quarter 2002.

Commercial contractors reported that bidding for jobs has become more competitive over the last six weeks. Many firms are taking jobs they would not normally take in order to maintain current staffing levels through the winter months, as they anticipate needing their staff for projects in the spring. Contacts have seen an increase in the number of projects scheduled for the spring and less hesitation by customers to move forward on projects that had been in the planning stages or delayed.

Most homebuilders reported that sales improved in October and early November and levels were similar to those at this time last year. The current pace of sales, however, is still substantially slower than earlier in the year. Nevertheless, customer traffic continues to improve, causing most homebuilders to be "cautiously optimistic."

Trucking and Shipping
Trucking and shipping activity improved little in October, and there has been a decline in the volumes shipped for November, partly due to seasonality. Activity is significantly down year-over-year. The volume of steel and manufacturing-related goods carried remains depressed. Contacts noted that shipping of retail and auto-related goods did not increase as much as expected given the October sales gains for discount retail goods. This suggests that inventoried goods, rather than increased production, have accounted for a large share of recent retail sales.

The outlook offered by our contacts indicates that activity will remain weak at least through first quarter 2002. Both carriers and their customers have moved in recent weeks to protect their declining profit margins against increasing cost pressures. Customers continue to transfer freight hauling from air to ground. Carriers are curtailing capital expenditures, and some are phasing in slight rate increases. Although the industry is very competitive, these price increases have stuck because customers appear to be willing to pay a premium for reliable and financially stable carriers during a time when many trucking companies have gone, and continue to go, bankrupt.

Most banks reported improvement in their net interest margins due to the lower cost of borrowing, but a few contacts did report tightening net interest margins. Competition for borrowers remains aggressive across all lines of lending. Demand for commercial loans continues to be soft in the District, but consumer loan demand has been mixed. There has been some increase in mortgage lending, as consumers refinance to take advantage of lower interest rates, but there has been significant decrease in demand for auto loans as consumers are opting for zero-percent financing offered by manufacturers. On balance, the number of loan applications has remained steady. All contacts except one reported a slight decrease in credit quality, and most banks reported a slight increase in the rate of loan delinquencies over the last six weeks.

Travel and Tourism
Contacts believe tourism in the District has remained fairly insulated from the effects of September 11 because it does not rely heavily on air travel, but current levels are slightly lower than before September 11. Business travel, which had already been declining more than tourist travel prior to September 11, continues to drop. Most of the decline in business travel is attributed to cutbacks in business spending to address current economic conditions. Although some meetings and conventions were cancelled in the weeks following September 11, these cancellations were rather limited and did not persist.

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Last update: November 28, 2001