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Federal Reserve Districts

Fourth District - Cleveland

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According to reports gathered the first week of January, the Fourth District economy still appeared to be in the process of bottoming-out during the last two weeks of November and the month of December. Some industries, however, did report improved business conditions: demand for construction services throughout the District remained unexpectedly strong, and manufacturing reported improvement in the northern part of the District, including expansion in the Cleveland metro area. Retail sales, on balance, were the same or a bit higher than a year earlier--an outcome that exceeded expectations. Contacts reported that unseasonably warm weather contributed to good auto sales, but resulted in poor winter apparel sales.

"Cautious optimism" characterizes the 2002 business outlook in the Fourth District. Most contacts expect a flat first quarter, with recovery beginning late in the second quarter 2002 or very early in the third quarter.

Labor markets continue to struggle. Demand for temporary workers slowed in December, and job security remained the number-one concern among unionized workers. While, on average, wage adjustments in new contracts remained fairly constant over the last two months, several contacts reported renegotiations due to adverse economic conditions. Employers in the steel and aerospace industries have invoked "economic duress" clauses that exempt them from certain job-security provisions. Some of these renegotiations have involved wage concessions or agreements to postpone (with "give-back" provisions) scheduled wage increases. Our contacts continued to report increasing health care and benefits costs.

The manufacturing outlook continues to improve for the northern part of the District. Contacts reported industry expansion for the second consecutive month in December for Northeast Ohio. In the southern part of the District, manufacturing reports were mixed: While employment remained fairly constant, inventories and prices declined. Overall, new orders and production declined in December, but the number of manufacturers reporting increases in new orders rose from November to December.

Both the auto and steel industries reported mixed conditions. Some auto plants in the District worked overtime hours to meet booming demand for their models, while others were forced to close for two weeks because of slumping sales of the models produced at those plants. In the steel industry, prices remained steady (with no expectation of decline), and some contacts reported that they would attempt price increases during the first quarter. While some steelmakers reported very modest improvement in conditions during the fourth quarter, most reported that business was flat from the previous quarter. Most contacts still expect conditions to improve late in the second quarter or early in the third quarter 2002.

Retail Sales
Although retailers reported weak activity through most of December, many noted that activity was strong in the days immediately preceding and following Christmas. Contacts noted that after-Christmas discounts and promotions were not significantly different from those in previous years. Overall, retail sales for the holiday season beat expectations, and sales were about the same, if not slightly better, than sales for the same period in 2000. Individual segments of the retail sector, however, had widely differing reports: Discount retailers noted that holiday sales were up 4-8 percent year-over-year, while apparel retailers reported their sales were down 3-9 percent year-over-year for the same six weeks. All contacts blamed weak winter apparel sales on unseasonably warm weather in the District. In general, contacts expect retail sales for the first half of 2002 to be flat or slightly better than the first half 2001, followed by marked improvement in sales for the second half of the year.

Auto dealers reported that sales the last half of November and December slowed from the record pace seen in October (when most contacts reported monthly sales roughly 40 percent above those in October 2000), but they noted that, despite the recession, December sales were still around the historical average for the month. On average, contacts expect poor first-quarter sales for two reasons. First, manufacturer offers for zero-percent financing and cash back on specific models will expire in January. Second, seasonality and higher-than-expected sales during the final quarter of 2001 will lower demand. Most dealers expect sales to rebound during the second or third quarter 2002.

Conditions in the construction industry continued to improve in late November and through December. Although the industry typically sees a slowdown during the holiday season, this was not observed this year. Most contacts reported that customer interest in initiating new projects was "uncharacteristically strong." Building activity has remained steady in both the commercial and residential sectors. The costs of labor and materials remained steady.

Some builders reported that increasing interest rates appear to have compelled some buyers to act out of concern that if they did not take advantage of lower rates now, the opportunity might not exist later. Others voiced concern that the rising interest rate environment might adversely affect demand, but, on balance, District builders remain cautiously optimistic about their prospects for 2002.

Trucking and Shipping
Trucking and shipping activity declined in December relative to October and November, but most of the decrease was seasonal (because Christmas fell on a Tuesday, manufacturer holiday shut-downs were slightly longer than usual, which also contributed to lower figures for December). Shipping of retail goods was slightly stronger than expected, but shipping activity for manufactured and manufacturing-related goods continued to decline. Overall shipping activity was down approximately 10 percent year-over-year for the fourth quarter. Contacts reported that total shipping volume throughout 2001 was well below prior-year figures.

Initial reports suggest that shipping activity the first six weeks of 2002 will remain steady from the last six weeks of 2001. Although carriers expect activity for January and the first half of February to be slow (in part due to seasonality), contacts are cautiously optimistic about the last half of the year. Most contacts expect turnaround in their industry late in the second quarter or early in the third.

With the exception of a recent slight uptick, diesel prices declined throughout late November and December. Surcharges associated with energy are currently very low, and some contacts reported that they have eliminated these surcharges.

Competition for borrowers continued to be very aggressive across all lines of lending as the demand for commercial and consumer loans remained soft. Most contacts reported that applications for loans were holding steady, but one contact did report an increase in applications. Banks reported that the credit quality of loan applicants had diminished. Roughly half our contacts reported an increase in the rate for loan delinquencies, while the other half reported a decrease.

Mortgage refinancing activity remained strong, although contacts did note some decline in activity during the second half of December as interest rates began increasing. Demand for auto loans at district banks remained low, as manufacturers continued to offer zero-percent financing.

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Last update: January 16, 2002