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Federal Reserve Districts

Fourth District--Cleveland

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Full report

Contacts in the Fourth District reported steady or improving conditions during June and the first few weeks of July. For the second consecutive report, manufacturers reported steady or improving production and sales. Residential homebuilders reported increased activity in July over May and up to 7 percent sales increases year-over-year. Aside from a typical seasonal slowdown in July, trucking and shipping experienced increased activity. Some contacts reported hiring activity, with very few reporting any layoffs.

However, some areas of the economy experienced continued weakness. Retailers and auto dealers are experiencing continued slow sales, with auto dealers in particular experiencing activity much below the strong sales levels of 2003. Commercial builders experienced little new activity and expect current trends to continue into the next few months. Demand for commercial loans fell since the last report.

Most contacts in manufacturing, including steel, residential construction, and trucking and shipping, expect conditions to continue improving throughout the rest of the year, while contacts in commercial construction, retail, and banking were pessimistic about anticipated activity in the coming months. Overall, prices remained relatively stable in this reporting period.

Manufacturing contacts reported flat to improving production and sales in June and early July, very much in-line with previous reports, with no contact reporting declines. Both sales and production were stronger in this period than in the previous months, though some contacts said levels were still down relative to last year. Inventories are down from 2002, and our sources reported idle capacity ranges from none to about 30 percent.

Though most manufacturers said they were maintaining their current workforce levels, more contacts reported hiring new workers and temporary workers than those cutting payrolls. Reports on prices, both inputs and prices charged, were mixed, though most contacts reported no change in prices. Most contacts anticipate moderate sales and production growth by year's end.

Auto production fell at most District plants in May and June, though at a lower rate than in the last report, with Districtwide production roughly 3 percent below 2002 levels. Model changeovers in early July prompted many plants in the Fourth District to schedule overtime in the weeks leading up to July 1.

Demand for steel remained unchanged from the last report, though it has increased some since last year. Demand has been high from the energy and military sectors in particular, and suppliers to these markets note robust orders with increases in production, prices, and labor forces. However, raw steel supplies continue to be high, resulting in fierce pricing competition and low profit margins. Natural gas and scrap prices rose, but the lower level of the dollar is helping sales internationally. Steel inventories have fallen since May and are down from last year's levels.

The outlook for steel production and sales was more optimistic in this report than in the last with more steel producers expecting demand to improve at a steady, yet limited rate. Should demand remain steady, sources anticipate raising prices by the end of the year.

Retail Sales
Reports were mixed from retailers, with some stating recent sales were below plan and others were on plan; comparable store sales ranged from declines of 5 percent to increases of 5 percent year-over-year. Many contacts noted deeper discounting and promotional activity. Most contacts' apparel sales have struggled over the past six weeks, and sales for Father's Day and the Fourth of July did not appear to help retailers. Items that have been selling well include cosmetics and select teenage apparel and jewelry, as well as basic items such as groceries.

Inventory levels also varied, ranging from down 15 percent to up 10 percent over last year. Vendor prices are stable along with labor activity, though a few contacts are limiting hiring and reducing payrolls, while others mention hiring a large number of temporary workers. Looking forward, most contacts are expecting 2003 sales to be flat or slightly higher than sales in 2002.

For the second report in a row, automobile dealers also noted sluggish activity throughout most of the Fourth District, with one contact noting new car sales were down 10 to 25 percent from last year. Sales continue to be very dependent on incentives. Used-car sales are doing somewhat better with consistent sales. Inventories at dealerships continue to be high with reports of 64-90-day supplies (above the 60-day supply target). Though some contacts reported an increase of showroom activity, contacts expect this slow activity to continue through the rest of 2003, resulting in total lower sales than 2002.

Homebuilders continued to report strong sales in June and early July, with contacts indicating that the Midwest has been outpacing other areas with respect to permit activity. Sales rose again from an already high level, year-over-year increases between 5 to 7 percent reported, and customer traffic remaining strong. Aside from typical seasonal price increases, material costs remained flat.

Commercial builders, on the other hand, continued to report poor conditions similar to the past few reports, though there are a few signs of improvement. Several contacts reported that sales and customer traffic had improved significantly in June and early July, though most firms indicated that the economic environment continues to be weak, while there was some activity in the health care and public works sectors. Few new projects were reported, and some scheduled projects have had delayed start dates, especially those related to public education.

Given the current economic environment, most commercial builders expect these trends to persist into the near future. Contacts stated that companies are hesitant to make major capital investments due to the economy and continuing concerns about national security. Input costs remained relatively stable, with materials prices remaining relatively the same, though some labor costs rose due to new union agreements. In recently renegotiated contracts cited by our contacts, wages will increase about four percent each year (renegotiations occur about every five years).

Trucking and Shipping
Demand for trucking and shipping has been constant since the last report, as the industry experienced steady conditions in June with a typical brief seasonal slowdown caused by manufacturing retooling in July. Shipping volumes are near 2002's levels and in-line with expectations. After holding steady since last summer, prices have begun to rise again as a result of scarce capacity in the industry. Contacts do not plan on acquiring additional equipment or drivers, as a large segment of the industry continues to experience consolidation. Demand is expected to rise in the fall although no higher than last year's levels.

Most banking contacts reported a decline in commercial loans since the June report, though demand for consumer loans has increased mainly as a result of home equity loan activity. Growth in core deposits has been mixed, as has the loan delinquency rate. Though there continued to be no change in credit standards, a few contacts maintained, as in the last report, that there is further deterioration in credit quality.

There continues to be a squeeze on net interest margins. While there was no change in the number of loan applicants, the competition for borrowers has been intense. As contacts have not seen much improvement in business and consumer confidence, few are optimistic about future activity.

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Last update: July 30, 2003