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Federal Reserve Districts

Fourth District--Cleveland

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Economic activity in the Fourth District grew at a moderate pace since early October; however, the housing market, restructuring in the auto sector, and some raw material prices have tempered enthusiasm. Production at District manufacturers was steady to increasing with the expectation that production will remain at current levels for the next six months. Several commercial builders report activity has slowed, but business remains relatively strong overall. New residential construction was mixed with a few builders experiencing a pick-up in activity. Sales by District retailers were more in line with expectations after a somewhat disappointing September. Loan demand at District banks was flat while core deposits were up slightly. And the demand for trucking and shipping services continues to soften.

On net, hiring across the District was stable. Staffing firms reported increased job openings since early October with some contacts saying that openings were up across the board. Wage pressures are not seen as an issue at this time. Almost all contacts said that, with the exception of metals, the rise in input costs continues to moderate. Manufacturers attempting to raise their prices met with a mixed degree of success. And almost all retailers reported that they were holding their prices steady.

Since early October, production by the District's durable goods manufacturers was stable or up slightly with higher production levels reported on a year-over-year basis. Demand for steel products continues to soften due to weakness in the auto, appliance, electrical distribution, and residential construction markets. Although District auto production increased in October, a decline was seen on a year-over-year basis. The outlook by most durable manufacturers is for production to remain at current levels over the next six months. Two contacts expecting lower production attribute it to seasonal adjustments. Almost all manufacturers said they were operating at normal capacity and that capital expenditures remain on target. Although a majority of the producers expect little change in spending, five respondents said they were going to increase capital expenditures in 2007. Input costs were mixed with higher costs being attributed almost exclusively to metals. Hiring has been limited over the past six weeks; however, four contacts said they are planning some hiring in the near future. Wage pressures are largely contained. Several contacts reported that benefits, especially health care, continue to rise.

Production levels at the District's nondurable goods facilities were steady to increasing since early October and on a year-over-year basis. Expectations for the next six months are mixed with one manufacturer saying that the auto industry could affect their output. About half of our contacts reported idle capacity. Most manufacturers said capital expenditures met or exceeded projections; further, about half expect to increase spending during the next few months. Input costs were relatively stable. Most manufacturers said they have no plans to hire in the near future and three reported reducing their workforce during the past six weeks. Wage pressures remain contained.

Sales by District retailers since early October were more in line with expectations after a somewhat disappointing September. However, customers are highly selective in their purchases. Drug stores report particularly strong sales driven primarily by pharmaceuticals. Overall, vendor prices have remained stable during the past six weeks with decreases seen in lumber and generic drugs. Retailers have passed on this price stability to customers. Most contacts report wage pressures are contained, but the cost of health care benefits continues to rise, albeit at a more moderate rate. Aside from normal seasonal hiring, retailers are limiting employment opportunities to new store openings. One contact reported reducing their workforce through attrition. Retailers are expecting a very competitive Christmas season.

Most contacts said that new car sales declined in October for a second straight month; further, purchases continue to be heavily dependent on dealer incentives. Reports on SUV sales are mixed with high-end SUVs holding their own.

Residential contractors in the District are continuing to adapt to the housing market correction through workforce cutbacks, delaying land purchases, and building fewer spec homes. Since early October, new home sales have been mixed with about half our contacts reporting a pick-up in sales while the other half report slow to declining sales. Almost all builders expect that the correction will continue until at least mid-2007. Backlogs for most contractors have decreased about 30 percent. Discounts or incentives being offered to prospective buyers are in the range of 5-8 percent of a home's asking price. Material costs are mixed with builders seeing declines in lumber, drywall, and cement; however, petroleum-related products remain high. Contacts report that land and development costs continue to increase.

The District's commercial contractors reported that activity has slowed since early October, but remains relatively strong overall. Most contacts have experienced an increased level of business on a year-over-year basis. Contractors are anticipating a strong first half in 2007 due to current backlogs and stable inquires. Segments continuing to show strong activity are health care and public works; manufacturing-related construction is beginning to pick-up. Material cost increases continue to slow or have stabilized which is contributing to a small increase in profit margins. Contractors reported little change in the size of their workforce, although a few have hired or are looking to hire.

Since early October, commercial and consumer loan demand was flat to declining for most District banks. Nearly all contacts reported a slight gain in core deposits. Activity in the mortgage market continues to be slow; customers looking to refinance are showing a preference for fixed-rate mortgages. Several bankers are concerned about small increases in delinquencies; however, credit quality remains relatively strong. The consensus outlook by District bankers is for a continuation of tight margins and a modest deterioration in credit quality.

Demand for trucking and shipping services continues to soften with a slight volume decrease on a year-over-year basis. Most contacts reported a slowdown in the shipment of auto-related products. Trucking companies continue to pass on fuel costs using surcharges; however, it's becoming more difficult due to competition and customer resistance. Trucking companies were hiring, but activity was limited to finding replacements due to driver turnover. One contact reported laying-off workers. Wages have remained stable during the past six weeks.

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Last update: November 29, 2006