May 7, 1997 Federal Reserve Districts Fourth District - Cleveland

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Business conditions in the District remain strong overall, consumer and business optimism appears high, and business expansion plans are above last year's increase. Construction activity has strengthened noticeably in the past few months. New housing and commercial construction are both much improved, despite generally poor weather. Employment is growing, but at a somewhat subdued pace relative to the national average. Presumably, extremely low rates of unemployment--often less than 4 percent--in many areas of the Fourth District are creating staffing problems. In a sample of the District's smaller employers, contacts cited increased training costs and high worker turnover associated with tight labor markets. One contact reported offering bonuses to employees who bring in new employees. Demand has risen for workers of all skill levels, particularly those with technical backgrounds, and wage growth is higher than this time last year. Respondents also report an increased frequency of job vacancies. Several temporary employment agencies, specializing in high-skill areas such as law, engineering, and healthcare, have recently emerged. Manufacturing Industrial activity is expanding at a good pace across most sectors. Capital goods producers report further increases from an already high level of production. Steel producers indicate large output gains in the past month or two. Manufacturing activity is generally expected to remain quite strong through the spring, as new orders are reported to have risen and the backlog is up from the beginning of the year. Only export orders have diminished since the last District report. While some rise in manufacturers' inventories has been seen, stocks are still moderate relative to the current level of sales. Industrial price increases vary by commodity, but in the aggregate, prices appear unchanged. Significant price increases are seen for a variety of metals, particularly steel. Still, manufacturers report difficulty making price increases stick for finished goods. Retailing District retail conditions continue to be mixed. Furniture and consumer electronics sales are weak, while computers and appliances are stronger than earlier in the year. Women's and men's apparel are selling especially well. District retailers report inventories are "on plan," and retail expansions were noted in Columbus, Dayton, and Pittsburgh. Although still a relatively small share of the total retail market, on-line retailers' sales (retail sales through the Internet) have been growing at an incredible rate, with the approximate number of these "virtual" retailers doubling in the past year. Industry sources indicate that exports account for about one-third of on-line retail business. Virtual retailers are not exempt from labor shortages; respondents report difficulty finding customer-oriented workers with an understanding of new technology. Auto Dealers Dealers indicate that larger factory incentives have only partially offset secondary lenders' tightened standards which have recently driven up the cost of credit. Still, District auto sales were strong in March and early April, although some softening was noted toward the end of the reporting period. Most dealers reported new car sales near, or substantially above, last year's high levels, but used car sales continue to languish. Inventory levels are reported to be at, or perhaps slightly above, desired levels, with the usual shortages of a few popular models. While most dealers expressed optimism about the remainder of the spring sales season, a few indicated a desire to keep inventories "cautiously lean." Dealers expressed little concern over the impact of recent supplier strikes on product availability. Banking and Finance Lending activity in the District varied. Commercial loan demand ranges from strong to disappointing. Smaller banks have noted a drop-off in commercial loan demand, while commercial credit growth at larger institutions has been moderate or better. Consumer loan extensions are lower, with only minor exceptions. Mortgage refinancing has deteriorated with the rise in interest rates. The majority of District bankers contacted report a slight drop in the number of delinquencies since the first of the year. However, several also noted a continued rise in personal bankruptcies. Commercial loan quality is high and predicted to remain strong as long as the economy maintains its current course. Despite tight margins and rigorous competition, District banks have reported that first quarter profits were, on average, slightly above their expectations. Return to top Philadelphia Richmond