January 15, 2003 Federal Reserve Districts Fourth District--Cleveland

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According to reports gathered from December 23 through January 3, the Fourth District's economy continued to show mixed signals during the last six weeks of 2002. Although some deterioration in conditions was noted among contacts in the nondiscount retail, automotive retail, steel, and banking industries, it appeared that more contacts saw flat conditions or slight improvement. Both homebuilders and trucking and shipping contacts reported continued favorable conditions in their industries. Commercial builders, for the first time in more than a year, reported signs that improvement may come with the new year, and most manufacturers appeared cautiously optimistic that new orders and conditions would pick up in the first quarter of 2003. That said, uncertainty over the economic outlook remains in the Fourth District. Many contacts seemed to expect flat conditions for 2003 only because they were not sure how geopolitical risks and equity markets would affect consumer confidence and their customers' willingness to spend money. Other contacts, however, particularly in banking and commercial construction, seemed to note cues from their business customers that slight optimism was emerging regarding 2003 prospects. Labor conditions were stable, although some firms reported difficulty in finding qualified managers. Other than seasonal adjustment of labor forces in retail, very few labor changes were expected among District companies. Manufacturing Reports from the manufacturing sector showed more consensus in this report than in the last. Most contacts reported that production remained fairly constant in November and December (adjusting for holidays); sales in December 2002 were above both November 2002 and December 2001 levels; input prices, with the exception of steel (which is falling), were stable; and inventories were down year-over-year and at acceptable levels. Most reported no changes in their labor force. Some reported excess capacity. In general, manufacturers of home- and automotive-related goods reported more positive conditions than other manufacturers. Most contacts appeared mildly optimistic about prospects for 2003, with none expecting a decline in conditions and some expecting an increase in both production and sales compared with 2002. District auto plants reported fairly mixed conditions--roughly half the models produced in the District showed an increase in production in the first three weeks of December compared with the first three weeks in November 2002, while the other half showed a decrease. This was also true when comparing production for the first three weeks of December 2002 with the same period in 2001. Overall, however, 2002 production in the District was higher than 2001 production for all but one company. None of the plants reported temporary closures in the last six weeks of 2002, but one reported that it ended production of one of its model lines in December. Steelmakers reported that demand softened yet again in December and noted that while some of the decline in demand was seasonal, part of it was because their customers had built their raw-materials inventories when prices began rising. Demand is expected to remain soft during the first quarter, due to an oversupply of steel in the industry. Prices, which fell roughly 20 percent in Q4:2002, were expected to continue falling in Q1:2003. Retail Sales Contacts in retail reported that sales in November and December were flat to down compared with one year ago, and, compared with historical averages, very poor. Contacts reported sales for the period from Thanksgiving to the week before Christmas were down between 1 percent to 10 percent from the year before, although some of this decline was due to the short holiday season. Nondiscount stores reported heavy promotions, and though the volume of merchandise sold was comparable to years before (resulting in lean inventories), total sales in dollars were significantly down for stores, especially among apparel retailers. Contacts noted some pickup in sales during the week of Christmas and the following week but did not expect the pickup to persist. Most contacts expected sales for Q1:2003 to be flat but did not have solid expectations beyond the first quarter, citing uncertainties in the geopolitical environment and wavering consumer confidence as reasons they could not make projections for sales in 2003. Although auto dealers in the District saw a slight increase in sales during the last week of November and the last week of December due to manufacturers' incentives, most reported sluggish sales for the last two months of 2002. Inventories among auto retailers were climbing--most dealers try to keep a sixty-day supply on their lots, but contacts reported inventories ranging from seventy-day to more than one hundred-day supplies. Although sales slowed considerably in Q4:2002, overall sales for 2002 were expected to be above historical averages, though not as high as 2001, which was a record year. Looking forward, contacts expected the level of sales in 2003 to be flat or slightly lower than 2002 levels. Construction Although there has been some seasonal slowing in residential construction over the last six weeks, District homebuilders reported that conditions remained stable and that 2002 sales were slightly above their projected plans. Commercial builders, on the other hand, continued to report weak conditions. In a change from most of their reports in 2002, however, commercial construction contacts reported that the number of prospective projects has increased significantly. The increase did not appear to be sector-specific, and some of the projects were "noncritical," suggesting that businesses are beginning to contemplate spending dollars on capital projects other than those strictly for maintenance and upkeep. Trucking and Shipping Trucking and shipping activity remained strong throughout November. Although contacts expected a seasonal slowdown in December, the slowdown was more pronounced than they had expected. Volume was expected to remain flat until spring, when the seasonal pickup in shipping from auto manufacturers and their affiliated companies occurs. Despite slowing demand, excess capacity in the industry remained at very low levels, and price increases continued to be reported across the industry. These price increases have not resulted in larger profits: most of the reported increases were spurred by increased costs of inputs, especially health and collision insurance costs. Banking Conditions in banking were relatively stable during the last six weeks of 2002, although contacts noted a narrowing of spreads because loan rates have fallen while funding rates remained relatively constant. Commercial loan demand was flat, and contacts continued to characterize conditions in commercial lending as weak. Most noted that businesses were taking a "wait-and-see" attitude regarding the economy--with increased uncertainty about equity market performance and potential war, companies are reluctant to take out loans to make major expenditures. Some contacts, however, noted that although their commercial customers were cautious, they seemed optimistic about prospects for 2003. On the consumer side, loan demand was steady and continued to be fueled by home equity loan activity (most of which was refinancing). The number of loan applications remained steady, but contacts noted that the credit quality of applicants was very poor. Competition for creditworthy borrowers remains intense. Return to top Philadelphia Richmond