January 14, 2004 Federal Reserve Districts Fourth District--Cleveland

Skip to content Summary Districts Boston New York Philadelphia Cleveland Richmond Atlanta Chicago St. Louis Minneapolis Kansas City Dallas San Francisco Full report

The economic environment remained relatively unchanged in recent months, as the slow and steady improvement in business conditions that marked the September-October period continued in November and December. Most manufacturers indicated that production levels stayed at least steady in the last two months of 2003. And while retailers expressed disappointment at sluggish holiday sales, sales levels, nevertheless, inched up as the year ended. Conditions in the construction industry seemed largely unchanged as well, as residential builders saw demand stay strong, and commercial builders continued to wait for demand conditions to improve. Shipping firms saw a pick-up in activity that began in the late summer continue, while banks reported mixed loan demand and a slowing in the rate of core deposit growth. As in reports of recent months, most firms indicated that they do not plan to increase staffing levels. Unlike in recent months, however, reports of rising input prices seemed more widespread. Manufacturing Durable goods producers, in general, reported that production levels remained steady in November and December, continuing the pattern of the last several months. Relative to a year ago at this time, durable goods production in the District appears to have increased slightly. Nondurable goods producers saw slightly higher levels of production in November and December than in September and October and also reported increases in production relative to the November-December period in 2002. Durable and nondurable goods producers alike reported lower inventory levels than at this time a year ago, and most indicated that inventories were at acceptable levels. The use of overtime was also widespread among both durable and nondurable goods producers, though neither group at this point reported plans to expand their employment rolls. In fact, about half of the durable goods producers contacted said they plan to trim their workforces in the near future. Rising input prices--over the last year and last several months--were also reported by a majority of respondents in the manufacturing sector. Durable goods producers in particular indicated increases in metals prices, notably steel and aluminum. An increasing number of contacts in the domestic steel industry reported rising new orders in recent weeks, a decided difference from the previous few months. Reports suggested steady demand from automotive and appliance makers and improving demand among industrial equipment producers and truck and trailer manufacturers. Lead times at steel mills are reportedly on the rise, and some respondents indicated that their order books were full through the end of the first quarter. Accordingly, a few respondents indicated that factory utilization was rising to accommodate the robust demand. While some firms increased work schedules slightly in response to the increase in demand, many firms have maintained normal work schedules and do not plan to add to their workforce. Prices for both flat-rolled and structural steel have continued to rise in recent weeks, as mills attempt to offset the rising costs of raw materials such as scrap, iron ore, coal, and natural gas. Steel prices to noncontract customers have increased over the last six weeks and, according to contacts, could continue to increase through the first quarter. For the November-December period, the District automobile plants that we track saw a slight increase in production relative to the same period a year ago. However, of the five major automakers with facilities in the District, two saw significant gains in production on a year-over-year basis, which masked moderate declines in production for the remaining three. Retail Sales In general, District retailers reported less robust sales activity in November and December than they had anticipated. After expressing optimism at the time of the last report about the coming holiday selling season, many retailers reported that their sales had not met expectations. Responses from contacts at specialty retailers ranged from those who cited soft sales to those who indicated modestly increasing sales from a year ago. Most contacts at discount stores reported lower-than-expected sales gains. Finally, department stores in the District continued to fare worse than other types of retailers, citing year-over-year sales declines. While apparel sales remain soft, contacts continued to note that furniture and other consumer durables were selling well, as were electronics, novelty gifts, and personal care items. Several contacts reported increases in promotional activity over the last six weeks of 2003, through temporary price reductions or coupons. Price reductions for apparel items were especially prominent. Nevertheless, many retailers also reported that their promotions were no more aggressive this year than last. In general, input prices remain flat. Inventories are reported to be flat or down relative to this time a year ago and continue to be tightly managed. New car sales were reported to be strong at the end of December, and up from the levels in November and at this time last year. Contacts reported that strong incentives continue to attract car buyers. Inventories, however, remain large, and some dealerships reported that they are concerned about their ability to sell enough of their older stock before the end of the model year. Used cars sales remained steady for dealers in the six weeks ending 2003. Construction Residential builders reported that activity slowed somewhat in the last two months of 2003, though most of this slowing was attributed to seasonality. Nevertheless, sales levels were strong, and similar to those at this time last year. Most builders saw stronger sales in 2003 than in 2002, and several expect 2004 to be better still. A few larger builders also noted an improvement in their profit margins in 2003, driven largely by lower costs. Cost pressures, in general, remain muted. Although lumber, oriented strand board, and plywood costs remain high, they have not risen recently. Commercial builders reported little improvement in conditions in November and December from previous months. And, relative to the last two months of 2002, about as many builders saw more activity in the last two months of 2003 as saw less. In general, 2003 was a weak year for commercial construction in the District, and most contacts don't expect conditions to change significantly for at least six months into 2004. In general, labor and materials costs remained steady. Trucking and Shipping After increasing in the fall, trucking and shipping activity in the District remained robust at the end of 2003 and outpaced the levels of activity at the end of 2002. Contacts reported that most of the strength in demand was attributable to clients in the retail sector. Despite strong demand, some firms reported that their amount of activity was below expectations, though others reported operating at almost full capacity. Carriers cited concerns about new EPA regulations regarding engine performance, recent increases in insurance costs, and new hours-of-service regulations that all could add significantly to costs. Fuel costs, however, have so far remained stable. Banking Commercial loan demand remained mixed across the District's banks during the six weeks ending 2003. Consumer loan demand also continued to weaken, as the number of mortgage refinancings that banks brokered fell further. Core deposits grew only modestly for most contacts, while a few contacts reported no growth in core deposits. Some contacts reported an improvement in their institution's net interest margin. Return to top Philadelphia Richmond