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Federal Reserve Districts

Fourth District--Cleveland

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Full report

The economic environment in the Fourth District remained strong through the six weeks ending in May. In the manufacturing sector, increases in production continued to be broad based, something that could not be said before the beginning of this year. And retailers reported steady conditions in recent weeks as well, though some store categories saw a slight slowing in sales since the beginning of April. Residential builders also saw slight declines in sales in late April and May, though homebuilders reported that the pace of building remains near the record rates of the previous year. Meanwhile, the pace of commercial construction has continued to gradually improve from low levels. In the banking sector, commercial loan demand continued to rise. Finally, trucking and shipping firms continued to report robust activity.

These signs of a strengthening economic environment, however, were accompanied by reports of rising input prices. Many of the firms that reported increases in input costs also reported that they remain able to pass input-price increases along to their end consumers. Finally, despite the steadily improving economic environment, many firms reported that their hiring is likely to be limited for the remainder of this year.

Most District manufacturers reported that their production levels remained flat or rose in the six weeks ending in May. On a year-over-year basis, production levels also rose for a majority of manufacturers, particularly for durable goods producers. Domestic steel producers reported strong shipment volumes recently, and volumes are up significantly from the levels of a year ago, often on the order of 10 to 15 percent. While some steel producers reported running their plants near capacity, others noted that they have available capacity, but are constrained by shortages of raw materials. Outside of the steel-producing sector, capacity utilization continues to be below the levels that many firms would like. Regarding the outlook for the remainder of 2004, most manufacturers expect modest growth in the months ahead.

In general, a majority of manufacturers characterized their inventory levels as acceptable. Most manufacturers also reported the use of overtime recently, and about half of all contacts indicated that they had increased the sizes of their workforce. Nevertheless, many firms noted that their future hiring was likely to be limited. For those firms that had hired recently, wage rates reportedly remained stable.

Increases in input costs continued to be widely reported. Prices for petroleum-based products, steel, and aluminum saw among the sharpest increases. In some cases, however, contacts in the steel industry indicated that some surcharges have declined due to recently receding scrap prices. Other raw materials prices for steel producers are reported to be dramatically higher than at this time last year. Finally, more manufacturers are tending to report that they can pass at least a portion of increased input costs along to their customers.

Retail Sales
Reports from District retailers suggest that the economic environment remained steady in recent weeks. Specialty apparel stores and department stores reported some slowing in sales growth in the last several weeks, but this follows a period of strong sales gains in the early spring. On a year-over-year basis, sales at these outlets are said to be down slightly. Discount retailers, by contrast, reported slight sales gains in recent weeks. Sales for these firms are up from the levels of a year ago. Finally, the drug store category continues to be strong, as personal care items remain strong sellers.

As has been true since the beginning of this year, several retailers reported that merchandise is being marked down less and promotions are being offered less often. A few firms reported rising vendor prices, due primarily to increases in fuel prices. However, unlike in other sectors, most retailers continued to report declines in input costs.

After slowing a bit in April, District sales of new automobiles reportedly rose in May. Sales in the last several weeks appear to be about even with those from this time last year. Incentives are reported to have risen in recent weeks, as automakers attempt to reduce the amount of inventories at their dealerships. Used car sales are said to be steady.

Residential builders reported that sales slowed slightly in recent weeks. Builders serving the lower-price segment of the market, in particular, noted a decline in demand. Most contacts attributed this decline to recent increases in interest rates. Nevertheless, most homebuilders expect sales in 2004 to be similar to those in 2003, a record year for homebuilders. Costs continue to be a concern for residential builders, but many reported being able to pass a portion of these increases through to their final prices. Many builders reported that materials costs remained high, and that the costs of concrete and steel have risen in recent weeks as well. Finally, some subcontractors are said to be seeking increases in their compensation.

Commercial builders continued to report improving conditions, with some contacts indicating significant increases in customer inquiries in recent weeks. A few firms also reported that their backlog of orders is increasing. As a result, many commercial contractors are increasingly optimistic. However, like homebuilders, commercial contractors remain concerned about rising materials costs. Hiring remains limited in the industry.

In general, commercial loan demand continued to be strong in the six weeks ending in May, as it has been since the start of this year. However, the total volume of commercial lending by banks in the District is reported to be somewhat less than at this time last year. Consumer loan demand was characterized as steady in the last several weeks, and approximately a third of contacts indicated an increase in lending to consumers when compared with this time a year ago. New mortgage lending and refinancing remained strong, but have slowed in the last several weeks. In addition, most institutions reported seeing a decrease in delinquencies on both consumer and business loans. All contacts reported growth in core deposits, both in recent weeks and relative to this time a year ago.

Trucking and Shipping
Business conditions continued to be strong for firms in the trucking and shipping sector. Moreover, contacts reported that the demand for trucking and shipping services came from an array of industries. The strength of demand is such that firms continued to report that they are running their fleets near capacity. While rising input costs remain a concern for many carriers, most reported that they are able to pass these increases along in their prices. The most significant increases in input costs have been for fuel and health-care insurance coverage (which is up about 10 to 20 percent on the year). Outside of benefits costs, wage rates reportedly remain flat in the industry. Several firms reported that they are hiring new drivers, in part to replace retiring drivers, as well as in response to revised hours-of-service regulations.

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Last update: June 16, 2004