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Fourth District--Cleveland

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The District's business conditions continued to show gradual improvement, despite declines in some areas, for the six-week period through the end of September. Manufacturing activity was stronger through the last several weeks for the District's durable goods producers. And District retailers saw sales rebound somewhat in September. In nonresidential construction, contractors again reported increases in activity, though sales seem to have peaked for many of the District's homebuilders. Demand for trucking and shipping services remained strong in September. And, on a year-over-year basis, loan demand at District banks was generally steady or slightly increasing.

Increases in firms' input costs intensified somewhat in September, especially for petroleum-based products, and partially as a consequence of the storms that struck the Gulf Coast. However, outside of the construction sector, contacts saw storm-induced increases in costs as likely to be short-lived. Hiring remained modest across most industries, with staffing services companies noting that employment conditions continued to improve throughout the District, but much more slowly than in the rest of the country.

Business conditions continued to show steady improvement for the District's durable goods manufacturers through the six weeks ending September. However, on a year-over-year basis, contacts generally reported that their production levels were flat. Conforming to this pattern, steel producers, which had seen shipment levels fall throughout the earlier part of this year, reported rising shipments in recent weeks. Contacts attributed the improvement in conditions to strengthening demand in some sectors and lower inventory levels throughout the steel distribution channel. Hurricane Katrina had yet to have a noticeable impact on steel shipments, but as reconstruction efforts expand, contacts expected this to change. The automobile sector was among those that registered an increase in demand for steel. Relative to a year ago, District automobile plants posted increases in production in August and September. Outside of durable goods manufacturing, nondurable goods producers generally reported that production levels were flat for the last several weeks, as well as relative to this time a year ago, with the pace of new orders remaining relatively unchanged for most firms.

Both durable and nondurable goods manufacturers mentioned increases in energy prices in recent weeks, only some of which were thought to be related to the hurricanes. Thus far, the primary impact of the storms that struck the Gulf Coast on the District's manufacturers has largely been confined to changes in input costs. In some cases, the temporary unavailability of certain inputs caused disruptions to firms' production facilities. Nevertheless, most firms expect the impact of the recent hurricanes on their operations to be short-lived, and accordingly, few have changed their capital spending or hiring plans, which were already generally cautious.

Business conditions in the retail sector seemed to strengthen in September, after District retailers had reported a disappointing August. Activity at the District's discount retailers was reported to be above year-ago levels, and typically conformed to firms' sales projections. Additionally, some discount retailers reported successfully shifting their product mixes toward higher quality items. In general, the District's specialty retailers also reported somewhat stronger sales than at this time a year ago. One contact observed that brands for buyers who are younger have tended to sell relatively better recently. However, in keeping with recent reports, the District's department stores generally reported that their sales were down dramatically from the levels of a year ago.

Contacts were cautious in their assessments of the outlook, since most expected energy prices to remain high and to continue to undermine consumer confidence. Accordingly, hiring plans among retailers remained modest. Still, contacts generally thought that the storms in the Gulf had not yet noticeably affected their sales or operations. With respect to prices, the District's department stores reported increases in mark-down activity, while other retailers reported that they were able to pass higher-priced merchandise along to consumers.

After strong sales in August, the District's automobile sales appeared to fall sharply in September when compared with a year ago, despite the continuation of several manufacturers' employee-discount pricing promotions. Some dealerships speculated that consumers who had planned to purchase cars this year rushed to make their purchases earlier in the summer.

The economic environment for the District's homebuilders generated little growth in recent weeks, with roughly as many builders seeing sales increase as decrease. Relative to a year ago, a majority of residential builders reported that their sales had fallen somewhat. Given the current business climate, most builders have not tried to increase prices, which are generally only slightly higher than at this time last year. Regarding changes in input costs, several contacts noted that many materials prices--notably prices for petroleum-based products, concrete, and drywall--appeared to rise as a direct consequence of the recent hurricanes that affected the Gulf Coast. Some contacts thought that input costs would increase further in the months ahead, although lumber prices--which have not risen as much after the current set of storms as was true after the several that struck the U.S. a year ago--were not expected to see sharp increases.

Commercial contractors in the District, unlike their counterparts involved in residential building, continued to see steady increases in activity in the six-week period through the end of September. In addition, most firms indicated that their backlogs would keep them occupied through at least the end of 2005. Commercial contractors also reported increases in input costs, citing many of the same increases in materials prices to which residential builders referred. Regarding specific building segments, contacts cited industrial and institutional building as faring particularly well. Despite recent improvements in business conditions, hiring among commercial builders continued to be limited.

Trucking and Shipping
Demand for trucking and shipping services in the District remained robust in September, despite increases in transportation costs from higher fuel surcharges. Even with the support of surcharges, increases in fuel prices still adversely affected shipping firms' profits through truck operations that could not be billed to clients. With fuel surcharges nearing historical highs, contacts reported that their customers were increasingly putting pressure on them to find ways to cut costs. Attracting and retaining drivers continued to be difficult for many firms in the industry. In fact, some contacts noted that they cannot accommodate all of the existing demand due to their inability to attract and retain drivers.

Trends in the banking sector remained relatively favorable. While some seasonal slowing was reported, on a year-over-year basis, commercial borrowing continued to be firm. District banks also reported that the healthcare sector saw especially strong loan demand. However, demand for consumer credit was more mixed across institutions. With respect to specific consumer borrowing categories, institutions reported that the demand for auto loans fell to more typical levels, as auto sales generally slowed in September. Additionally, there was a slight increase in demand for home equity loans. Credit quality was still seen as strong at most District banks, though some banks reported a minor increase in delinquencies.

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Last update: October 19, 2005