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Fourth District--Cleveland

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Economic activity continued to increase at a steady pace throughout the District in the first two months of 2006. Moreover, gains were spread across a broad array of industries, including durable goods producers, most retailers, residential and non-residential builders, and trucking and shipping services providers. However, nondurable goods production was little changed, and auto sales and production weakened. While gains were widespread, cost pressures seemed somewhat less pronounced in recent weeks, especially among manufacturers. Hiring continued to appear somewhat sluggish across the District, though contacts from staffing services firms noted that District openings were on the rise. Moreover, many contacts mentioned that workers with adequate skills were becoming more difficult to find.

Production at District durable goods producers continued to show steady increases in the first two months of 2006. Activity was also above year-ago levels. Among important District industries, steel producers reported that shipments held steady or improved. Strong steel demand was reported for many industries, including equipment, energy, aerospace, and appliance producers. However, steel shipments to the auto sector were mixed, and automakers in the District saw sizeable year-over-year declines in production. Most contacts, especially capital goods producers, expect to be busier as the year wears on; as a result, many are planning increases in capital spending for the first half of 2006. However, hiring plans remained relatively limited for most durable goods producers.

Among nondurable goods producers, production has been flat, both since the end of 2005 and relative to this time last year. Contacts' current order books suggest that production will remain flat through the next few months. Accordingly, capital expenditures are expected to remain flat or fall at most firms through the first half of this year. In general, nondurable goods producers are not making net additions to their payrolls; however, in replacing staff, some contacts report difficulty finding workers with more specialized skills. Among a majority of both nondurable and durable goods manufacturers, materials costs were characterized as flat overall through the end of February.

In general, sales at the District's retailers were above year-ago levels in the first two months of 2006. Discount retailers, in particular, reported solid year-over-year sales gains in January, with more moderate increases in February. Specialty stores, including apparel merchants, also generally reported year-over-year increases in sales, though some contacts noted that their growth rates had declined recently. Department-store sales were down, on a year-over-year basis, through the first two months of 2006, continuing a longer-term trend. Finally, District grocers continued to report solid sales gains. Products that sold well include those that were energy-conserving or -efficient, home repair and improvement items, personal care products, and some apparel. Most merchants reported that their product prices were generally stable.

At District auto dealerships, sales generally remained somewhat sluggish, even though unseasonably warm weather had increased traffic at some showrooms. Sales were especially weak for domestic nameplates. As a consequence, inventories continued to be above desired levels, generally by more than thirty days.

Residential builders reported a slight improvement in sales in the first two months of 2006, relative to the end of 2005. Builders attributed the improvement to several factors, among which were seasonality, particularly poor sales at the end of last year, warmer weather which may have encouraged shopping, and increased discounting. Discounting was more widely reported than usual, as inventories of unsold homes remained at relatively high levels--for some builders the highest they have ever seen. Despite the recent improvement in sales, they remained less than at this time a year ago. Homebuilders generally reported continued increases in materials costs, at rates similar to those seen at the end of 2005. Specifically, contacts cited increases in costs for concrete, lumber, copper wire, various metals, and some petroleum-based products. Most contacts reported that subcontractors are readily available.

Commercial contractors continued to report increases in activity. In the first two months of 2006, activity was above that for the end of 2005 and a year ago. While commercial builders' backlogs were mixed, many contacts reported thinking that recent inquiries were more likely to turn into jobs than in the past. Regarding materials costs, commercials builders reported increases similar to those reported by residential builders, specifically citing increases in costs for concrete and some metals. However, unlike homebuilders, most commercial contractors have been able to raise their prices, keeping profit margins stable. Finally, most firms planned to add to their staffs in the months ahead.

Through the first two months of 2006, District banks, especially smaller institutions, reported a slight increase in loan demand from their commercial clients. Larger lending institutions also noted that lending for commercial real estate remained strong. By contrast, consumer borrowing continued to be "weak to moderate" for most banks in the District. Both automobile and mortgage lending were seen as slow, though for the latter, some of this weakness was attributed to normal seasonal patterns. Many contacts were concerned about the "flat" yield curve, and the pressure this put on their net-interest margins. Finally, credit quality continued to be at or near historical highs for many institutions.

Demand for trucking and shipping services remained strong across a broad base of industries during the first two months of 2006. High fuel costs continued to concern contacts, even though trucking companies have been able to maintain their surcharges. Many contacts reported raising their base shipping rates at the beginning of the year, though none planned subsequent increases in the foreseeable future. Carriers continued to report difficulty attracting and retaining drivers; some carriers reported raising their wages in response. Capital spending in the industry is extremely strong, as firms attempt to purchase trucks that don't need to meet impending EPA guidelines.

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Last update: March 15, 2006