June 14, 2006
Federal Reserve Districts
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The District's economy continued expanding in late April and May, as it has throughout the year. Most manufacturers reported steady to increasing production in recent weeks. Retailers also reported better-than-anticipated increases in sales relative to this time a year ago. Demand for trucking and shipping services remained strong and broad-based. While commercial building continues to recover, homebuilding has slowed. Some of this slowdown is reflected in weaker consumer loan demand at District banks, though commercial borrowing continues to be steady.
On hiring, more firms reported that they are looking to add workers, and contacts from the staffing-services industry said that some types of skilled workers remain in short supply. Nevertheless, outside of a few areas, there were no reports of any accumulating wage pressure. Nonlabor input-cost increases, however, were widely reported. Specifically, contacts cited increases in the prices for petroleum-based products, some building materials and metals, and natural gas. Attempts to recover these increases in costs varied by industry; in general, about half of the contacts from construction and manufacturing firms reported attempts to increase prices in response to cost changes, while reports of retailers' increasing their prices were few.
Production at the District's nondurable producers improved in April and May but remains roughly the same as at this time last year. Several contacts reported an increase in new orders. Hiring and planned increases in capital spending were limited. Though nondurable good producers also reported price increases in energy-related items, most contacts reported that their overall input costs were stable. According to contacts, firms that attempted to increase their prices had more success passing price increases along to smaller customers than to larger customers.
Some segments, however, did see a softening. Reports from the District's discounters indicated that their sales were slightly weaker than anticipated, though sales still grew relative to a year ago. Some of this weakness was attributed to increases in gasoline prices. Several contacts suggested that consumers were more value conscious than in the recent past and that consumers may have been trying to limit spending to necessities. Increases in gasoline prices also affected retailers through rising freight costs; nevertheless, retailers' prices remained relatively flat.
Most auto dealerships reported sluggish sales in late April and early May, though sales of foreign nameplates fared significantly better than their domestic counterparts. In response, some manufacturers are attempting to spur sales with incentives. For instance, in early June, Ford announced a new incentive offer, wherein buyers would receive $1,000 for gasoline purchases.
Almost all commercial contractors reported that business has tended to improve throughout 2006 and is better than at this time in 2005. Contractors are optimistic about the remainder of 2006. Building segments reportedly doing well include office construction, particularly for professional service and health care concerns, and public projects. Contacts reported rising materials costs, notably for copper, concrete, drywall, and petroleum-related products. As a result, almost all contractors are planning to increase prices sometime in the future. About half reported increasing staff sizes, some significantly. Subcontractors are also seeing an increase in work and are charging higher rates.