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Federal Reserve Districts

Fourth District--Cleveland

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Full report

Economic activity in the Fourth District has softened since mid November as many businesses and consumers are now more cautious in their outlook. Production levels at District manufacturers were stable to increasing with little change expected for the next six months. Activity in commercial construction was mixed with half the builders experiencing an increase in business. In contrast, most residential contractors reported a continuing decline in sales. Holiday sales by District retailers showed mixed results. Loan demand at District banks was flat to down while core deposits showed modest growth. Energy activity was strong overall. And the demand for trucking and shipping services continues to soften.

On net, employment across the District was largely stable. However, staffing firms were upbeat in the number of job openings. Half our contacts said that openings have increased over the past six weeks and all contacts reported an increase on a year-over-year basis. The greatest demand was in health care and financial services with some weakness seen in manufacturing. With the exception of some energy-related businesses, wages continue to be steady to modestly increasing. Almost all contacts said that, with the exception of metals, input costs have stabilized. Several District manufacturers reported increasing prices since mid November with more than half saying they were successful. And almost all retailers reported that they were holding their prices steady.

Reports by the District's manufacturers show production levels were stable to increasing since mid November and on a year-over-year basis. However, about half of our contacts reported some idle capacity. Focusing on steel products, demand continues to be soft for most producers due to weakness in the auto, appliance, and residential construction markets. However, steel producers anticipate an up-tick in Q1 of 2007. Although District auto production decreased in November, an increase was reported on a year-over-year basis. The outlook by most manufacturers is best characterized as stable to improving. Those that foresee downturns are primarily in the auto supply market. Almost all manufacturers said that capital expenditures remain on target with slightly more than half expecting little change in the New Year. However, three contacts said they have aggressive capital projects in the works for 2007. Most producers believe that input prices, for the most part, were stable; however, several commented that metal prices remain high or are increasing. Hiring has been limited over the past six weeks and manufacturers anticipate little hiring in the near future. Reasons given include cost containment and monies being allocated for capital improvements. Wage pressures are largely contained; however, several contacts reported benefits, especially health care, continue to rise.

Reports on new home construction were mixed with most builders saying the decline in sales continued into November. Looking forward, almost all residential contractors expect activity in 2007 will be similar to the second half of 2006. In general, material costs have leveled off with most contacts reporting a decrease in lumber prices. Builders have significantly curtailed, or eliminated, "spec" building. District home prices have been steady during the past six weeks and contractors are hesitant of offering any additional discounting. Many builders reported adjusting the size of their labor force during 2006 to match market conditions and do not foresee laying-off additional workers. Further, contractors said wage increases will not be given in 2007.

The District's commercial contractors were split in their assessment of business activity since mid November. Slightly more than half experienced a pick-up in business while several reported that business is slowing. On a year-over-year basis, most contacts said that their level of business has increased. Although inquiries have generally slowed down, most contractors remain optimistic about 2007 due to healthy backlogs. Segments continuing to show strong activity are health care, education, and public works. A majority of our contacts report that material costs are stable with the exception of steel and concrete which showed small increases. Almost all contractors said that prices remained stable and over half reported small increases in their profit margins. Finally, hiring by contractors was kept to a minimum.

District retailers showed mixed results for the holiday shopping season; reports ranged from very good to below expectations. Further, most retailers noted that no unusual markdowns or promotions were used to increase sales. Expectations for Q1 of 2007 are also mixed with more than half our contacts anticipating weak sales. Retailers reported that overall supplier prices and other input costs have remained steady over the past six weeks. Wage pressures are contained, and aside from normal seasonal hiring, retailers are limiting employment opportunities to new store openings. Domestic new car sales for the months of November and December were characterized as poor while foreign makes sold reasonably well. Increased SUV sales were attributed to winter weather and lower gas prices.

Since mid November commercial and consumer loan demand continues to be flat to down for most District banks. On the consumer side, declines were seen primarily in home equity lines of credit and auto loans. Two contacts reported commercial real estate loans are growing, but at a very modest rate. Activity in the mortgage market was mixed with refinancing driving much of the activity. Two bankers saw increases in mortgage applications; however, they were uncertain if this is the beginning of an upward trend. Core deposits showed modest growth and most bankers report no change in credit quality.

Overall, energy activity remains strong across the District. Rig count is flat to slight increase with almost all contacts reporting difficulty in obtaining drilling equipment. Over half the producers plan to increase exploration activity in 2007. The ability to attract and keep skilled workers is a continuing issue for most drilling companies; resulting competition is putting significant pressure on wages. Mining production is near capacity with three coal producers expressing interest in expanding operations. However, there are no plans to hire additional workers. Minimal wage pressure was reported. Alternative energy representatives see an acceleration toward more advanced energy technologies and polices. However, the recent drop in oil prices and mild winter weather lessens the sense of urgency for alternative energy projects in the public eye.

Demand for trucking and shipping services continues to soften with two contacts reporting a slowdown in the shipment of auto-related products and coal. Trucking companies continue to pass on fuel costs using surcharges and anticipate doing so into the foreseeable future. One contact expressed concerned about the price of the new ultra low sulfur fuel. Hiring was attributed to the usual high driver turnover; however, two contacts said their hiring was related to increasing capacity. Wages have remained stable since mid-November.

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Last update: January 17, 2007