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Federal Reserve Districts

Fourth District--Cleveland

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Overall economic activity in the Fourth District has weakened since mid-August. Factory output and steel shipments softened. Residential construction remains very slow, with no improvement expected through 2009. Most commercial builders told us that business has been stable. Sales by District retailers were characterized as flat to declining, while reports from auto dealers indicate that purchases of new cars have declined sharply. The commercial credit market tightened, and consumer lending was flat. Energy production was steady to increasing. And the market for freight transport services declined.

On net, reports show a slight drop in employment levels, with wage pressures limited to energy producers. Staffing firms saw a small increase in the number of job openings, primarily in health care and professional business services. Most manufacturers and construction firms reported that prices for raw materials either held steady or moderated slightly.

Output at District factories was stable to lower during the past six weeks. Reports of declining production were attributed primarily to weakness in the auto and construction industries. On a year-over-year basis, a majority of our contacts said that production was slightly down. Manufacturers anticipate that production will be maintained at current levels or weaken during the upcoming months. Capacity utilization was at or below normal levels. Steel producers and service centers reported shipping volume was flat to down, which they attributed to a downturn in the auto and construction industries. The strongest end users for steel are energy and capital equipment producers. In general, our contacts believe market conditions for steel will change little or weaken slightly in the upcoming months. District auto production showed a significant increase in August, rebounding from seasonal plant closings in July for new model year retooling. In terms of year-over-year comparisons, District auto production fell sharply, with domestic makers reporting steeper declines.

Capital spending remains on plan; however, the share of respondents who anticipate increasing capital expenditures going into 2009 has declined since our last report. Half of our respondents who accessed credit markets told us that they experienced tighter controls and higher interest rates. Most manufacturers commented that the prices they paid for raw materials had flattened out or declined. Moreover, significantly fewer respondents raised their product prices than reported earlier in the summer. Looking forward, a majority of our contacts expect inflationary pressures to remain steady or diminish. On net, employment levels decreased slightly, and wage pressures were contained. Manufacturers anticipate little hiring in the near future.

Real Estate
Residential builders reported that new home sales continue to be very slow. On a year-over-year basis, sales are steady to down. Looking forward, builders are not expecting any industry turnaround through 2009. Further, we heard several comments that banks are imposing significantly tighter credit standards on homebuilders and buyers. Little change in materials prices was noted, and list prices on homes are reported to have dropped slightly since our last report. Inventories of new unsold homes declined. Subcontractors are readily available at very competitive rates. General contractors and subcontractors reported reductions in staff levels and no wage pressures.

Most commercial contractors told us that business has been reasonably stable during the past six weeks, and they believe that it will remain so through 2009. Backlogs are relatively strong, and inquiries have been steady to increasing. Several contractors commented that credit is becoming more restrictive; nonetheless, financing is available. The rate of increase in the prices of building materials is moderating, though fuel surcharges remain high. Contract pricing outside of materials costs remains stable. Workforce levels were largely unchanged, and no wage pressure was reported.

Consumer Spending
In general, District retailers reported that August sales were flat to declining on a month-over-month basis across all industry segments. Looking forward, most respondents believe sales will remain relatively weak. Reports from auto dealers indicate that purchases of new cars have declined sharply over the past six weeks, while used car sales are flat to slightly down. Purchases of SUVs and trucks were characterized as poor. Dealers are very concerned about lower sales volume in the coming weeks. Retailers report that vendor prices have remained stable, with the exception of increases for paper and food products. In response, retail sellers of paper products passed through increases to their customers. Capital spending remains on target, with few revisions planned in the upcoming months. For the most part, staffing levels at retail stores have not changed; however, we heard many reports of auto dealers cutting back on their sales and support staffs. Wages remain stable in the retail sector.

Demand for business lending has been flat to down. Reports of increased demand were generally attributed to customers tapping existing lines of credit. Commercial loan pricing is increasing across the board. On the consumer side, loan demand, including home mortgages, is flat to slightly down, with interest rates holding steady. In general, regional banks are continuing to constrict the availability of credit--especially to commercial borrowers, while community bankers do not foresee much further tightening of underwriting standards. Reports showed that delinquencies at community banks are flat to down, while regional banks are experiencing an upward trend especially for commercial and residential real estate loans, HELOCs, and credit cards. A majority of our contacts said that core deposits have been steady to increasing. However, some community bankers commented that they are losing depositors to large banks which are paying higher rates on CDs. The spread between lending and deposit rates at community banks are steady or have widened a few basis points. At the same time, spreads at regional banks are under pressure due to higher rates paid on time deposits. Staffing levels were stable, and no wage pressure was reported.

Energy production has been steady to increasing during the past six weeks, with most of our contacts expecting production levels for coal, natural gas, and oil to expand during the upcoming months. Reports indicate that the prices received for oil and natural gas fell significantly, while coal prices were stable. Materials and equipment costs remain at elevated levels, especially for petroleum-based inputs and steel. Capital expenditures were on plan, with little change expected during the next few months. We heard several reports of tightening credit markets; however, only one of our respondents sees it as a serious issue at this time. There has been a slowing in hiring by most energy companies from the pace seen earlier in the year; however, a slight pick-up is expected in the near future. Wage pressures remain an issue due to competition for skilled labor.

Freight transport service companies experienced an overall decline in shipping volume since our last report. Company officials told us that the auto, consumer products, and housing industries are primarily responsible for the drop-off. Volumes are expected to flatten out, with little pick-up anticipated during the next several months. Several contacts commented that fuel prices have declined recently, and their declines are reflected in reduced fuel surcharges. Capital expenditures remain on target but are at low levels for most companies. Little change in capital spending is expected during the upcoming months. For the most part, hiring was limited to driver turnover, and any wage increases fell within industry norms.

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Last update: October 15, 2008