Beige Book Report: Cleveland
September 12, 1979
Business conditions in the Fourth District have shown evidence of further inventory accumulations in August, but the consumer-centered recession has not yet spread to the capital goods sector. Most businessmen and economists forecast a shallow recession extending into the second quarter of 1980. Manufacturers report that inventories have been accumulating at a slow rate, but few are concerned that inventory liquidation would pose a serious problem for the remainder of this year. Bankers and retailers have mixed viewpoints over prospects for a moderate comeback in consumer spending, but even those more optimistic do not expect a comeback that will be strong enough to reverse the downward trend of the economy. The housing market has continued to show surprising strength as mortgage loan demand has remained unchanged from last month. The city of Cleveland has slipped deeper into default.
Most manufacturers report that involuntary inventory accumulation has been occurring in the Fourth District. However, most had expected some accumulation to occur as consumer spending slowed, but have been unable to alter production schedules in anticipation of a decline in orders. The inventory buildup, so far, has been concentrated in material parts and components related to the auto industry. A producer of consumer items reports that his inventory buildup resulted from special market conditions for those items. The standard view remains that tight controls on inventories over the past year have kept inventories at satisfactory levels which can be adjusted by slowing the rate of accumulation into the first quarter of 1980.
Capital goods producers, in general, have experienced little direct effect from the recession. An official in the machine tool industry reports no major change in new orders, although the peak in orders occurred early in the year. Some softness in machine tools is expected over the next six to twelve months and one official expects a "sudden" softening in the fourth quarter of 1979. However, because delivery times are extended well into 1980 and backlogs are still increasing, layoffs have not occurred. A manufacturer of truck parts notes some weakness in heavy-duty trucks which can be attributed to the general slowing of the economy. He also states that a rebound in light truck sales could lead a recovery in the second quarter of 1980. A steel economist reports that new orders for steel dropped sharply in August, but are not expected to get worse. However, he is apprehensive that declines in the demand for metal building materials may be a preliminary sign of the recession spreading into the capital goods sector. The steel industries' operating rate is likely to drop sharply next quarter to about 70% operating rate, according to one economist. Most producers are concerned that capital goods spending will soften over the remainder of the year if availability of money tightens and the consumer recession spreads.
Retailers report some improvement in consumer demand related to back-to-school purchases, which are predominately seasonal, and to new car sales. Although operating at a satisfactory level, one manufacturer of apparel notes that unit sales are off 20% for the Fall season and are expected to be about 6% off this year from last. Sales of nondurables have been on a down-trend all year, but one super market official expects that any further retrenchments by the consumer will be concentrated in durable goods. Consumers have been increasingly shifting purchases away from inflationary items and one retailer is concerned about the effect of income redistribution in consumer buying, especially from rising food prices. However, a District banker reports that consumer loan demand has been strong in his area and has suggested that final demand will remain strong enough through the Christmas season to spark a temporary consumer comeback. A few others have taken a less sanguine view. They expect consumer spending to worsen, because of increased consumer resistance to high prices. In response to declining real incomes, one retailer expects GAF sales next quarter to show about a 4% year- over-year increase, about half of the increase that he expects for the third quarter.
Housing market conditions have continued to experience relative strength despite the recession. Building suppliers state that 1979 has been better than expected, but they are skeptical about 1980 prospects. A major regional builder of homes reports that housing starts have been accelerating since June and are expected to be "rapid" through October. Although a banker is concerned about housing inventories being increasingly financed through borrowing, a builder reports no excess inventories at this time. Sales of existing houses have continued to be slow in August, with a rising number of requests by home owners for banks to finance both the old and the newly purchased house until buyers can be found.
Mortgage and consumer loan demand has been strong in August, but S&Ls are still having trouble competing with commercial banks for loanable funds. Bankers report increasing funds flowing into the banks, but S&Ls continue to borrow heavily from FHLBs. Mortgage loans over the remainder of 1979 are expected to be below last year's peak and interest rates on 80% mortgage loans are set to increase by another twenty five basis points to 11-1/4% in some parts of the District early in September. Consumer installment loan demand has picked up, according to one area banker, because of a switch from vacations to home recreation purchases. A banker notes that even auto loans have made a comeback from April to June levels.
The city of Cleveland has gone into its second default after failing to roll over $3.3 million in city-held waterworks notes. The first default last December amounted to $15 million. A second default became certain when City Council refused to allow the transfer of general operating funds to the waterworks fund, because of the questionable legality of the transfer. A third default on $14 million in city-held notes, also held by the waterworks fund, is now probable in October. However, the city was able to pay about $500,000 in interest payments on the original default.