Beige Book Report: Cleveland
September 9, 1980
Summary
Most respondents in the Fourth District expect that further
weakening in capital spending and sluggishness in consumer spending
will contribute to another slight decline in overall economic
activity this quarter and next. Recent improvements in consumer
spending and housing, however, have raised the possibility that real
economic activity will increase in the fourth quarter, according to
some officials. Recent strength in real retail sales may have been
supported in part by a slim return to credit card usage, but most
retailers and bankers doubt that the consumer sector will provide
much impetus to a recovery until mid-1981. Respondents tend to be
skeptical over reduced consumer inflation rates in August, and are
concerned about a return to double-digit rates in 1981. Savings
flows have improved slightly, but lenders anticipate that recent
marginal gains in mortgage lending activity are likely to be
dampened as mortgage rates in the District have firmed.
Outlook
Although most respondents still expect a trough in the
fourth quarter, several expect real GNP growth in the fourth quarter
to be zero or slightly positive. Most still expect a peak-to-trough
decline in real GNP of about 3%. A bank economist cites a revival in
growth of consumer debt, the stabilizing of car sales, and the
bottoming out of housing as the first signs of recovery. Negative
factors most often mentioned that lessen prospects for a prompt
recovery include a continued weakening of capital goods with no
bottom yet in sight, rising interest rates and prices that may hold
down the demand for consumer durables and housing, and a combination
of low savings rates and high debt levels going into the recovery
that will limit the ability of consumers to increase spending
substantially. Weakening in capital goods is likely to continue into
next year and, according to a durable-goods producer, declines in
the capital-goods sector will partly offset strengthening in
consumer goods and housing. A producer of household goods expects
that it will be the end of 1981 before the economy gets back to pre-
recession levels of real economic activity.
Steel
The steel industry has experienced a reversal from the steep
decline in orders that began in March, and operating rates in the
industry should rise gradually from the 50-55 percent rates
experienced in June and July. However, the 20-25 percent increase in
new orders in late July and August was still 20 percent below
February and March levels, according to an industry economist.
Although the source of the order strength is widespread, much of the
improvement is due to an ending of inventory liquidation. Demand
related to oil field equipment remains strong, but demand from
machine tools and construction customers is easing and cancellations
are reported from railroads. However, a better-than-expected upturn
in auto sales this fall may produce a rush to re-stock steel
inventories.
Autos
Auto sales in July were higher than the underlying rate of
demand (9 million units), according to an industry economist, but
sales for August and September should be below that rate (8.4 and
8.6 million units, respectively). While some purchases may have been
advanced by dealer and producer promotions, many buyers are thought
to be awaiting the 1981 models. The price of many of the new models
will be above imports, but an auto supplier notes that fuel-
efficiency should be comparable and domestic models will be larger,
safer, and more stylish than imports. A steel economist reports that
orders from the auto industry indicate a conservative production
schedule, averaging 9.9 million units for 1981. A manager of several
area dealerships expects no strong increase in auto sales until next
March and has reduced his inventories and staff to the lowest levels
of any time.
Consumer Spending
Retail sales in August rose again in real terms
particularly for soft-goods, but remain weak for furniture and
appliances. An economist in the appliance industry reports that
orders continue to be weak, but declines have moderated, with orders
10 percent below last year in real terms. Several bankers report
some increase in credit card usage in August by existing
cardholders. However, retailers report cash sales up, but credit
card usage has not shown any improvement since the decline in April.
An economist for a major retail chain believes that a prerequisite
for a sustained consumer recovery is increased credit card usage,
because incomes will remain depressed by further price increases.
Most producers and retailers expect a slower-than-usual recovery in
consumer spending. They assume a tax cut and increased small car
availability that should improve retail sales by early 1981.
Inflation
Despite moderation in consumer prices in August because
of lower mortgage rates, most respondents expect upward price
pressures through the first half of 1981. They view the underlying
rate of inflation to remain about 9-10 percent. An auto economist
expects consumer prices to rise from 8.1 percent in the third
quarter to 12.7 percent in the first quarter of 1981, before
dropping back to 8.1 percent in the fourth quarter of 1981. Food
prices are a major factor in the expected acceleration in the
inflation rate, but several economists express hope that tight
monetary control would reduce the rate further in 1982.
Loan Demand
Loan activity in the District remains weak. Consumer
loans continue to decline in most areas and business loans are still
on a low plateau. An area banker expects some seasonal pickup in
consumer loans in the fall, but notes that consumers seem more
concerned about paying back loans. However, an auto dealer is
encouraged by the increasing interest of banks in financing auto
sales. Business lending remains soft, but banks are now more active
in the commercial paper market. A durable-goods producer states that
many firms are more liquid now since inventories have been reduced.
Loan demand will continue to be weak in early 1981 because of better
cash flow during the early stage of recovery, according to a bank
economist.
Savings flows improved slightly among banks and S&Ls, especially in passbook accounts. Several respondents note a tendency among customers to prefer liquidity over higher paying time deposits with withdrawal penalties, which typically occurs when times are uncertain.
Mortgage Lending
Mortgage activity, especially loan commitments,
picked up in July and early August, but loans are still 30 to 40
percent below year-earlier levels. Although builders were never too
optimistic about a recovery in housing, according to an economist
with a regional FHLB in this District, rising mortgage rates could
postpone a recovery until 1981. Housing starts may be erratic over
the balance of this year, and average about a 1.3 million rate
monthly. Mortgage rates rose about 1 percentage point last month
according to an S&L official, because lenders are more sensitive to
rate changes in secondary markets and to cost of funds. Although
most respondents expect a downward trend in mortgage rates because
of improved deposit flows, current rates offered by banks are
generally at 13 percent plus points, while S&Ls offer rates that
range from 12-1/4 to 12-3/4 percent plus points.