Beige Book Report: Cleveland
June 30, 1981
Summary
Respondents in the Fourth District generally expect very
little growth in output through the third quarter, and many are
beginning to lower their inflation forecast for 1981. Manufacturing
activity in the District continues to expand, although signs of
third quarter weakness are emerging. Consumer spending, weakened by
the second quarter slump in auto sales, is expected to strengthen in
the third quarter. Bank lending activity has increased in June,
partly due to financing business inventories. Local housing
construction has declined again in June, as saving flows into S&Ls
have weakened further.
Outlook
The tone of the Fourth District Round Table meeting early
in June was somewhat more optimistic with respect to output and
prices in 1981 than at the March meeting. The median forecast of the
30 participants shows growth in real GNP of 3.2% between the fourth
quarter of 1980 and the fourth quarter of 1981, and 4.0% in the
subsequent four-quarter period. One-third of the group still expects
real GNP to decline in the second quarter (-1.4%, according to the
median forecast), but all 30 expect resumption of at least mild
growth in the third quarter. The projected acceleration in growth of
output later this year is in response to a personal tax-rate
reduction and less intense inflation that will increase growth in
real income. Nearly two-thirds of the group assume that growth in M-
1B in 1981 will be within its long-run target range and the balance
expect that growth will exceed the upper limit of the range. The
bulk of the group expects a Federal deficit for fiscal year 1981 in
the range of $55-60 billion and a deficit for 1982 in the range of
$45-55 billion.
Prices
Fourth District economists scaled down their forecast of the
GNP implicit price deflator a little from the March Round Table
meeting. The median forecast now shows the deflator increasing by
9.1% in 1981 (fourth quarter to fourth quarter) and 8.6% in 1982.
While most participants expect a gradually decelerating inflation
trend to provide thrust to economic activity, many remain doubtful
that the underlying inflation rate has changed much, despite recent
moderation in consumer and producer prices. Some raised doubts that
farm price declines will continue much longer.
Manufacturing Activity
The latest monthly Survey of Fourth District
Manufacturing indicates continued expansion in shipments and orders
in June, although some easing in the pace is occurring. A steel
economist reports a letup in steel orders in recent weeks,
apparently because of a sharp rise in imports and hedging prior to
the price increase in June. Aluminum orders for the second half of
1981 are weak virtually across the board, according to an aluminum
industry economist, and some cutback in production is anticipated in
the third quarter. Also, two regional crude-oil refineries in the
District are still operating at about 70% of capacity. Backlogs of
machine tool orders have been steadily cut to 12 months from 18
months a year-ago, according to an industry economist. The long
slide in machine tool orders is unlikely to be reversed for another
quarter or two. The spending surge for machine tools by the auto
industry has peaked, judging from recent cancellations and deferrals
of spending by GMC, especially for production of additional four-
cylinder engine capacity. In view of the letup in capital spending
by the auto industry, some machine tool producers believe they have
sufficient capacity to accommodate an upswing in defense orders
before reaching supply constraints, perhaps in 1983.
Consumer Goods
Despite a second-quarter decline attributed largely
to weakened auto sales, consumer spending should increase by about
3% in 1981, according to an economist for a major department store
chain. Retail sales of food items are expected to be flat over the
year, but real growth in department store sales should reach 4%. A
packaging producer for nondurable consumer goods reports that
shipments of corrugated boxes, usually a reliable coincident
indicator, have been dropping slowly. Several producers of durable
consumer goods report that inventories continue to be tight at plant
and retail levels, with some seasonally volatile items (such as air
conditioners) experiencing slow deliveries as a result of low
stocks. Auto producers have been trying to influence dealers to step
up orders for the remainder of this model year, but dealers are
reluctant to order because of high interest rates on floor plans and
an uncertain consumer market. An auto industry economist states that
May and June should be a post-rebate low point in auto sales, and
summer months are expected to show increases, on a seasonally
adjusted basis. This assumes, however, continued moderation in
consumer prices, further declines in gasoline prices, and lower
interest rates. The economist asserts that availability of
installment credit, hindered by usury ceilings in many states, is
depressing auto sales rather than higher interest rates.
Banking
Loan demand by businesses has increased in recent months,
but consumer loan demand remains weak. A bank economist reports that
C&I loans recorded a strong increase in June. Inventory financing
and a need for working capital appear to be significant factors for
the step-up in borrowing from small and middle-sized corporations.
Continuation of interest rates at current levels could have a
crippling effect on smaller businesses over the next three to six
months, according to several bank economists. Consumer installment
lending continues to decline, according to a local bank official,
but at a slower rate than during the first quarter. However, an area
banker expects installment lending to receive a boost from new car
buying in the fall. Credit card usage is showing signs of bottoming
out.
Housing
Mortgage loan demand remains very weak in the District,
with mortgage rates rising to as high as 18% on conventional 80%
mortgages. A 100-basis-point advantage on renegotiable-rate-
mortgages has not overcome consumer reluctance to buy homes under
current market conditions, according to an S&L official. An official
for a major builder reports that orders for new houses in the second
quarter are 30% below normal, with each month showing progressive
weakness. The current order pattern, along with rising mortgage
rates, does not suggest a revival in housing starts similar to that
which occurred last summer.
Savings flows into S&Ls may fall as sharply in June as in April, according to an economist for a regional FHLB in the District. An S&L that has benefited from a promotion to attract funds to their six-month money-market certificate in May reports that competition from other S&Ls and higher rates offered by commercial banks have reduced savings flows in June. Several S&L officials see little relief from their earnings problem this quarter or next. Losses this quarter will apparently be even more widespread than last, which will aggravate those associations that have already been operating with relatively low liquidity. An S&L official asserts that the proposed tax-free savings certificate would promptly improve the supply of and demand for mortgages, although several others feel such an instrument would be too late to benefit this selling season.