Beige Book Report: Cleveland
August 11, 1981
Summary
Respondents in the Fourth District generally view the
growth potential of the economy as strong and expect a quick rebound
in real GNP if interest rates fall. Real retail sales are expected
to show only mild gains over the next few months. Current interest
rate levels, along with a slowdown in orders, have led to deferring
of some capital spending projects and liquidating of inventories.
District employment continues to slide toward the 1980 recession
trough level. Effects of dollar appreciation on exports and imports
are mixed, but few respondents expect exports to rebound. Large
savings outflows at S&Ls continued in July.
Most respondents have scaled down their third and fourth quarter forecasts of real GNP, but the core inflation rate is expected to remain around 9%. A bank economist, who previously forecasted strong growth in real GNP for the second half of 1981, now expects only 1% growth in the third quarter and 2.5% in the fourth quarter. A steel economist and a retail trade economist see prospects for a negative third quarter and possibly fourth quarter, if interest rates do not fall. However, several respondents expect that tax cut incentives and declining interest rates will provide stimulus by September to support a positive third quarter. The fall in interest rates assumes that business loan demand weakens and monetary policy eases.
Inflation continues to be a major concern of respondents, with a widespread view that further moderation involves bringing down wage and employment cost increases. Also, several respondents are concerned that the effects of tight monetary policy on output will limit productivity gains that are necessary to reduce the core rate of inflation.
Consumer Goods
Some retailers expect sales, excluding autos, will
grow at a slower pace the balance of the year than earlier this
year, because of the slow growth of income and rising unemployment.
An economist for a major department store chain projects a 2%
increase in real retail sales of department store-type goods during
the second half of 1981. A nondurable goods producer reports that
sales volume has been soft in recent months, with year-over-year
gains at 1-2%, rather than an anticipated 3-4%. While several
department stores report small gains in real sales, a local chain
store that caters to blue-collar workers reports declines in real
sales. An area auto dealer reports new car sales rose slightly in
the last 10-day period of July, partly because of a revised Ohio
sales tax law that can reduce sales tax on new cars.
Manufacturing Activity
High interest rates and slackened final
demand are contributing to some curtailment of inventories and
deferment of capital spending. While most respondents report that
inventories at the plant and customer level are generally lean, some
spot excesses have occurred in recent weeks. Larger-than-desired
inventories are apparent, especially in steel, petroleum, and
construction supplies. A petroleum economist reports that refinery
operating rates range between 66-70% because of an excess of crude
stocks. A steel economist states that the moderate buildup of steel
inventories in the second quarter of 1981, while low by historical
standards, is in the process of being cut back. Steel orders
generally have weakened as a result of unwanted inventories and
rising imports. Order rates in the last few weeks are equivalent to
only a 60% operating rate, compared to the current 75% operating
rate. An official with a machine tool producer reports that new
orders amount to 50% of capacity and that production, which has been
at capacity, will be cut back by the end of the year even if orders
rebound. Several respondents state that some capital spending
programs are being deferred because of slackened demand and high
interest rates. A steel economist expects business fixed investment
to improve if the volume of sales returns, regardless of the
interest rate.
Employment
Employment conditions in the District have been
weakening steadily in recent months. Nonagricultural employment,
which peaked in November 1980, is currently approaching the July
1980 trough level. Nonmanufacturing employment, especially
government and construction, accounted for most of the decline from
the November peak. Manufacturing employment has drifted downward
since March, with declines concentrated in the auto industry. An
auto economist reports that temporary layoffs are likely to continue
throughout the third quarter as plants are closed for a week at a
time. A steel economist expects that slackening in steel orders and
production will cause shortened work weeks and some layoffs
throughout the second half of 1981. The latest monthly Survey of
Fourth District Manufacturing has shown a steady decline in rate of
employment expansion since the end of last year, and virtually no
change in hours worked since February.
Exports/Imports
Respondents acknowledge the difficulty in
differentiating effects of dollar appreciation on U.S. exports and
imports from economic weakness abroad. Several small
producer/exporters in the District report little loss in export
business despite dollar appreciation, while several others attribute
the recent decline in their exports to dollar appreciation and
softness in economics abroad. A machine tool builder reports growing
competition for orders from foreign producers and estimates that 25%
of his market is absorbed by imports. A manufacturer of pigments for
appliance paints states that sales in Europe have been declining
since mid-June and expects the decline to continue for the next few
months. In contrast, a chemical manufacturer reports a 10% increase
in sales during the first half of 1981 over the first half of 1980.
Imports have been rising noticeably in the steel industry, according
to a steel economist, but may partly reflect attempts to maintain
production levels abroad as demand softens. A chemical manufacturer
reports shifting to foreign sources of raw materials because of the
price advantage.
Savings Flows
The heavy outflow of funds from S&Ls continued in
July, as many area S&Ls look to new four-year certificates, "all-
savers" certificates, and repurchase agreements for new sources of
funds. Savings outflows, according to an economist for a regional
FHLB in the District, were not as severe in the second 10 days of
July, compared with the first 10 days, but were still massive by
historical standards. S&Ls appear to be more aggressive in promoting
the new four-year certificate and retail-repurchase agreements than
banks. Some banks are apparently reluctant to make long-term
commitments at present interest rates, but an S&L official states
that the new saving instrument adds stability to their source of
funds. A local S&L offers both a fixed and a variable rate on its
four-year certificate. An economist for a large S&L expects the "all
savers" certificate to be more helpful to the industry than the
four-year certificate in attracting funds and should shift funds
away from the money market certificates. Retail repurchase
agreements are being promoted in several major metropolitan centers
of the District, mainly by S&Ls.