Beige Book Report: Cleveland
December 16, 1981
Summary
Respondents in the Fourth District have generally lowered
their forecasts of real GNP to show deeper declines this quarter and
next, especially because of inventory correction. Capital goods
orders are deteriorating, except in limited cases such as energy and
aerospace. Steel production continues to decline, as inventory
liquidation weakens orders. Post-Thanksgiving Day retail sales rose
less than anticipated, and several retailers are pessimistic about
the remainder of the shopping season. District unemployment is
expected to rise further in December, because manufacturing
industries are experiencing shutdowns and seasonal hiring in
nonmanufacturing is relatively light. Housing may be bottoming out,
but several S&Ls expect a very sluggish recovery.
Outlook
Several economists, who expected a decline in real GNP
between 3% and 5% in late October, now have lowered their fourth
quarter forecasts to show a decline between 5% and 7% (annual
rates). Effects of high interest rates and a sizable inventory
accumulations are primary reasons given for the larger than expected
weakness in economic activity. The peak-to-trough decline in real
GNP is expected to be milder than the 1980 recession. Although most
respondents expect the recession to trough in the first quarter of
1982, a bank economist expects a turnaround no sooner than mid-1982,
when consumer tax cuts and capital spending provide stimuli. Since
sharp recoveries often follow an inventory adjustment, an initial
surge in economic activity is likely, followed by a sluggish advance
until capital-goods spending accelerates in the second half of 1982,
according to a capital-goods economist.
Capital Goods
Capital-goods spending is still basically flat,
according to several respondents, but a few producer-goods
manufacturers report that orders have been deteriorating a little
more rapidly recently. Generally, weakness in capital spending for
trucks, industrial machinery, and farm machinery has been offset by
continued strength in computer equipment, energy, and electronics.
Within electronics, an economist for a capital-goods producer notes
a slowdown in orders for production-related equipment, even though
order books for advanced technology equipment are full into 1984.
Recent weakness in construction of office buildings has resulted in
some decline in commercial air conditioning parts, according to one
producer. Weakness has also occurred in utilities and their
construction-related activities, according to a capital goods
supplier, because of declining power consumption. Several
respondents expect capital spending to decline in the first half of
1982 because of concern that interest rate will remain high, as well
as because of declining operating rates and a lagged effect of weak
profits during the second half of 1981.
Steel
The pace of decline in steel orders is slowing, but steel
production still exceeds demand. Current operating rates, according
to a steel economist, are at about 60% of capacity, while order
rates are equivalent to only about 50%. Inventories are accumulating
at the mill and among customers, although a steel distributor
reports some customers are requesting immediate delivery to maintain
production. Operating rates could fall below 50% in the weeks ahead
in an effort to control steel inventories. However, an industry
economist states that inventory liquidations underway may cause
shortages and could result in a recovery in steel orders by next
March. A steel fabricator reports business activity has slowed
substantially since mid-August, with even some softness emerging
among oil industry customers where oil projects have been disrupted
by bankruptcies.
Consumer Spending
Retail sales in the District have deteriorated
more than nationally during November, in contrast to recent months.
An economist for a major department store chain believes that some
pickup in retail sales began in late-November, mostly in auto sales,
but further gains in December are expected to be divided between
auto sales and GAF. Several local retailers report post-Thanksgiving
Day sales slightly below year-ago levels, but total sales through
November were slightly above year-ago levels. Heavy promotions are
expected through the remainder of the year. An economist for a major
grocery-store chain reports a gradual slowdown in sales as customers
experienced falling disposable income in recent months. Spreading
unemployment has made consumers more cautious. A producer of home
and personal care goods reports mild year-over-year gains in sales
(about 2-3%), but these gains are considered to be below expected
normal increases (about 4-5%) under present economic conditions.
Auto sales were very weak in November, according to several local auto dealers, and December could be among the worst sales months ever. No sales promotion are being offered in December, although new promotions may begin in January. An area dealer has cut orders from producers by 75%, while retaining a 90 day stock. Several import dealers also report weak sales, although less severe than domestic dealers. A turnaround is not expected until next spring, and possibly not before the next round of consumer tax cuts.
Employment
Plant shutdowns for inventory control are expected to
produce a substantial further increase in District unemployment in
December.
Declines in manufacturing employment have already exceeded nationwide declines since the mid-1981 high. The sharpest decline in the District, in absolute and relative terms, occurred in auto and auto-related industries. Only in primary metals has the decline in the District been less than nationwide. Most respondents to the latest Fourth District Manufacturing Survey report tightening control on labor costs and overtime, but virtually all of the recently announced lay-offs are occurring among durable-goods producers.
Housing
Some housing officials believe a trough in housing could be
in the fourth quarter, if easing mortgage rates, which have declined
to about 17%, continue to ease and if an economic recovery occurs
early next year. Housing orders, according to a major builder, are
below year-ago levels, although recent year-over-year percentage
declines have narrowed since summer of 1981. A local builder is
skeptical that falling mortgage rates will contribute much to
increasing the number of qualifying loan applicants.
Also, mortgage lending may be slow to pick up, according to several S&L officials, because increased savings flow will be absorbed by repaying FHLB advances. Savings flows thus far continue to be weak but positive. S&Ls have been more aggressive than banks. in promoting IRA accounts. Some S&L officials note that All-Savers certificates have shown only marginal increase in November, with most the funds coming from existing accounts.