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Beige Book Report: Cleveland

June 23, 1982

Summary
Economists have scaled down their forecasts of economic activity for 1982. Unemployment rates in the Fourth District are higher than the national rate and more layoffs are expected. Manufacturers report little sign of recovery in orders and sales, although declines appear to have bottomed, except in capital goods. Inventory liquidation probably is complete in consumer goods and some industrial products but further liquidation is expected in primary metals and capital goods. Little recovery in housing is expected. A variety of financial strains are reported.

Outlook
Economists who attended the Fourth District Roundtable Meeting on June 11 at this Bank scaled down their forecasts of economic activity for 1982 from their March forecasts. The median of 29 forecasts now shows a 0.5% annual rate of increase in real GNP in the second quarter, 3.5% in the third quarter, and 3.3% in the fourth quarter. Twelve of 29 forecasts show declines in the second quarter, while none expects a negative third or fourth quarter. The median forecast shows the implicit price deflator accelerating from a rate of 5.0% in the second quarter to 6.4% in the third quarter and 6.7% in the fourth quarter, and the unemployment rate gradually receding from a peak at 9.5% in the second to 8.6% in fourth quarter. They expect fourth quarter 1982 to fourth quarter 1983 increases of 3.7% in real GNP and 6.4% in the implicit price deflator.

Employment
Labor markets in the District remain weak, and unemployment rates are generally much higher than the national rate despite a decline in May. Most of the major metropolitan centers in the District have double-digit rates of unemployment. The Cleveland Press, an afternoon daily, failed in June idling 900 workers. Our latest monthly survey of manufacturers suggests employment will decline again in June, particularly in the District's steel industry where the drop in orders has resulted in the banking of numerous blast furnaces in Cleveland and Pittsburgh.

<>>Manufacturing Activity
A variety of manufacturers in the District report little sign of recovery in orders and sales, although the declines appear to have bottomed except for the typically lagging capital goods industries. Producers of personal safety equipment for industrial uses, basic chemicals and reinforcement fiber glass report orders and sales have flattened in recent months but no improvement has yet occurred. Sales of residential glass are flat to down a little but sales of commercial building glass continue strong. Coatings and glass sales to the automotive industry apparently bottomed in April, but sales of house paint continued to decline in May. A producer of corrugated boxes (sales of which apparently closely parallel industrial production) reports a small sales increase in May over April, and a petroleum refiner reports gasoline sales in May were the best in the last two years. Capital goods producers generally report further deterioration in orders and shipments. Orders for bearings from the construction, agricultural and railroad equipment industries weakened further in May, and a producer of electrical capital goods reports that their orders deteriorated in June. A producer of pneumatic and hydraulic parts reports orders from industrial machinery manufacturers have dropped severely recently. Machine tool orders remain very weak, even for robotic equipment, and no turnaround is expected until well after an economic recovery because of weakened balance sheets and cash flows of capital intensive industries.

Inventories
Most respondents in the District report that inventory liquidation of consumer goods and select products in industrial markets has probably run its course but further liquidation remains in primary metals and capital goods. A producer of major home appliances has cut inventories "below the bare minimum" and could not respond quickly to an upturn in orders. A diversified producer of industrial materials reports that their inventories have been reduced from a 5 to 6 month supply to 30 days and are down "as far as they can go." Dealer inventories of tires for agricultural implements are also reported to be extremely low. Crude oil inventories are expected to decline more in the second quarter than in the first, according to a petroleum economist. Refined product inventories are expected to grow in the third quarter. An auto manufacturer reports their inventory reduction in the second quarter was much less than in the first. There are still some inventories that are high. A pneumatic and hydraulic parts producer reports inventories of construction and agricultural machinery and some non- electrical machinery are high. Steel producers expect inventory liquidation again in the third quarter, although not as severe as in the second quarter. One expects no improvement in steel production until the fourth quarter, which should be the best of the year as users begin to rebuild inventories.

Housing
Neither lenders nor suppliers to the housing industry expect much of a recovery in housing, at least in the near term. A producer of major home appliances forecasts little recovery in house construction in 1982-1983 as an increase in the number of units is offset by reductions in house size. A housing industry economist projects a weak recovery in housing because mortgage rates are not expected to fall much, consumer income is constrained by the sluggish economic recovery, and savings institutions are weak. He reports there is not yet any pickup in S&L loan commitments in this region. House sale closings are at one-third the level of 1978, delinquencies are up sharply in the last 18 months, and foreclosures are also rising.

Financial Conditions
Bank officials in Cleveland and Pittsburgh report business loans are still strong, although banks in some smaller metropolitan centers report all kinds of loans, business and consumer, are weak. One banker reports delinquencies on consumer loans have not yet been a problem despite widespread layoffs in his area, but another predicts mortgage foreclosures and bankruptcies will increase unless economic conditions improve next half.

A variety of financial strains are reported. A major public accounting firm reports that many client firms are in severe financial difficulty. One auto producer reports that their credit company is not encouraging new business and has been advising dealers to seek credit from local banks. Another reports that an estimated one-third of the new car market is unattractive to lenders because of usury law limits on interest rates. He estimates that the prime rate would have to fall to 12% for new car financing to be attractive to lenders in all 50 states. Thrifts in the District are preoccupied with their continued deterioration in net worth and are concentrating on merger plans rather than making mortgage loans, according to an economist in this District. Thrifts generally report very little loan activity.