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Beige Book Report: Cleveland

August 18, 1982

Summary
A sluggish national recovery is expected to begin this quarter but there are few signs of recovery in the Fourth District. Unemployment remains high and additional plants are being closed. Consumers remain cautious and capital goods activity is weak. Additional inventory reductions are likely. Steel producers and farmers continue in difficulty.

National Outlook
Respondents in the Fourth District generally expect a sluggish national recovery beginning this quarter but have scaled down their expected gains in output for the near-term because the capital goods slump is sharper than expected. One respondent asserted that recovery will not be sustainable without (1) a better outlook for Federal deficits, (2) greater conviction by consumers that inflation has moderated, and (3) a 200 basis point decline in long rates and a further 100 to 150 basis point decline in short rates.

District Outlook
Most observers report no signs of recovery in the Fourth District, although there are some signs that the bottom is near. Primary metals, capital goods, and the coal market are all weak. Plant closings and layoffs continue, and capital spending plans are being reduced. Preliminary results from our August survey of Fourth District manufacturers, however, show some optimism for August. On balance, the 19 respondents expect shipments and new orders to rise in August after declining in July, and backlogs to be unchanged after declining in July. The survey indicates manufacturers are significantly more optimistic, or at least less pessimistic, in their expectations for August than they were a month ago about July.

Employment Situation
Labor markets in the District remain weak as unemployment continues high, additional plant closings are announced, and layoffs exceed callbacks. In Ohio, the unemployment rate at 11.8 percent (sa) in July, showed no net change since March. Among the District's eleven major SMSA' s, unemployment rates (nsa) in June ranged from 9.6 percent in Wheeling to 18.3 percent in Youngstown, and most SMSAs had rates about 2 percentage points higher than the national rate. Measures of current activity in the Pittsburgh area, which usually lags the national economy, show continued declines through early July. Initial unemployment claims are up significantly, and an index of leading indicators for the Pittsburgh region fell in June for the 14th consecutive monthly decline.

Temporary and permanent plant shutdowns continue to be announced. Babcock and Wilcox will permanently close an 800 employee boiler parts plant by December 1, AM International is permanently closing a 450 worker duplicating machine parts plant on October 15, Republic Steel will "suspend indefinitely" by November 1 operations at two bar mills, affecting 700 employees, and Clark Equipment Company is closing its 450 employee truck plant in Georgetown, Kentucky. A director in southern Ohio reports that layoffs exceed callbacks in his area.

The Consumer
Some respondents assert that the tax cut is not leading to a surge in spending on durables. Consumers are very cautious because of high interest rates, fear of unemployment, and the belief, conditioned by the sticker shock phenomenon, that inflation has not abated. One banker estimated car financing rates would need to decline to 12% before cars would sell well. Consumers are cautious on both necessities and luxuries. A hospital association reports patients are now sicker and staying longer than several months ago because they delay seeking care, while major amusement parks in northern Ohio report attendance is down from last year. A major national retailer reports sales are very weak.

Capital Goods
The capital goods industry continues to suffer as new orders are weak and planned projects are deferred or stretched out. A machine tool manufacturer says orders are flat and will remain flat until after two or three quarters of solid increases in PCE. A large diversified capital goods manufacturer sees no spark in any of his markets. Sales of heavy trucks are below 1974-75 levels. U.S. Steel is making sharp reductions in 1982 capital spending plans, including stopping construction of a continuous caster in Lorain, Ohio. Republic Steel has reduced capital spending plans for 1982 from $280 million to $200 million. Armco recently reduced planned capital spending in 1982 from $570 million to $370 million. Sohio has reduced its planned capital spending in 1982 from $3.0 billion to $2.6 billion.

One respondent asserted capital spending could not lead the national recovery because (1) capacity utilization is so low, (2) interest rates are too high, and (3) the new tax bill would offset a substantial part of the tax reductions that corporations obtained from the 1981 tax law changes.

Inventories
Additional inventory reductions are likely this quarter. A major steel producer expects his inventories to fall sharply again in the third quarter and less rapidly in the fourth quarter. Inventories of oil country pipe are especially high. A major automobile producer, who had involuntary inventory accumulation in the second quarter wants to reduce inventory this quarter but so far has not been successful. A major retailer expects less reduction of retail inventories this quarter than last. He reports excess stocks of household goods, especially furniture.

Steel
Major steel producers continue in great difficulty. One firm forecasts shipments will remain anemic this quarter and show only a slight improvement next. Prices are a "disaster," according to a director, with oil country pipe prices continuing to fall rapidly from a high level and other steel product prices drifting down from already low levels. Orders are extremely weak and capacity utilization ranges between 40% and 50%.

Agriculture
Financial difficulty continues among farmers. More bankruptcies are expected, even if interest rates fall and crop prices rise. Agricultural land prices have fallen by one-third or more in eastern Kentucky, and many farmers there who bought land just before the price decline now have no equity to collateralize working capital loans. A Midwest grain storage executive reports grain crops are large, inventories high, and prices low, and asserts the farm economy won't turn around very fast.

Banking
Some bankers acknowledge the prime rate is higher than justified by money costs because banks want greater spreads to offset loan losses, and because they want to minimize the risk of rate increases later in the year. Business loan demand has weakened, and loans are limited from the supply side also as bankers have become more cautious. Small banks report more problem loans, and small businesses being liquidated. A bank that cut mortgage rates to 16 1/4% from 17% received no customer response and expects none until the rate moves below 15%.