Beige Book Report: Cleveland
September 29, 1982
Summary
Economic conditions and the outlook in the Fourth District
remain bleak. Unemployment is high. Survey results and leading
indicators suggest continued sluggishness in economic activity.
Capital goods production is unlikely to recover until next year. The
steel industry remains in depression. Weakness continues in
construction with few signs of improvement. Retailers are cautious,
expecting slow sales gains. Municipal employment and
creditworthiness have fallen.
Unemployment
Labor markets in the District remain weak.
Unemployment rates continue higher than the national rate, but are
demonstrating no clear trend. In Ohio, the unemployment rate (s.a.)
was 12.7 percent in August, up 0.3 percentage points since April.
Among the District's eleven major SMSA's, unemployment rates
(n.s.a.) in July ranged from 9.1 percent in Columbus to 18.2 percent
in Youngstown, and most SMSAs had rates about 2 percentage points
higher than the national rate.
District Outlook
Continued sluggishness in District economic
activity is suggested by leading indicators and our latest survey of
manufacturers. An index of leading indicators for the Pittsburgh
SMSA posted its fourteenth consecutive monthly decline in July. An
index of leading indicators for the Cleveland SMSA rose in July but
has declined in eight of the last twelve months. Results from our
September survey of Fourth District manufacturers indicate District
manufacturing activity has yet to trough. New orders and shipments
are expected to expand, but at a slower rate than in August.
Manufacturers continue to liquidate inventories at about the same
rate as in August. Contractions in employment and hours worked are
expected to be less severe than in August.
Capital Goods
Capital goods production continues to weaken with no
recovery seen until next year. A producer of recording instruments
for the natural gas industry reports a sudden drop in orders. A
large diversified capital goods producer reports his backlogs are
low and there is "complete disarray" in capital goods markets with
little prospect for recovery in the next six months. A major bank
expects the lag between an upturn in economic activity and an upturn
in real expenditures on capital goods will be longer than usual in
this cycle and will not occur much before the second half of 1983.
Steel
Current conditions and outlook in the steel industry remain
dismal. Output remains extremely weak, with producers operating at
about 40 percent of capacity. Workers continue to be furloughed.
Republic Steel has cut exempt employee salaries 7 percent effective
October 1 and is planning to layoff about 13 percent of currently
working non-union employees in early autumn. One major producer
reports that the steel market "is on hold," with no meaningful
improvement expected until the fourth quarter. Another major firm
reports that "near-term cutbacks in auto production and continued
declines in capital goods production are depressing steel demand. A
slowing of steel-user inventory liquidation should produce moderate
improvement in fourth quarter steel demand. Steel mill inventories
will be liquidated through year end and into early 1983." A medium
size steel producer reports his orders fell 20 percent in August
after some improvement in June and July.
Construction
Weakness continues in construction with few signs of
improvement. A builder describes industrial construction as being in
the "depths of depression" and showing no signs of improving. He
looks for industrial, commercial, and highway construction to start
growing in second quarter 1983. A director reports several office
building construction projects nearing completion have not yet been
able to attract permanent financing. A home building executive
reports strong customer interest but weak sales because of a wait-
and-see attitude toward interest rates. Fixed rates on mortgages in
the Cleveland area have been lowered to about 15 percent and
variable rates are in a 14 percent to 15 percent range but there is
still very little consumer response. Some thrifts are not
encouraging loan activity because of continued deposit losses and
are worried that they will not be able to roll over the maturing All
Savers Certificates, now 5 percent to 6 percent of total deposits,
in light of intense competition. They expect little let-up in their
earnings and net worth squeeze. Moreover, some point out they own
the highest proportion of non-productive assets in years because of
repossessed houses.
Retail Sales
Retail sales are weak but some growth is expected. A
national retailer of general merchandise reports consumer outlays
are slow, but a regional retailer of do-it-yourself building
supplies says his sales are still holding up. A department store
executive is cautiously optimistic about Christmas sales and has
ordered more merchandise for fourth quarter this year than last. A
banker observes that the saving rate has jumped but consumer debt
has increased only slowly, so prospects for recovery in consumer
outlays are promising. An economist with a national retail chain
headquartered in this District still expects consumer spending to
lead an economic recovery, but revival will be smaller and later
than usual. He expects real PCE this quarter to increase only 0.5
percent from last, but a larger increase in fourth quarter if the
saving rate recedes to 6 percent, interest rates decline further,
and retailers continue to price aggressively. An economist with an
auto producer is also cautious about near-term prospects. He expects
total new car sales in fourth quarter to increase only 6 percent
from this quarter's dismal 7.8 million a.r., partly because high
interest rates on installment loans remain a constraint on sales. He
expects that dealer rebates will be sufficient to reduce inventories
of 1982 models over the next few months.
Municipal Finance
Tight fiscal conditions have reduced municipal
employment and creditworthiness. Local governments in Ohio reduced
employment by 1,600 non-school employees in August while public
schools and colleges reduced employment by 2,700 workers. Cleveland
expects to furlough about 100 workers soon. A municipal bond dealer
reports that the market views municipal debt in Ohio as not as good
as in many other areas of the country, and most issues have been
downgraded a notch, reflecting general economic conditions and
federal grant reductions. Nevertheless, he believes the quality of
debt in Ohio is generally good, and the debt is being received
favorably in the market. He knows of no local government that has
had difficulty issuing or servicing its debt. In contrast, a major
banker reports that weaknesses in the fiscal positions and financial
information systems of some municipalities are hampering their
access to capital markets.