Beige Book Report: Cleveland
November 16, 1982
Overview
Forecasts of fourth quarter economic activity have been scaled down.
Steel and automobile manufacturers plan inventory reductions this
quarter. The housing outlook remains bearish. Personal consumption
expenditure is expected to grow modestly. Manufacturers expect
shipments, inventories, backlogs, employment, and hours worked to
decline in November, while orders stabilize at the low October
level. Automobile, steel, and capital goods producers face
continuing weak sales. District unemployment rates exceed the
national rate as additional plants are being shut down and workers
laid off. Some firms are obtaining labor-cost concessions.
National Outlook
Economists who attended the Fourth District roundtable meeting on
October 29 at this Bank scaled down their forecasts of economic
activity from their June forecasts. The median of 30 forecasts now
shows a 2.6 percent annual rate of increase in real GNP in the
fourth quarter, 3.1 percent in the first quarter, 3.0 percent in the
second quarter, and 4.0 percent in the second half of 1983. Only
three of the forecasts show declines in the fourth quarter, and none
show declines in the first and second quarters. However, several of
the roundtable participants prepared their forecasts before third
quarter preliminary GNP data were available, and some of those now
expect a decline in the fourth quarter. The median forecast shows
the Implicit Price Deflator accelerating to a rate of 6.1 percent in
the fourth quarter and then moving to 5.6 percent in the first
quarter and 5.9 percent in the second quarter. The median forecast
has unemployment averaging 10 percent in the fourth quarter, 9.8
percent in the first and 9.7 percent in the second.
Inventories
Additional inventory decumulation appears likely this quarter. A
steel firm forecasts steel mill inventories will fall an additional
1 million tons by year-end, bringing to 4 million tons the total
mill inventory reduction in 1982. The firm, however, expects no
further decline in customer steel inventories. Automobile producers
plan to reduce their inventories in the fourth quarter. A steel firm
expects truck inventories to be reduced in the fourth and first
quarters. However, a major producer of consumer electrical durables
says inventories are not excessive at the manufacturer or retail
level. Fourth District observers expect inventory liquidation to be
complete by year-end.
Construction
Housing industry economists are quite bearish on prospects for
starts. Interest rates are not yet down to attractive levels,
consumers are cautious, the inventory of unsold houses is large, and
houses have lost their appeal as an investment vehicle. One thrift
industry economist forecasts 1.09 million (a.r.) housing starts in
the fourth quarter and 1.33 million for 1983. A producer of
insulation reports only a seasonal rise in orders and expects fewer
than 1.3 million starts in 1983. A bank economist predicts that,
because of the lag in their decline, mortgage interest rates will
not be down to attractive levels until spring.
Consumer Spending
Personal consumption expenditure remains sluggish. Real PCE
nationally will increase 3.5 percent (saar) in the fourth quarter,
2.5 percent in the first quarter, and 3.7 percent in the second
quarter, according to the median forecast of economists at this
District's roundtable meeting. Spending is retarded by high
unemployment, sluggish growth of real disposable personal income,
and declines in real house price, but encouraged by declines in
inflation and consumer interest rates and the rally in stock and
bond prices. Overwithholding of the July tax cut should result in
larger tax refunds early next year, stimulating consumer spending in
the second quarter.
A major producer of household consumables says their real sales were up in the third quarter and that the consumer is buying. A major producer of consumer electrical durables reports a sharp rise in early October orders compared with a year ago, following months of declines. An official with a large department store reports that recent improvement in sales has prompted officials to raise their near-term sales forecasts from September.
Manufacturing
Preliminary results from the November survey of Fourth District
manufacturers indicate continued weakening in that sector. Shipments
and inventories are expected to decline more in November than in
October, while employment and hours worked are expected to decline
slightly. New orders are expected to stabilize after falling in
October. Backlogs fell in October and are expected to fall again in
November.
Automobile and capital goods sales are weak. A major auto manufacturer reports domestic producers have reduced their fourth quarter planned output to a 4-3/4 million unit annual rate. According to a major capital goods producer, orders are weak, and no pickup is expected until the second quarter. He says output of capital goods is falling more than capital spending because export sales are falling more sharply, in response to strong appreciation of the dollar. A diversified producer of capital goods expects his real sales to decline 8.7 percent (a.r.) in the fourth quarter and rise 14.4 percent (a.r.) in the first quarter, after which they will still be 25 percent below the level of four years ago.
The steel industry is in great distress. A major steel firm asserts that falling auto production and extreme weakness in capital goods output are undermining steel consumption and extending the period of customer inventory liquidation. Steel mills are closing plants to cut costs and lengthen the time span before huge operating losses produce financial collapse. An early cyclical recovery in the economy is essential to preserve the viability of the U.S. steel industry. Another steel firm expects no increase in steel consumption in 1983, but thinks shipments will improve because steel user inventories will stop falling.
Labor Market Conditions
Labor markets in the District remain weak. Unemployment rates are
higher than the national rate, as temporary and permanent layoffs
and plant shutdowns continue. A major steel firm is shutting down a
seamless pipe mill for three weeks, idling 500 workers. At one steel
plant, 40 percent of the hourly employees have been reduced to a
four-day work week. Another steel firm has suspended all operations
at a plant for an expected three months, laying off 450 workers.
Another steel firm is shutting down two blast furnaces and other
facilities indefinitely and laying off 900 more workers. A foundry
that has been operating at 25 percent of capacity is closing for six
weeks. A duplicating-machine-parts plant that employs 300 workers
closed permanently after union members rejected a three-year package
of concessions.
Some firms are obtaining labor cost concessions. A major manufacturer of aircraft and automotive components obtained givebacks worth $1.77 per hour in a new three-year contract. A large producer of machine tools obtained substantial givebacks in a three-year contract for one plant and gave no pledges of job security. Workers at another automotive parts manufacturer recently authorized union leaders to open concessions negotiations with the company. Most major steel firms in the Fourth District have imposed 5 percent to 10 percent pay reductions on non-union, salaried workers.