Beige Book Report: Cleveland
December 15, 1982
Summary
Economic conditions and the outlook in the Fourth District
remain dismal. Unemployment is high and rising. Early December
retail sales are sluggish. Little near-term improvement is seen for
the automobile industry. The steel industry is in desperate
condition. Survey results and leading indicators point to further
contraction of manufacturing. House construction is showing only a
little improvement. On the bright side, scattered indicators of
disinflation continue.
Labor Market Conditions
Unemployment continues high and rising. The
November unemployment rate was 14.2 percent (sa) in Ohio and 12.1
percent in Pennsylvania. The District's eleven major SMSA's
unemployment rates (nsa) in October ranged from 8.9 percent in
Columbus to 19.7 percent in Youngstown, and averaged 3.2 percentage
points above the national rate. The unemployment rate has reached 21
percent in Lorain County, adjacent to Cleveland, as shipbuilding,
automobile and steel industries have stagnated. The United Mine
Workers union reports only 40 percent of active members in Ohio are
working.
Consumer Spending
Two major department store chains in the Midwest
report Christmas season sales are moderate to sluggish so far,
perhaps because of unusually warm weather. Both expect real sales
this season about 1 percent above the year-ago level. One chain
reports inventories are somewhat high and expects it will take a
record amount of price promotions to achieve their forecast; the
other says inventories are smaller than usual and promotions won't
be as aggressive as last year. Both expect sales volume to be
concentrated closer to Christmas than in previous years because of a
secular trend in that direction and because unseasonably warm
weather has delayed sales of apparel. One chain expects real PCE to
rise 4% (saar) this quarter from last and, assuming a continuation
of automobile purchase incentives, to rise 2 1/2% in the first
quarter.
Automobiles
Automobile inventory adjustment appears near completion
but a near-term sales reduction is expected by industry economists.
November sales were better than expected by one major producer, who
believes some of the sales were borrowed from next quarter. The firm
projects import and domestic sales at 7.4 million units (saar) next
quarter, unless all domestic producers were to give sales incentives
on 1983 models, in which case sales might reach 8.0 million. Current
sales are divided about evenly between 1982 and 1983 models.
Inventory will still be a little too high at year-end. The firm sees
no change in inventory next quarter, and industry production will be
only slightly above fourth quarter levels. Employee recalls to
produce certain models will be offset by temporary layoffs from
other model production facilities, so there will be little net
increase in employment next quarter.
Another major automobile producer expects December sales will drop about 8 percent from November, partly because fewer of the popular 1982 models are left. First quarter sales will be down slightly from this quarter, as sales incentives terminate at year-end. Production will rise somewhat next quarter to build inventories for second quarter sales, but seasonally adjusted, inventories will be flat. Some employees will be called back next quarter.
Manufacturingbr> Manufacturing activity continues to contract, although less rapidly than earlier in the year. A survey of purchasing managers reveals further reductions in inventories of raw materials, supplies, and finished goods. A record percentage of firms are purchasing production materials on a hand-to-mouth basis. The survey shows new orders, production, and employment continue to decline. A diversified producer of parts for cars, trucks, and materials handling equipment reports his orders are weak because many customers are canceling capital expansion plans. Orders for heavy trucks are the lowest since 1967. He expects no upturn in his business before 1983:IVQ. A producer of consumable equipment for the mining industry sees no sign of an upturn in orders. This bank's survey of Fourth District manufacturers shows December declines in new orders, shipments, backlogs, inventories, and employment, although the declines are expected to be somewhat smaller than in November. Indexes of leading indicators point to further decline in Pittsburgh but a bottoming in Cleveland. An index of leading indicators for the Pittsburgh area registered its 17th consecutive monthly decline in October, while the index for the Cleveland area has been advancing erratically and in September stood 2.5 percent above its April low.
Steel
The steel industry is in severe distress. A major steel
producer reports further declines in shipments, inventories, orders
and employment. Fourth quarter shipments are expected to be less
than 13 million tons for the industry, 29 percent below the
depressed year-ago level, and orders received so far give no
indication of first quarter improvement. Another major producer
describes the market as ''unbelievably weak,'' and expects further
drops in shipments and employment. The firm is operating at 20
percent of capacity, with only one of twelve blast furnaces in
operation, and is no longer certain of survival. The firm projects
industry losses larger this quarter than last because shipments and
transaction prices are lower. Steel mills are reducing inventories
to generate cash as working capital continues to erode. Several
firms plan to liquidate inventories, draw down lines of credit, and
sell off assets to delay bankruptcy while waiting for economic
recovery. Survival of some producers is contingent on economic
recovery and strengthening of steel demand by mid-1983. Another firm
reports stocks of oil country pipe are still high. Steel producers
have sharply reduced capital expenditure plans, hurting steel mill
equipment producers, who see no upturn in their sales before 1984.
Construction
A major builder of houses forecasts national housing
starts of 1.3 million units in 1983, up from about 1.1 million this
year. However, builders see a slower recovery in this District,
where there are scattered reports of mild increases in house
construction. In the Cleveland area, bankruptcies among contractors
and building-material suppliers in 1982 are up 36 percent from last
year, and will account for one-third of total corporate
bankruptcies.
Prices
Scattered indicators of disinflation continue. Retailers in
Cleveland are offering unusually extensive pre-Christmas price
reductions. Some Teamster Union locals in Cleveland have been
bidding against each other with wage concessions to obtain
employment, but steelworker union local presidents recently rejected
concession adjustments to the current labor contract. Industrial
vendors are reported to be offering deep discounts to obtain orders.
A survey of purchasing managers reveals more price declines than
increases, while a survey of manufacturers predicts prices they pay
will not change from November to December.