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Beige Book Report: Cleveland

March 23, 1983

Summary
Forecasters in this District expect a moderate national recovery with unemployment falling slowly and the inflation rate' rising by year-end. Personal consumption expenditure is improving slowly. Employment fell and unemployment rates continue to rise in this District but leading indicators suggest the bottom is near. Manufacturers in general expect little change in activity in March. Automobile production is expected to rise substantially this year. Steel producers had sharp order increases in February but expect no profits until late this year. Machine tool orders are improving but shipments and backlogs are still deteriorating. Loan demand is generally flat with a few indications of improvement.

National Outlook
Economists who attended the Fourth District Roundtable Meeting on March 11 at this Bank scaled up their forecasts of economic activity from their October forecasts. The median of 27 forecasts now shows a 4.3% annual rate of increase in real GNP this quarter, 2.9%, 4.5%, and 5.0%, respectively, in the second, third and fourth quarters and 4.3% in the first half of 1984. None of the 27 forecasts shows negative figures for any of the next six quarters. Industrial production is forecast to rise 8.2% this year (IVQ to IVQ). The median forecast shows the implicit price deflator rising at a rate of 4.6% this quarter, slowing slightly for two quarters, and then accelerating to 5.6% in the fourth quarter. The median forecast has the unemployment rate averaging 10.5% this quarter and falling steadily to 10.0% in the fourth quarter.

Consumer Spending
Personal consumption expenditure is improving slowly. Spending growth on consumer durables this year is expected to be retarded by high unemployment, reduced unemployment benefits, and high real interest rates, but boosted by the rise in stock prices and consumers' improved ability to service debt. Car and truck sales are not expected to rebound as sharply as usual for the first year of a recovery, because sales incentives provided support during the bottom of the cycle. Also customers are reported to be hesitant about purchases because of uncertainty about changes in gasoline prices. One automotive industry economist expects sales incentives to be continued after March 31 only for small cars, because large cars are selling well.

An economist with a major producer of consumer nondurables reports nondurable goods expenditures are well on the road to recovery. The improvement seems fairly widespread across the major components of nondurable goods and he expects the first quarter to show a 3% real year-over-year gain in expenditures, the largest since mid-1981. He also notes some return by consumers from generic and lower-priced brands to higher-priced brands. A major petroleum company expects very little near-term sales response to the drop in oil prices. Expenditures on services in the first quarter will be held down because of the mild winter's impact on sales of natural gas and electricity.

District Labor Market Conditions
Employment fell and unemployment rates in this District rose again in January but leading indicators suggest the bottom is near. Unemployment rates reached 13.2% (nsa) in Wheeling, 17.6% in Pittsburgh, and 18.1% in Erie. Twenty of 88 Ohio counties have unemployment rates that exceed 20% and the state average is 14.9%. However, factory employment, particularly in the automotive industry, is rising slowly and announcements of factory layoffs are less frequent than three months ago. Leading indicators for Cleveland and Pittsburgh rose in December and January, indicating that the bottom is near in those SMSAs.

Manufacturing
Results of the March survey of Fourth District manufacturers indicate little change in activity from the previous month. Shipments are expected to rise in March, but backlogs, orders, and inventories are expected to show little change. Employment and hours worked are expected to remain at February's level.

The median of ten automotive industry forecasts at this Bank's Roundtable Meeting shows domestic production of automobiles rising 28% to 6.5 million units in 1983. Automobile inventories are reported to be low and, considering current rates of sales and production, are unlikely to rise excessively. Dealer stocks, which fell by 360 thousand units last year, are expected to increase by 150 thousand units in 1983.

Steel-making firms see some improvement in orders and production but are unlikely to earn a profit until late this year. Major steel producers expect domestic consumption of steel to fall by 1% from last year. One major producer notes that since 1948 domestic steel consumption generally has risen only in years when real GNP growth has exceeded 2.7%. Nevertheless, major firms expect industry shipments to rise by 20% and production to rise by 35% as both users and producers partially reverse their sharp inventory declines of last year. However, producers are likely to suffer losses again this year as transactions prices remain well below published prices and recent labor concessions reduce costs by only $15 per ton.

Steel firms had sharp increases in orders in February, mainly from the automotive sector, and expect further increases in March, but order levels remain low relative to capacity. Mills currently are operating at about 50% of capacity versus the 30% low during the 1981-82 recession. Order backlogs are rising but producers are cautious about recalling workers and restarting idled facilities. The price of steel scrap is reported to be up sharply.

The machine tool industry remains depressed with shipments expected to deteriorate further in 1983 although orders should turn up. Order backlogs at current shipping rates are only five months, the lowest in the post-World War II period. Backlogs are low more because of the record length (14 quarters) of the industry's order downturn than because of its depth (87% decline). One firm forecasts no recovery in the industry's shipments in 1983 and only a small recovery in orders.

A major producer of materials for the construction, automotive, and general industrial sectors whose output tends to be coincident with the economy reports sales were up in January but were flat in February, except for February sales gains in fiberglass for the automotive and construction industries.

Bank Lending
Bank loan demand is generally flat with some pockets of strength. Business loan demand has been generally flat this year but is showing some signs of strengthening in March. One banker reports little borrowing thus far to rebuild inventories. Some consumer lending rates have been lowered a little in the past 30 days. Some banks note no strength in demand for new car loans and presume the financing is being done by the manufacturers' credit companies at incentive rates. Residential mortgage lending continues flat, except for strength in Cleveland. A Cleveland bank reports some strength in home improvement loans, only part of which is believed to be a response to unseasonally mild weather. Other consumer lending in the District is generally flat.