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Beige Book Report: Cleveland

May 18, 1983

Summary
Economic conditions continue to improve. Employment is rising and unemployment is falling. Retailers report improving sales. Manufacturing activity appears to be expanding slowly. Prices and orders for primary metals are strengthening. Construction continues to be a bright spot. Demand for fossil fuels remains weak, and farm prospects remain uncertain despite the new program to curtail production. Banks are reported to be liquid, with residential mortgage lending the only sector showing strength.

District Labor Market Conditions
Employment is rising and unemployment is falling in this District. Manufacturing employment in Ohio (nsa) rose slightly in January, February, and March, and average hours worked per week has a slowly rising trend. Recalls have begun at some firms as orders have improved but firms generally are cautious about expanding their workforce. Indexes of leading indicators point to recovery in Pittsburgh and Cleveland. Indexes for both areas have risen for five consecutive months.

Unemployment rates in the District are falling but remain well above the national average. Unemployment rates in the District's eleven largest SMSAs averaged 14.0% in March (nsa), down from 15.4% in January, and the rate fell in every SMSA except Toledo.

Retail Sales
Major retailers report improving sales. Department store sales have been very good in recent weeks. One major firm reports sales up 4 percent in real terms from the year-ago level. Another reports April sales up 1.7 percent (s.a., monthly rate) from March, and similar gains in early May. Both firms report higher priced "upscale" goods doing especially well, and both are optimistic about the sales outlook. The intensity of price promotions has ebbed some in the last two or three months. Inventories are described as "clean and lean;" neither firm plans major adjustments up or down.

A major automobile service and tire retailer reports unit volume of tire sales up 10 percent from last year and dollar volume of service sales up 7 percent. The firm describes the market as "extremely competitive," with more price cutting this year than last. Inventory levels are satisfactory and no adjustments are planned. Customers continue to replace tires only when absolutely necessary, except for buyers of "prestige" tires.

Manufacturing
Manufacturing activity appears to be expanding slowly, but capital goods production remains weak. A survey of purchasing managers reveals increases in orders and production, and stable employment. Inventories of raw materials, supplies, and finished goods are stable. Many orders are "rush," apparently because of lean inventories. Price increases outnumber price decreases by a growing margin but most prices are stable.

Preliminary results of this Bank's May survey of Fourth District manufacturers shows new orders, shipments and backlogs are rising while inventories are flat. Prices paid for supplies are generally stable, as is employment, but there is some increase in average hours worked per week.

A major producer of machine tools is very pessimistic. Except for those from the defense industry, he is obtaining practically no orders, not even for spare parts for which orders usually improve at this stage of a business cycle. He sees no sign of upturn in his business before 1984. A major producer of components for capital goods reports orders were flat in April and are likely to be flat in May.

Primary Metals
Orders and prices are strengthening for steel and aluminum. A major steel producer reports that orders for flat rolled steel had surged earlier this year as customers feared that supply might tighten, but that flurry of orders quickly died. Steel users have ceased liquidating inventory. Shipments to steel users have risen to equal steel consumption, which is rising slowly in line with the general business recovery. Steel mills are still reducing their own inventory to raise cash to offset losses from operations that are still below the break-even point. The gap is slowly closing, however, as volume and prices gradually rise.

A major producer of aluminum reports that orders have improved substantially since last fall, at times coming in at a rate that exceeded capacity. The strength in orders has come from customers hedging against rising prices and a possible strike in June, from refilling the supply pipeline after customer inventories had become too low, and from some strengthening in underlying demand, especially from housing and autos. Ingot prices have risen by half since last summer but remain below some producers' costs of production as there is strong competitive pressure for market share.

Construction
Construction continues to be a bright spot. House construction continues to rise and respondents are confident the improved level of house construction in the District can be maintained at current mortgage interest rates. House prices are firming and larger houses are being built and bought. House builders expect shortages of lumber, gypsum board, and skilled workers. Office construction is likely to remain strong in the District for another year or two as major projects already underway are carried to completion, but few new projects are being planned. Construction of shopping space is weak, but construction of general purpose industrial buildings is firm. Rental rates for non-residential properties are very soft.

Energy
Demand for fossil fuels remains weak. A director reports spot market demand for coal is practically non-existent. Small mine operators are in difficulty and their numbers are shrinking. Oil and gas exploration is drying up. There is an excess of drilling rigs, and drilling is expected to be weak for at least another year.

Agriculture
Farm income is low and prospects remain uncertain despite the payment in kind (PIK) program. A director is concerned that the PIK program may not take enough land out of production to avoid another bumper crop. Prices are rising sharply for grass seed required to prevent erosion of idled land that has more than an 8 percent grade. Commodity prices are recovering, but only because of speculation on PIK' s impact. Some farmers, expecting higher prices, are fertilizing crops more heavily than usual, and others are considering reducing the amount of land they will withdraw from production.

Some farms still are being sold at distress prices but others are now selling at reasonable prices. Another director reports farm equipment sales are rising and dealers are accepting PIK commodity warrants as payment for equipment. Fertilizer sales are reported to be slow.

Commercial Banks
Banks are very liquid, putting downward pressure on interest rates as residential mortgage lending is the only sector with strong demand. Inflows of deposits to MMDAs are reported slowing, especially as offered interest rates are lowered toward market rates. Business loan demand is soft, while consumer loans are up a bit. Bankers report getting a smaller-than-usual share of automobile financing business. Residential mortgage lending activity continues to grow rapidly, and the proportion of it used to refinance older high-interest rate mortgages is shrinking.