July 1, 1983
Summary
Economic conditions in the Fourth District continue to improve.
Employment is rising steadily and unemployment rates, although very
high, are falling. Manufacturers remain optimistic about the near-term outlook for price and wage inflation. Retailers report
improving sales. Manufacturing orders and production are mixed.
Automobile-related production continues to improve, while capital
goods orders and production remain flat at a low level. Steel sales
and prices are weak, as last winter's spurt in orders has ended.
Housing construction shows signs of weakening recently, but office
construction remains strong. Commercial banks are very liquid, as
deposit growth is strong and loan demand is weak.
District Labor Market Conditions
Employment is rising steadily in this District. Total employment in
Ohio edged up in May for the fourth consecutive month and
manufacturing employment has risen for five consecutive months.
Average weekly hours of manufacturing production workers increased
slightly in May for the fourth consecutive month. Local indexes of
leading indicators point to continued improvement in Pittsburgh and
Cleveland. Indexes for both areas have risen for six consecutive
months.
Unemployment rates in the District are falling but remain well above the national average, unemployment rates have fallen in each of the District's eleven largest SMSAs and averaged 13.3% (nsa) in April, down from 15.4% in January. However, the unemployment rate for Ohio edged up from 12.8% (nsa) in April to 12.9% in May, as labor force growth exceeded the gain in employment.
Prices and Labor Compensation
Fourth District manufacturers remain optimistic regarding the near-term path of price and wage inflation. List prices for their own
product lines have generally remained stable since January, and
although discounts are still common, they are gradually narrowing as
market conditions improve. They do not expect to have a significant
degree of pricing flexibility until the fourth quarter, at the
earliest. With a few exceptions, including natural rubber, natural
gas, and inputs for specialty steels, material input prices have
also been stable over the past several months. Labor cost increases
have been moderate because of a series of concessionary labor
contracts, reductions in fringe benefits, easing of work rules, and
business cycle-related productivity gains.
Retail Sales
Major retailers report improving sales. Sales gains have been good
for several months and especially good in the first half of June.
Retailers report higher priced goods selling especially well, while
also noting that customers continue to place strong emphasis on
price and price promotions. Inventory levels are satisfactory and
firms plan to expand them cautiously in line with sales gains.
Retailers are optimistic about the sales outlook for summer.
Manufacturing
Manufacturing activity in the District is mixed, with some producers
expanding output and others showing no change. However, few firms
report declining output.
This Bank's June survey of Fourth District manufacturers shows little progress in manufacturing activity in May and June. Employment, hours worked, shipments, new orders, and order backlogs are flat. Inventories continue to fall and about 20% of firms report increases in prices they pay for materials, components, and services.
A survey of purchasing managers in the Cincinnati area indicates a steady slowing in April and May in the rate of gain in production, new orders, and order backlogs. Inventories of raw materials and finished goods are falling. Firms report a decline in employment in May after two months of increases.
Manufacturing of light trucks and automobiles, especially large autos, is strong. Producers of these vehicles and their components report expanding hours and employment, but remain cautious about building inventories. Production of parts for the auto after-market, which remained fairly steady during the recession, is rising slowly.
Tire manufacturing is improving mildly. Tire manufacturers report shipments of original equipment auto tires up substantially over last year in line with improved new car sales, while replacement tire shipments are up only slightly. Production is up only moderately over last year because original equipment sales account for only a small share of the business. Manufacturers have stopped inventory drawdown but are taking a cautious approach to inventory building.
The machine tool industry is depressed but deterioration apparently has ended. Orders, production, and shipments are flat, and order backlogs are very low. Employment is stable, with firms reporting neither layoffs nor recalls or increases in hours. The low capacity utilization levels of customers may increase the customary lag between general economic recovery and improved demand for machine tools.
Primary Metals
Demand for steel is weak. The spurt in orders that occurred in
February and March has ended. Orders have been weak and flat since
then, causing order backlogs to shrink. Steel prices remain very
weak, putting great pressure on profit margins. Production in the
industry currently is only about 55% of capacity. The industry
expects to ship about 69 million tons this year, little better than
last year's very low 62 million tons. Advance orders for the third
quarter are so weak that production, employment, and hours may
decline in July and August. Producer inventory liquidation has ended
except for oil pipe, for which liquidation is likely to continue
through yearend.
Construction
Construction activity is one of the stronger sectors of the
District's economy. Housing construction activity is much greater
than a year ago, although recently its improvement appears to have
slowed substantially. Most houses are being built on contract,
rather than on speculation. The mix of demand is shifting toward
higher-priced homes. Prospective buyers are reported to be very
sensitive to interest rates and are shopping for small rate
advantages. The recent increase in mortgage interest rates is
reported to have slowed or stopped the rise of, but not decreased,
sales of new and used houses. 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.
Commercial Banks
Banks are very liquid as deposits growth is strong and loan demand
is weak. Money market demand accounts continue to grow extremely
rapidly, although not nearly as fast as earlier in the year. Total
deposits are showing solid growth. Business loan demand is flat or
down. Consumer credit demand is generally flat except for some
strength in credit card credit and variable rate loans. Automobile
loan demand is reported strong in Pittsburgh in response to rate
competition.