Beige Book Report: Cleveland
August 10, 1983
Summary
Economic conditions in the Fourth District continue to improve.
Employment is rising although unemployment rates show little change.
Real incomes are rising, and retailers are experiencing broad-based
sales gains. Manufacturing activity continues to grow but perhaps at
a slower pace than in June. Demand is strong for aluminum but
remains sluggish for steel. Retailers and manufacturers report lean
inventories and caution about inventory growth. Builders, expect
construction activity to slow when current contracts are completed.
Mortgage lenders report declines in mortgage applications in
response to higher interest rates. Banks remain highly liquid.
District Labor Market Conditions
Employment continues to rise in this District but unemployment rates
show little change. In Ohio, manufacturing employment rose in June
for the sixth consecutive month and is 3.3% above last December's
low. Nonagricultural nonmanufacturing wage and salary employment
rose in June for the fourth consecutive month and is 3.1% above its
February low. In May and June, total employment increased by 160
thousand workers but the labor force expanded by 179 thousand,
leaving Ohio's unemployment rate unchanged at 12.8% (nsa).
Unemployment rates in the District's eleven largest SMSA's ranged
from 9.3% to 17.3%. Local indexes of leading indicators for
Pittsburgh and Cleveland have risen for seven consecutive months and
point to continued improvement in those industrial centers.
Prices, Wages and Earnings
Incomes of production workers have been rising faster than prices.
Hourly earnings for production workers in manufacturing in Ohio have
been rising at a 6.4% annual rate since last October. Average weekly
hours worked have also been increasing so that in the same period
average weekly earnings have been advancing at a 13% annual rate.
The Consumer Price Index for all urban consumers in Cleveland rose 9.3% in the last twelve months and 1.5% in the last two months. For Pittsburgh, the index advanced 7.1% and 0.l% and for Cincinnati 7.8% and 1.2% in the same two periods.
Retail Sales
Fourth District retailers are experiencing broad-based sales gains.
Most major general merchandisers report between 9% and 11% nominal
sales improvement between the first and second quarters (a.r.). They
anticipate continuing, albeit more modest advances in the third
quarter. The July sales pace has moderated from June. Consistent
with national trends, sales of cars, particularly large domestic
models, are leading the sales strength in the District. Retail food
sales are lagging, registering between 2% and 3% nominal growth from
last year. Retail sales growth is occurring throughout the
District, although Northern Ohio retailers appear to be lagging the
region.
Manufacturing
Growth of District manufacturing activity may have slowed in July. A
survey of purchasing managers in the Cleveland area reveals new
orders and production rose in July, but at a much slower pace than
in June. Similarly, the pace of price increases slowed from June.
Raw materials and finished goods inventories were stable in July.
A survey of purchasing managers in the Cincinnati area shows new orders, production, and backlogs continuing to rise through June. Increased proportions of firms surveyed report prices paid for commodities, services, and equipment are rising while vendor deliveries are reported to be slower. Raw material inventories are stable while finished goods inventories continue to fall.
Primary Metals
Demand for aluminum is strong while demand for steel remains
sluggish. Aluminum orders and shipments have increased substantially
since December, boosting the price of primary aluminum ingots by
about 50%. A major producer reports its U.S. smelters are operating
at the highest level since 1980. Aluminum inventories are very low
relative to current shipping rates.
Steel producers report new orders are slow, shipments are flat and order backlogs are falling. Product prices remain weak. At current prices steel producers would have to operate at over 70% of production capability to break even but they are operating at only about 50% to 60% of capability.
Inventories
Retailers and manufacturers report lean inventories. Retailers
expect some inventory accumulation by yearend 1983 but less than
typical for a recovery because of high carrying costs and skepticism
about the durability of the recovery. Industrial firms generally
report their inventories are at desired levels and are lean relative
to sales. Plans to expand inventories as sales increase are
cautious, as many firms plan permanently lean inventories.
Construction
Builders expect construction activity to slow when current contracts
are completed. Home builders report a substantial drop in new
contracts following recent increases in mortgage rates. However,
construction of new homes is likely to remain strong through the
Fall as builders work down their backlog of orders. Office
construction remains strong as work continues on projects underway.
Realtors, however, report an excess of office space, and prospective
tenants are being offered substantial incentives, such as several
months free rent. Suburban office space and shopping centers have
been over-built in recent years and developers expect very little
new construction. Prices of building materials and supplies have
begun to stabilize following several months of sharp price
increases, and expected shortages have not materialized.
Mortgage Lending
Mortgage lenders report declines in mortgage inquiries and
applications last month. Lenders offering conventional 30-year fixed
rate mortgages report a substantial drop in mortgage activity, and
without exception attribute it to an increase in mortgage interest
rates. Rate increases ranged from 50 to 100 basis points bringing
conventional mortgage rates into the 13% to 14% range. Lenders
offering variable rate mortgages have not experienced a substantial
drop in mortgage activity, and in several cases, lenders have had an
increase in the number of loan inquiries and applications. The
majority of loan inquiries and applications have been from existing
home owners seeking to trade up to more expensive homes. Lenders
report a significant decrease in their refinancing activity.
Commercial Banks
Banks in the District remain highly liquid. Continuing strong core
deposit growth and relatively sluggish commercial loan demand are
allowing banks to reduce their reliance on large denomination CD's
as a source of funds. Banks are using deposit growth to increase
investments in federal funds, repurchase agreements and U.S.
government and agency securities. Some funds are also being used to
satisfy the somewhat higher demand for consumer loans.