Beige Book Report: Cleveland
May 8, 1984
Summary
Economic activity in the Fourth District continues to increase, but
labor market conditions remain weaker than in the nation. Retail
sales improved in April from March, but gains for the March-April
period are smaller than for the previous two months. Output and
prices in manufacturing continue to rise, and some primary metals
and automotive production lines are operating at capacity. Housing
construction and sales remain strong. Strike-hedge demand for coal
is rising. Business loan demand remains strong at commercial banks.
District Labor Market Conditions
Despite steady recovery, labor market conditions in this District
remain weaker than in the nation. A banker estimates the
unemployment rate for eastern Kentucky to be 16%. Ohio's
unemployment rate in March was 3.1 percentage points below its year-
earlier level but was still 2.4 percentage points above the national
rate. Nevertheless, the average workweek in Ohio manufacturing
increased 0.2 hours to 42.6 hours (n.s.a.) in March, after two
months of declines, and the average workweek in automobile
manufacturing increased to 46.2 hours, the highest since December
1978.
Unemployment rates in eleven major metropolitan areas in this District in February ranged from 7.6% in Columbus to 13.3% in Pittsburgh. An index of leading indicator, for the Pittsburgh area has risen strongly in the last few months following a slowdown last autumn, suggesting substantial employment gains in the months ahead.
Retail Sales
Retail sales recovered briskly in April from the previous month's
slump. General merchandisers contacted, however, report less than
10% year-over-year gain for the March-April period as compared with
increases of about 11% to 12% in the previous two months. Much of
the April strength was concentrated in soft goods, especially
apparel. New cars sales remained quite strong in April. Both
domestic and import dealers report solid, across-the-board sales
strength, which is expected to persist through the reminder of the
quarter. Shortages were reported for some larger size models, and
the waiting period for some import models has lengthened to about
eight weeks.
Manufacturing
Output and prices continue to rise. This Bank's survey of Fourth
District manufacturers indicates that firms expected shipments to
rise in April but at a slower pace than in March. A survey of
northeastern Ohio purchasing managers indicates production and new
orders rose again in April. Two-thirds of the respondents report
prices paid are higher than a month ago, and none report lower
prices. A survey of Cincinnati area purchasing managers indicates
vendor performance is continuing to deteriorate while prices paid
are rising. A major auto producer reports difficulty adding to
production schedules that are at capacity for mid- and standard-size
cars.
Primary Metals
Demand for sheet steel and aluminum remains strong. A major steel
producer reports that production is at capacity for sheet steel,
which is used primarily in automobiles. The firm suggests demand for
sheet steel may not increase further because automobile production
has peaked and steel imports are readily available. Area steel
producers report growing demand from the capital goods sector.
A major aluminum producer's fabricating facilities have been operating at capacity for a year. The firm is allocating supplies of aluminum sheet among customers for June and July deliveries because demand exceeds production capacity. The firm's smelters have been operating at capacity since autumn; however, some high cost smelters are closed and won't reopen unless aluminum prices increase by about two-thirds. World market prices of ingot aluminum have declined in the last three months despite apparent tight supplies, a phenomenon the firm cannot explain. World supplies of bauxite and aluminum are reported to be ample.
Housing
House construction and sales remain strong but are sensitive to
interest rates. Builders of single-family homes report that
construction activity during the first quarter of 1984 was up from a
year ago, and barring a further rise in interest rates, construction
in 1984 would match or possibly exceed last year's total. The "move-
up" market remains strong and demand by first-time buyers is being
bolstered by expectations that interest rates will edge up steadily
as the year matures. Realtors, who reported record earnings in 1983,
are currently experiencing a strong sales pace; even if interest
rates rise slightly, they expect a fairly good housing market for
the balance of 1984.
Lenders recently experienced a decline in mortgage applications. Applications for fixed-rate mortgages fell, but are being partially replaced by applications for adjustable rate mortgages (ARMs). Lenders say ARMs will keep the market buoyant until initial ARM rates reach the 13% - 13 1/2% range, which lenders now consider the "tolerance" rate.
Coal
Coal prices are rising and demand and shipments are increasing in
eastern Kentucky. Utilities are reported to be increasing stockpiles
as a hedge against a strike when the United Mine Workers' contract
expires on September 30.
Commercial Banking
Loan demand remained strong at Fourth District banks in recent
weeks. Business lending led the way and is expected to remain strong
throughout the year. Consumer loans also increased, particularly
auto loans. Bankers expect the pace of consumer lending to taper off
somewhat, but expect overall loan demand to remain quite strong in
the months ahead.
Net deposit inflows have been relatively flat with the lack of growth partly attributed to the April 15th tax deadline. Loans have been financed to a large extent with borrowed and purchased funds, and from the sale of government securities. Bankers expect deposit growth to pick up moderately in the next two months.