September 16, 1984
Summary
Growth of economic activity in this District appears to be slowing.
Labor market conditions softened recently and price increases are
slowing. Retail sales gains continue to shrink on a year-over-year
basis. Manufacturing activity continues to expand, but at a slower
pace than in early summer. Inventory trends are mixed but suggest
slow growth of inventories. The downtrend in housing activity has
been temporarily interrupted by funds from a special Ohio bond
issue. Business loan demand is flat while consumer loan demand
remains strong.
District Labor Market Conditions
Labor market conditions in the District have softened. Employment
fell and unemployment rose in Ohio in August, causing the
unemployment rate to rise to 9.8% (s.a.), its highest level since
May and only 1.5 percentage points below its level of a year
earlier. Nevertheless, Ohio manufacturing employment continues to
increase slowly while average weekly hours worked by manufacturing
production workers continues to decline. The decline in overtime in
manufacturing has been pulling down the average weekly earnings of
manufacturing production workers in the last few months.
Prices
Upward price pressures are easing but concern about inflation
continues. Purchasing managers report continued slowing in the rate
of increase in prices paid for commodities. One group reports prices
are increasing at the slowest rate in a year. The rates of increase
for prices paid for services and equipment are higher than for
commodities and are slowing only slightly. A survey of midwestern
manufacturing firms reveals a smaller percentage of firms are
raising prices now than were doing so earlier in the year.
Nevertheless, contacts report there remains substantial concern
about inflation and they believe that increases in the rate of
inflation would cause a resurgence of inflationary expectations.
Retail Sales
Major department store chains in this District report year-over-year
sales gains continue to slow in most product lines. Nevertheless,
unwanted inventories are not accumulating at the retail level. One
major chain expects year-over-year gains will continue to shrink to
8% in the fourth quarter of 1984 and 7% in the second quarter of
1985.
Cleveland area auto dealers report strong sales demand continued in August but in early September moderating consumer appetite and inventory problems have resulted in a mild sales slowdown. Dealers say an auto strike at the onset of the 1985 model year would sharply reduce fourth quarter domestic sales. Import dealer outlook for the fourth quarter is more positive because 1985-model deliveries are easing quota-induced shortages.
Manufacturing
Manufacturing activity continues to expand. Purchasing agents report
new orders continue to increase at a slower pace than recently in
Cincinnati but more rapidly in Cleveland. Order backlogs remain
flat, as production continued to increase steadily. Major steel
producers report orders and shipments fell in June and July as
customers reduced inventories, particularly in anticipation of an
auto strike, and steel imports remained strong. Orders for steel
improved slightly in August and steel producers expect further
improvement in orders if there is an early labor settlement in the
auto industry. A producer of consumable supplies used in mining
reports a slowing of orders.
Inventories
Inventories show mixed trends. A survey of purchasing agents in the
Cincinnati area indicates manufacturers' inventories of raw
materials are being held constant, but purchasing agents in the
Cleveland area indicate manufacturers raw materials inventories are
being increased as a hedge against lengthening lead times. Both
groups report continuing slow growth of finished goods inventories.
Steel users, especially in the auto industry, and steel distributors
continue to trim inventories.
Housing
Housing activity in Ohio experienced an unexpected, one-time surge
in August because of lower-cost financing made possible by state-
issued mortgage revenue bonds. Although the near-term outlook of
market participants remains gloomy, optimism is surfacing that
housing activity will improve by mid-1985. Most market participants
expect 1984 to closely approach the sales pace and profits of 1983.
Builders remain cautious and, except for August, have been experiencing a steady dwindling of their order backlogs. Housing completions were strong during July and August and new orders, which typically are seasonally low, registered unexpected gains because of the bond monies. Also, as a result of bond monies, lenders recorded stronger-than-expected loan volume during August, but otherwise are experiencing a gradual slowing of mortgage originations.
Realtors report an unexpected surge of new contracts in August, principally from homebuyers using mortgage bond monies. Contract closings in August, which resulted from June's sales, also exceeded projected levels by a wide margin. According to realtors, the overall deceleration of housing activity will reverse in mid-1985 if interest rates fall and another dose of mortgage bond money becomes available.
Commercial Banking
Business loan demand has been relatively flat recently at District
banks, but consumer loans continue to grow at a strong pace. Bankers
expect consumer loan demand to remain quite strong and business loan
extensions to pick-up moderately in the next few months.
Banks appear to be funding new loans to a large extent by stepping up their issuance of large certificates of deposit and reducing the volume of federal funds sold. Although District banks registered increases in time and savings deposits, these gains were negated by declines in transaction deposits.