October 23, 1984
Summary
Reports from this District indicate moderation of economic growth.
Employment is growing slowly and pressures to avoid price increases
are intense. Retail sales gains are moderating. Manufacturers report
either smaller order increases or declines in orders. Inventories
are near desired levels. Housing activity continues to fall, but
banks report business and consumer lending remains strong.
District Labor Market Conditions
Labor market conditions in the District improved in September.
Employment increased and unemployment declined in Ohio, reducing the
unemployment rate to 9.22 (s.a.), 2.3 percentage points below its
year-earlier level. Manufacturing employment continues to rise
slowly.
Prices
Firms report substantial competitive pressure on prices. A survey of
manufacturing firms in the region reveals fewer firms are raising
prices and more are cutting prices than three months ago, while most
are holding prices steady. Those firms also report a substantial
slowing of increases in prices paid for commodities and services.
Capital goods producers anticipate using productivity gains
primarily to moderate increases of prices charged rather than to
widen profit margins, despite their view that profit margins are
very narrow for this stage of an economic expansion.
Retail Sales
General merchandisers in this District report double-digit sales
gains from year-earlier levels for September. The increases,
however, were concentrated in the first part of the month. Gains
dropped back to a single-digit pace by month-end and remained there
through early October. Retailers expect this more moderate pace to
continue through yearend, with one analyst anticipating a 7% - 8
1/2% gain for the year as a whole. Cutbacks in orders have kept
inventories at acceptable levels.
Area auto dealers report an easing in early-October sales. Low inventory rather than a lack of demand continues to be cited as the major cause of slower sales.
Manufacturing
Firms in this District generally report new orders continue to rise
but at a reduced pace, although several capital goods producers
report order declines. Weakness in capital goods orders is generally
attributed to inventory adjustment, growth of imports, and slowing
of business fixed investment to a more normal pace for this stage of
the business cycle. One capital goods producer, noting the strength
of new appropriations for capital spending, expects orders to
rebound soon, and capital spending to decline in late 1985 at the
earliest. Firms experiencing declines in orders expect to use order
backlogs to avoid reducing output, but only for a few months. A
producer of truck parts notes that there was a decline in orders for
large trucks in the third quarter because orders had been bunched
into the first half to avoid tax increases effective July 1. He
expects truck orders to rebound in the fourth quarter.
Steel producers report soaring imports and customer inventory liquidation have caused a reduction of orders and production. Together with excess capacity, this weakness in demand has kept transaction prices well below published prices. A major producer estimates it will be late in the first quarter of 1985 before customer inventory targets are reached.
A tire producer reports orders from original equipment manufacturers continue very strong but orders for replacement tires have softened in the last two months. Despite their having operated at capacity for any months, domestic tire producers generally plan no increases in production capacity.
Inventories
Inventories generally appear to be near desired levels. Most
manufacturers report inventories of materials and finished goods are
being kept level, while roughly equal numbers of firms report
inventory increases and decreases. Excessive inventories are
reported in the steel industry, especially at steel service centers,
and in the farm machinery industry. Inventories of truck and
automobile tires are very low for this stage of the business cycle
but manufacturers, distributors, and retailers seem satisfied with
current inventory levels. General merchandisers report inventory
levels are satisfactory, and automobile dealers complain that
inventories are too low.
Housing
After an unusual one-time surge in August funded by proceeds of
State of Ohio mortgage revenue bonds, housing activity in September
resumed its downward trend of recent months. Despite signs of
further weakening during the fourth quarter, market participants are
expecting better-than-normal sales and profits for this stage of an
economic expansion. Nevertheless, builders and realtors are
undertaking significant steps, including reducing building on
speculation and lowering employment through attrition, to weather
the slowdown that they forecast will continue through mid-1985.
Mortgage lenders report considerably fewer applications in the third quarter than in the second, with applications in September ranging from 20 to 40 percent below expected levels. Lenders indicate that high mortgage rates have softened demand considerably, and a recent slight drop in mortgage rates had no effect on borrowing. Unlike in any other parts of the country, mortgage borrowers in this area seem to be particularly cautious about adjustable rate mortgages.
Commercial Banking
Loan outstandings in all major categories increased at Fourth
District banks during September. Business lending increased
significantly, after being relatively flat in July and August.
Consumer loan demand continues to be strong although the pace of
lending has tapered off somewhat. Bankers expect business and
consumer loan demand to remain quite good in the next few months.
Evidence suggests that district banks used borrowed funds to accommodate much of the recent loan growth. Although savings deposits increased, banks experienced a greater decline in transaction deposits.