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Beige Book Report: Cleveland

August 6, 1985

Summary
The District's economy remains lackluster, with no signs of pickup. Unemployment remains high and manufacturing employment soft. Retailers report lower sales of autos, other durables , and nondurables. Major manufacturing industries report production and sales are flat or slightly down. The housing industry remains cautious despite recent strengthening in sales. Consumer loan demand is strong but business loan demand continues soft.

Labor Market Conditions
Unemployment remains high and manufacturing employment remains soft. Ohio's civilian unemployment rate rose from 7.7 percent (s.a.) in May to 8.6 percent in June, but analysts believe much of the increase is a reversal of inaccurate seasonal adjustment in May. Employment showed only marginal gain in June. A survey of Cleveland- area manufacturing firms indicates employment is growing slowly. Firms reporting increases stated that people were being hired to reduce overtime, which employers have kept at higher-than-usual levels during this recovery. Manufacturing employment in Cincinnati was down for the second straight month in June and weakness in order activity revealed by a survey of Cincinnati-area firms suggests employment declines are likely to continue in July. An outlook survey projects that the Midwest's third quarter hiring will be healthy relative to the rest of the nation, despite continued deterioration in the manufacturing sector.

Retail Sales
Fourth District retailers report mixed signals in recent sales patterns. For the first time this year, car dealers' sales were below expectations for more than a brief period. Domestic dealers especially report lower sales, although they note that this decline occurred in comparison to very strong sales through May. They remain optimistic about car sales for the rest of the year and are not planning to decrease inventories, which are slightly above previously desired levels. Dealers of Japanese cars report quickening sales as the number of vehicles allowed under voluntary quotas increases. Even with the higher quotas, some popular models remain in extremely short supply.

Other durable-goods sales appear to be weakening. Department stores report weakness in turn furniture appliance sales, confounding earlier expectations that sales of these goods would strengthen as late tax refunds were spent. Nondurables sales were also soft at major retailers, although this decline was described as marginal. Because sales generally came in below forecasts, inventories at department stores are now moderately above desired levels. Nevertheless, all stores maintain that profit margins remain too thin to allow for much discounting. The expect strong sales for the rest of the year and so feel little pressure to cut stocks.

Manufacturing
Manufacturing activity remains flat in the District while new orders, backlogs, and inventories of raw materials and finished goods are declining. Workers at a major steel producer went on strike for the first time in 26 years when the firm, operating under Chapter 11, demanded an 18 percent reduction in wages and benefits. Another major steel producer has offered to sell its specialty-steel division to reduce its debt. One major steel firm expects that shipments in the second half will be about the same as in the first half of 1985. Shipments of steel to auto manufacturers may be down while shipments to appliance makers may be up a bit in the second half.

A major tire manufacturer reports that original equipment sales remain strong but replacement tire sales have been weak since February and continued disappointing in July. Tire prices remain soft because of import competition. Employment has been flat but is likely to decline as the big three Akron-based rubber companies are implementing special programs to reduce salaried workforce to prepare for the next squeeze on profits.

A major supplier of parts to truck manufacturers reports that orders for both light and heavy trucks are softening, apparently reflecting a reduced pace in capital spending. The firm continues to operate at effective capacity but expects to cut production as orders weaken.

A supplier of construction materials reports demand from the commercial-building industry has been flat at a low level for six months. Demand from the residential building industry remains at a high level but has not grown for four or five months.

Housing and Construction
Housing market participants remain cautious despite recent strengthening activity. A regional builder in the Fourth District had exceptional months in May, June and July bringing new orders for the first half above last year's first half. Builders anticipate that the second half will be equally strong. However, there is little speculative building, as builders remain cautious and uncertain about how long the current uptrend will last. Real estate firms had an exceptional second quarter. The volume of contract closings at one realty firm was the highest in two years, and its forecast for closings in the second half has been revised upward, but the firm will remain in a wait-and-see posture until August before deciding whether to increase its staff. More move-up buyers are reentering housing markets. Mortgage lending volume is picking up with the 15-year mortgage becoming popular and the adjustable rate mortgage losing favor among borrowers. In the second half of the year, mortgage markets in Ohio will receive a boost from recently approved state-subsidized mortgage money that amounts to $346 million and that will be available to qualifying home buyers at 9.8 percent.

Commercial Banking
District loan demand continues to be mixed. Loans outstanding in all major categories at large banks increased over the past month. Consumer installment loans registered the largest gain, and contacts expect consumer loan demand to remain strong, particularly with lower and declining interest rates. In contrast, business loan volume increased only moderately, and most of the growth apparently was due to seasonal factors. Contacts do not expect business loans to pick-up significantly in the next few months.