Beige Book Report: Cleveland
September 16, 1985
Summary
The District's economy continues to be soft and uneven. The
unemployment rate remains high and manufacturing employment shows no
improvement. Retail sales increases are moderate. Auto dealers
report a recent sales surge from cut rate financing but overall see
some downtrend in sales volume. Manufacturing activity is strong in
auto- and defense-related sectors but generally weak elsewhere.
Current strength in housing activity is expected to wane as the year
progresses. Bank loan demand has softened.
Labor Market Conditions
Unemployment remains high and manufacturing employment remains soft.
Ohio's civilian unemployment rate fell 0.8 percentage points in
August but is still 9.1 percent. The employment-to-population ratio
rose. In manufacturing, almost as many firms report layoffs as
report callbacks and new hires.
Retail Sales
Fourth District retailers express satisfaction and little surprise
in July-August sales. Major department stores report that sales of
almost all goods continue to increase moderately along expected
trends. Back-to-school sales have been slightly stronger than usual,
helping to boost otherwise sluggish sales of nondurables. After some
mid-summer weakness, durables sales have strengthened in the
District, with appliance sales described as the firmest component.
With nearly optimal inventories, retailers do not expect to engage
in extraordinary discounting during the remainder of the year. They
expect demand to continue at or near present growth rates.
Auto dealers report a surge of sales in response to reduced financing rates, but looking at a longer period they see sales on a slight downtrend. This held especially for domestic dealers who say that Japanese competition is becoming a more important factor. Some domestic dealers express concern over high inventories and may significantly reduce factory orders for the rest of 1985. Some Japanese-make dealers are actually low on inventories, although they too have noticed a slowdown in demand.
Manufacturing
Manufacturing activity continues to be sluggish. On balance,
contacts indicate production and new orders are increasing very
slowly. Inventories of raw materials and finished goods are being
cut. Most manufacturers continue to report that import competition
is making it very difficult to impose price increases. None of our
contacts have yet seen any impact on their business from the
depreciation of the dollar. A producer of road-building materials
reports orders are strong and are expected to remain so because fuel
tax increases are financing extensive road repairs. Contacts report
sales of chemicals are soft. A producer of parts for heavy trucks
reports production cutbacks because of order weakness, which the
firm expects to continue into 1986. The weakness reflects slackening
of capital spending rather than import competition. Parts demand for
light trucks, which are more consumer- than business-oriented,
continues to do well. Firms associated with the auto industry assert
that the recent new car sales spurt is borrowing from future sales
and the producers are unlikely to increase their production
schedules. Some suppliers believe that auto production may be cut
back later this year unless the major producers offer sales
incentives again later in the year. A tire producer reports sales at
replacement tires continue to run below year-ago levels.
A major steel producer reports orders are getting weaker in the third quarter and bookings for the quarter are especially weak. Steel price pressures are intensifying as domestic producers compete aggressively to regain market shares. Steel users are cutting inventories because the economic outlook is uncertain and because low capacity utilization by steel producers assures customers at rapid delivery. A machine tool producer reports sales are up from a year ago but by only a half to a third as much as is usually associated with this stage at an economic expansion. The firm says its machine tool orders are still less than half of the peak level reached in 1979. Machine tool orders are strong from the auto and defense industries and weak elsewhere.
Housing and Construction
Market participants agree that housing activity will deteriorate as
the year progresses. They attribute the current strength of housing
and mortgage markets to the lagged effects of lower mortgage rates
and Ohio-subsidized mortgage funds.
A regional builder in the District reports a third consecutive month of strong ordering and heavy traffic by potential buyers. Most builders refuse to take the risk of speculative building because they are uncertain about the economy's direction. One builder asserts home buyers are not responding to lower mortgage rates because they are increasingly uncertain about whether the current economic expansion will continue.
A large mortgage lender reports exceptionally strong closings in August. The firm attributes most of the higher loan volume to availability of Ohio-subsidized mortgage funds. Some lenders find customers are considering only fixed-rate mortgages because of the small gap between fixed-rate and variable-rate mortgages and because of view that fixed rates may have reached a low point.
Commercial Banking
Loan demand appears to have weakened at District banks in recent
weeks. Total loans outstanding at large banks fell slightly over the
past month due largely to a decline in commercial and industrial
loans. Contacts generally acknowledge the weakness in business
lending and they anticipate continued flatness in business loan
demand. On the consumer side, installment loans outstanding are
rising at a rapid pace but slower than in previous months. Contacts
expect consumer loan demand to remain quite good.