Beige Book Report: Cleveland
December 5, 1985
Summary
The Fourth District economy remains lackluster. The unemployment
rate remains high and employment shows little growth. Retail sales
growth is positive but not robust. Manufacturing activity remains
flat with the steel and machine tool industries continuing in
difficulty. House sales are strengthening and builders plan to step
up construction. Commercial bank loan demand remains moderate.
Labor Market Conditions
Labor market conditions in the Fourth District remain mixed.
Unemployment rates range widely around Ohio's current rate of 9.2
percent (s.a.), from as low as about 4.5 percent in Lexington, Ky.
to around 20 percent in some coal mining regions of southeastern
Ohio and eastern Kentucky. Manufacturing employment shows little net
change in recent months. A survey of manufacturing firms in the
Cincinnati area indicates that, on balance, they expect a slight
decline in their employment in 1986.
Retail Sales
Retail sales in the Fourth District improved in October for most
non-auto retailers, but sales growth was quite mixed within the
District. Year-to-year growth rates of 7 to 9 percent were common in
the southern half of Ohio (Cincinnati), but nearer 0 to 4 percent in
the northern portions of the state (Akron, Cleveland, Toledo, and
Youngstown). Sales of apparel, particularly women's apparel, showed
relatively strong gains between September and October, while most
hardgoods sales are still moderate or declining. One department
store analyst anticipates "near-double digit rates of increase for
the Christmas selling period", although in general, retailers are
only guardedly optimistic over holiday selling prospects.
Similar to the national market, new-car sales in the District are down so far in the fourth quarter because of exceptionally high third-quarter sales. Sales of larger models are especially soft. Import car sales are reported strong and getting stronger. Truck sales are moderate, which is not unusual for this area. Large inventories of used cars accumulated from third quarter trade-ins are beginning to thin out.
Manufacturing and Mining
Manufacturing activity in the District is flat while coal mining
remains depressed. On balance, contacts indicate industrial
production is flat or up slightly, new orders are down, and backlogs
are falling. Manufacturers are holding employment steady, although
one contact reported increasing overtime being worked in his area.
Raw materials inventories are falling sharply while finished goods
inventories are flat. Prices paid by manufacturers for materials are
unchanged.
In the steel industry, import competition continues to hold down domestic sales and prices. One senior executive asserts that it will take a very large depreciation of the dollar to get a significant price increase in basic steel. A major steelmaker in Chapter 11 bankruptcy recently negotiated a 16% compensation cut with its union, ending a 98-day strike. An aluminum industry executive reports that turmoil in the tin market has spilled over into additional downward pressure on already low aluminum prices.
Producers of machine tools continue to report weak orders and low prices. Employment at any firms remains well below its pre-recession peak, and one firm expects to cut employment further next year unless orders improve quickly. Competition from imported machine tools remains very strong. Machine tool orders are weak also because an increasing share of capital spending is for computers and other information processing equipment.
A producer of components for heavy trucks reports North American production of heavy trucks and buses is down about 9.5 percent in 1985; the firm expects it to fall another 6 or 7 percent in 1986. A major diversified producer of components for capital goods reports all lines of business are "on hold" except for strength in defense goods.
Coal production remains low and the outlook for the District coal industry weak.
Housing
The optimism evident in District housing markets last month
continues unabated. Builders, who had been cautious and waiting for
lower mortgage rates, are now stepping up construction plans.
District builders expect housing demand to rise steadily in coming
months if mortgage rates continue to ease. The confluence of lower
mortgage rates, further income advances, the availability of state
of Ohio-subsidized mortgage funds, and retention of housing's
favored status in pending tax reform legislation has led to a
consensus among builders, mortgage lenders, and realtors that
favorable housing conditions should prevail through at least mid-
1986.
Realtors in the District report a resurgence in both listings and closings in recent months. Particularly strong sales are reported for Columbus, Dayton, and Cincinnati. However, realtors are uncertain how much the recent tightening of private mortgage insurance standards by lenders will reduce the number of prospective house buyers.
According to a major mortgage lender, mortgage loan volume remains lower than expected at the current level of mortgage rates, because many potential borrowers are waiting for even lower rates. This lender continues to sell all of its fixed rate mortgages in the secondary mortgage market. Like a growing number of midwestern lenders, this lender may begin to retain shorter-term fixed rate mortgages in its loan portfolio if it decides that prepayments of shorter-term mortgages will be substantially less than on 30-year mortgages.
Commercial Banking
Overall loan demand at District banks remains moderate. Declines in
commercial and industrial loans are being more than offset by gains
in real estate and consumer installment loans. Lower interest rates
are helping to improve the demand for real estate loans. Consumer
installment lending at banks has received a boost from the end of
the cut-rate financing through auto dealers, even though car sales
have declined significantly.
Contacts anticipate a small pickup in business lending primarily because of seasonal factors. While consumer loan demand is expected to remain good, the rate of growth is expected to decline in the months ahead.