August 5, 1986
Summary
The Fourth District economy continues its pattern of slow growth
with a sluggish manufacturing sector, depressed energy production,
and a strong housing sector. Retail sales growth continues to be
quite good. Unemployment rose in June and the unemployment rate
remains above the national and year-ago levels. Manufacturing
activity remains on its flat path and the energy industry is in the
doldrums. Steel supplies may be disrupted by strikes against the two
largest steel producers. Crops are growing well, and housing
construction and sales remain robust. Commercial bank lending growth
is strong for real estate, moderate for consumer installment credit,
and slow for business.
Consumer Spending
Consumer spending in this District appears to have improved
recently. Major retailers report that sales steadily increased
throughout the second quarter and into the first half of July. Year-
to-date current-dollar sales increases range from 4 percent to 10
percent and July may be even better. Only one major chain reported
higher inventories, and all of the retailers felt that inventory
levels were satisfactory. Delinquent charge accounts continued their
gradual rise, but none of the major chains indicated any great
concern.
District auto dealers are showing satisfactory but relatively flat sales of domestic new cars. Domestic dealers' inventories continued to be slightly higher than desired, but no reason for concern. Several domestic auto dealers asserted that low interest rate financing incentives are too costly and no longer very effective. On the other hand, demand for imported cars continues to outstrip supply. One dealer reported that sales have been good despite an approximately 10% price increase in the 1986 model-year imports.
Labor Market Conditions
The unemployment rate for Ohio rose in June as employment fell and
unemployment rose. At 8.9 percent (sa), the unemployment rate is 0.2
percentage points above its year-ago level. In the last twelve
months employment grew slower in Ohio than in the nation (2.1
percent vs. 2.9 percent) and unemployment grew faster (4.5 percent
vs. 0.2 percent). Within the District, the unemployment rate is very
high in counties that rely on coal mining.
Manufacturing
Manufacturing activity in this District continues to be sluggish.
Production increased slightly recently but new orders declined
slightly and several firms indicated they expect order declines to
continue for the next month or two. Employment continues about flat
as order backlogs decline. Prices of purchased commodities are flat
but prices manufacturers pay for services and equipment are rising
slowly. Firms continue to trim inventories of raw materials and
supplies, while finished goods inventories are flat. On balance,
manufacturers expect very slow growth in the second half of 1986.
Steel customers apparently have been diverting orders from USX (formerly U.S. Steel) to other suppliers, Including LTV, because of a possible strike against USX widely expected to begin at the end of July. USX recently announced a layoff of 1,400 workers from its Lorain (Cleveland) works because the threat of a strike has caused a sharp drop in orders for that mill. Ironically, production at the LTV East Chicago, Indiana plant has been halted by a strike in response to termination of health and life insurance benefits for retirees. LTV, the nation's second largest steel producer that recently filed a Chapter 11 bankruptcy, is also being threatened by work stoppages if they ask the bankruptcy court for wage concessions beyond those in the labor contract negotiated just last spring.
Agriculture
Crops in Ohio, one of the largest agricultural-producing states, are
doing better than average this year and corn especially is
flourishing in response to ample moisture and warm weather.
Housing
Housing activity remains strong in this District. Housing market
firms are surprised that the housing market remains strong so late
into a business expansion but the consensus is that house building
and house buying will continue strong throughout 1986. However, some
firms are cautious in their planning for 1987.
Housing starts have slowed recently, but builders view that as a temporary result of the unusual delays in obtaining mortgage loan approvals. In recent months, processing times had reached 90 to 120 days as the volume of applications surged. Few mortgage lenders expected the high volume to persist and thus virtually no lender added permanent staff. Real estate closing cancellations had begun to rise as mortgage rates rose and few lenders would guarantee the lending rate beyond 60 days. However, real estate brokers report that mortgage loan processing times are now approaching the normal 60 days.
There are spotty signs that savings and loan institutions in this District are reducing their interest rates on new adjustable rate mortgages to increase their attractiveness relative to the fixed- rate mortgage loans the buyers seem to strongly prefer.
Commercial Banking
Overall loan demand is picking-up somewhat at District banks. Loans
outstanding in all major categories at large banks increased over
the past six weeks. The largest gain was in real estate loans,
reflecting the continued robust demand for mortgage loans. Consumer
installment credit continues to grow but at a pace substantially
lower than a year ago. Commercial and industrial loans registered
the smallest increase, but the growth indicates some improvement in
business loan demand since April and May. Contacts expect moderate
business loan growth over the rest of the year.