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Beige Book Report: Cleveland

October 23, 1986

Summary
The regional economy during September has remained relatively stable. The outlook for the region is less optimistic than previously reported with the majority of respondents to a recent survey predicting no change. Economic indicators are generally mixed: Retail sales and housing have declined slightly; orders and inventories are mixed; and capital, borrowing and employment plans are down. Despite overall regional economic doldrums, some metropolitan areas, such as Columbus and Cincinnati, are experiencing healthy expansions.

Retail
Retail sales during September were slightly lower than reported for the previous month. In addition, the composition of sales has changed; retailers report that sales of hard goods considerably outpaced soft goods sales. Retailers attributed this change to the increase in housing sales earlier in the year. Looking toward the holiday season, the Christmas sales outlook is more pessimistic than any reported in the last three years, especially for the Northeast portion of the district.

Domestic auto dealers in the Fourth District reported that sales have been driven primarily by the recent incentive programs. Most dealers reported a 20-25 percent increase over the same period in 1985. Sales surged immediately after the announcement of low interest rate financing, tapered off during September, and then jumped again right before the incentives expired.

Several dealers mentioned that the even lover 2.1 percent and 2.9 percent financing arrangements stirred the market again, after the previous round of incentives had list their appeal. The incentive program apparently lowered dealers' inventories of 1986 models, below normal carry-over levels, and non-GMC dealers said that levels of 1987 models were very tight. Import dealers reported that the domestics' incentive programs helped to increase import sales by about 10 percent. even though they did not offer similar financing rates.

Labor Market Conditions
August unemployment in Ohio rose by 0.5 percentage points since July to 8.5 percent of the civilian workforce, compared to the national rate of 7.0 percent. The rate still remains below the 9.2 percent level of a year ago.

Total employment in Ohio rose by 0.2 percent from the previous month and by 3.1 percent for the year ending in August. Employment in the fifteen largest MSAs in the district rose 0.1 percent during August and 2.8 percent from a year ago. Employment changes were mixed in the largest metropolitan areas. Cincinnati and Columbus recorded greater than average growth (0.5 percent and 0.4 percent change since last month), while Pittsburgh lost jobs (0.6 percent) and Cleveland remained virtually unchanged.

In most cases, nonmanufacturing employment has risen at the expense of manufacturing employment. In Ohio, a 4.8 percent employment gain in nonmanufacturing since last year was more than enough to offset a 2.0 percent decline in manufacturing employment. The service industries are the strongest component of employment growth in Ohio. The 7.4 percent increase in the service sector brought it within 50,000 jobs of overtaking manufacturing employment. Wholesale and retail trade also increased employment substantially (by 5.2 percent); this sector cow employs 9,000 more workers than does the manufacturing sector in Ohio.

Surveys of both manufacturing and nonmanufacturing companies reveal plans to hire slightly fewer workers in the near term.

Manufacturing
Once again, the region's manufacturing outlook is mixed. Employment was relatively steady over the past few months, but remains far below its level during the peak of the last business cycle peak. Orders in consumer durable and capital goods are up, but orders in materials and services and technology are down. At the same time, inventories of consumer durables are higher, while material and services and technology are lower. Companies have revised downward their plans for capital expenditures in the coming quarter and are also scaling back their borrowing plans. However, a high proportion of companies surveyed are planning to cut inventories in the coming months in anticipation of a decline in sales.

Steel industry employment in Ohio during August fell by 5 percent from the previous month. The decline was considerably worse in Pittsburgh (15 percent) whereas Cleveland's employment remained stable. However, reported production increases of 10 percent in the Pittsburgh area during September may cushion the sharp employment decline experienced in August.

Much of the difference in employment experience had to do with the location of USX steel facilities that have been shut down since August 1. In some parts of the district, the USX strike has been beneficial to workers employed by competing steel producers. For example, LTV, which is operating under Chapter 11 protection, is enjoying a considerable increase in orders.

Despite the overall decline in manufacturing employment and union wage concessions, weekly earnings among production and non- supervisory workers in manufacturing rose by 1.5 percent in Ohio for August, compared to a 0.5 percent increase for the U.S. Average hours worked rose by .6 hours, which is similar to the national change.

Housing
Housing activity in the Midwest shows clear signs of slowing down. However, the activity in most housing markets in the district remains higher then a year ago. Some areas, (in particular, Columbus, Dayton and Cincinnati) report considerably more building and sales than do other areas of the district. Conditional on mortgage rates, housing market participants forecast moderate housing activity in the Midwest through the rest of 1986 and into 1987. Housing activity in the District appears to be very sensitive to interest rates since the region is not experiencing substantial immigration or demographic changes. Those interviewed foresee a housing boom only if mortgage rates fall below 9 percent.

Lenders report shallow demand for the adjusting rate mortgage because most lenders refuse to discount these products enough to induce borrowers to accept them. This is consistent with the fact that most borrowers perceive the current level of mortgage rates as the trough in long tern mortgage rates.

Banking
Overall loan demand has improved at district banks, primarily, because of the strong demand for consumer installment credit and mortgage loans. Consumer installment loans increased at an annual rate of over 25 percent, and real estate loans rose 16 percent. Business loan demand, on the other hand, was sluggish, and commercial and industrial loans fell at an annual rate of nearly 7 percent over the last six weeks.