Beige Book Report: Cleveland
January 28, 1987
Summary
As regional businesses close the books on 1986, the consensus is
that the past year did not stand up to their initial high
expectations. The first quarter of 1987 is marred by uncertainties
about the effect of the recent tax reform and about the length of
the current recovery. At present, economic indicators show a
moderate increase in production, new orders, and retail sales and a
slight reduction in inventories.
Retail Sales
A late holiday shopping spree helped many retailers recover from
slow sales early in the season. Sales continued to be strong after
the holiday season due partly to post-Christmas bargains and mild
weather. Retail sales grew at a 5 to 6 annual percentage rate
throughout the fourth quarter. Low profit margins by foreign
manufacturers and importers have lead some retailers to expect
import prices to rise at a 3 to 5 percent annual rate over the next
quarter.
Domestic automobile sales were up as much as 50 percent over sales a year ago. Most of the increase is reportedly due to changes in the tax laws. Consequently, sales so far in 1987 have been weak. One dealer commented that sales were the slowest in 4 years. Since most dealers anticipated the year-end rush, inventories are reported to be at "comfortable" levels.
Import dealers reported similar sales volumes. Some foreign car dealers feared that a weak dollar may result in price increases for cars produced abroad.
Labor Markets
Ohio added 19,500 new jobs in November, increasing total employment
by 0.43 percent compared to 0.27 percent growth in the country as a
whole. This increase brought the Ohio unemployment rate to 7.2
percent, just slightly higher than the national rate.
First quarter 1987 projections by the Manpower Incorporated Employment Outlook Survey suggest that this region's employment growth will be slower than the nation as a whole. However, three of the largest cities in the District have outlooks better than those of the nation. These include Pittsburgh, Columbus and Cincinnati. Employment increases are expected services, wholesale/retail and durable manufacturing, while job losses are expected in finance, insurance and real estate.
Manufacturing
Manufacturers report for November an increase in new orders,
production, and prices and a reduction in inventories from the
previous month. Total manufacturing employment increased slightly in
November, although it is over 2 percent below its level of a year
ago. The recent gain came exclusively from durables, which were up
1.2 percent. Class and glassware, and general industrial machinery
led the monthly employment increases.
Steel production in Ohio fell by 3 percent during November, approximately the same rate of decrease as U.S. production. However, since November of 1985, steel production increased 8 percent in Ohio while falling 20 percent nationwide. Consequently, Ohio's share of total tonnage produced in the U.S. rose from 15 percent to 20 percent over the last year. LTV recently announced intentions to spend $500 million over the next two years to improve its flat- rolled steel division.
Uncertainty about the ability to sustain the recovery much longer and the effects of tax reform have generated pessimism among business executives, especially in Northeast Ohio. Respondents of a recent survey expected the first quarter of 1987 to be the worst in three years. Twenty percent of businesses surveyed reported unplanned expenditures in 1986:IV in order to take advantage of the old tax laws, and the same percentage indicated cut backs in spending plans in 1987 because they lost investment incentives. In addition, a record high percentage (20 percent) of business executives expected no profits in the first quarter of 1987.
Housing
Housing is at a seasonal ebb. The level of seasonally adjusted
housing construction and the volume of mortgage lending in 1987 is
expected to remain at moderate levels in most markets. Builders
expect strong demand for single-family homes because of tax reform
and low mortgage rates. However, the shortage of developable land
may slow some housing starts, especially in the Columbus and
Cincinnati areas.
The consensus among those interviewed is that mortgage rates will decline during the first half of 1987, but will rise slowly during the second half. Lenders report keen competition for mortgages and have been forced to drop interest rates. They are partially offsetting the lower rates by charging higher points. Mortgage refinancings are a small proportion of current volume, but most lenders expect another wave of refinancings if mortgage rates decline another 50 to 75 basis points.
Banking
District loan demand strengthened considerably over the past several
weeks. Loans outstanding in all major categories grew substantially
in the last two months, particularly in December. Commercial and
industrial loans expanded at an annual rate of over 65 percent in
December, up sharply from little or no growth experienced in the
fall and summer months. In addition to the turnaround in business
loan volume, consumer and real estate lending also accelerated in
December from their already high levels.
However, loan demand may soften in the next few months as both manufacturing and nonmanufacturing companies surveyed have reported that outside financing is considered unlikely in the next few months.